“Trust but verify” is a phrase associated with the 40th US President, Ronald Reagan. But it is a phrase that I’m sure many Chief Procurement Officers use when directing their procurement teams.
This phrase is most applicable to procurement situations when you are working with a supplier with whom you have a long-term relationship. For certain situations, it’s not appropriate to do a formal RFP every two years to ensure fair market pricing.
But if that long-term supplier proposes pricing on a new product or service or needs to revise pricing on currently purchased products and services, how do you know that pricing is fair? Do you just trust them not to inflate their margins because they are a long-term partner? Or do you seek that little bit of assurance that the supplier is “playing nice?”
I believe in trusting but verifying. How to go about that verification process requires a little thought.
Some people believe in doing RFP’s solely for the purpose of verifying pricing. While, in some cases, I may get pricing from another supplier where it is easy for that supplier to prepare such pricing, I would not show the incumbent that competitor’s pricing. That is unethical. I also consider it unethical to ask a non-incumbent supplier to do a lot of work to prepare pricing for comparison’s sake when there is no chance that the supplier would earn your business.
Some of the activities that I do recommend, each of which may be more appropriate than others in certain situations, include:
1. Preparing a should-cost model
2. If it is a previously purchased item, comparing the change in pricing with the change in a recognized, published price index over a matching period of time
3. Making the submissions of cost breakdowns a routine part of doing business with suppliers (if you’re interested in exploring this further, this article goes into more detail – https://www.nextlevelpurchasing.com/articles/early-supplier-involvement.html)
So what if you’ve verified that your supplier’s pricing is unreasonable?
Negotiate! Negotiating doesn’t mean that you don’t trust your supplier – it just means that you are doing your duty as an agent of your organization.
And it doesn’t have to be hardball negotiation. In cases where your company’s input purchase costs determine whether or not it will win business, there is a lot to be said for managing the supplier relationship so that it feels like your company and the supplier are on the same team. For example, saying something like “Look, if we can keep costs down, we can win this much more business for both of us” is a way of negotiating as a partner, not as an adversary.
While “trust but verify” is associated with Ronald Reagan’s legacy, perhaps “trust, verify, then negotiate if your trust was misplaced” will be associated with mine. Check Wikipedia in 30 years.
To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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