Responding to global challenges with your key customers

By William Moore -- Industrial Distribution, 2/1/2007

If you have customers with global sourcing operations, you may be facing requests that are based on your customers’ company-wide global sourcing experience.

For example, you may be asked to meet offshore distributors’ price points or even to compete in situations in which manufacturers sell some items direct.

Here’s what usually happens: A buyer compares your offering to what he has discovered happens at other company locations worldwide.

Most frequently, the comparison boils down to price, since this is the easiest item to compare. This focus on price can create tension and dissonance in your customer relationship. 

In countries where a distributor’s cost of doing business is a fraction of what it is in the United States, product comes to the global marketplace at prices that may appear to be extremely low. Pressure on North American distributors to match these prices can be intense.

But your local, high-service and logistically advantaged business can often trump even the lowest-cost option. True, those offshore prices may look like bargains—but only from a distance.

Thorough preparation can go a long way towards helping your company manage these opportunistic pricing demands. Here are some key points:

1. Identify who and what you are being compared against.
2. Know how to justify your pricing structure.
3. Be prepared to explain the reasons your customer should embrace you as a preferred source of supply.
4. Above all, do your homework.

Your supplier partners, especially those with worldwide operations, constitute a terrific source of research for that homework. So before responding to your customer’s low-price request, talk with suppliers whose knowledge and experience can strengthen your selling proposition.

Ultimately, you will want to enter into negotiations asking these questions: Who are your most likely competitors? In what type of marketing conditions do they operate? How are they able to bring product to market at such low cost?

Thus armed, you are better equipped to justify your own pricing and to explain the critical advantages that your business almost certainly has over offshore supply.

Meeting the low-price challenge
How can offshore distributors bring to market products at prices that may undercut yours by 25 percent or more? Reasons may vary regionally, but we can point to several generalities. Foremost are differences in compensation, social and legal costs, environmental costs, and infrastructure and transportation costs—all of which tend to be much higher in North American markets than in many offshore regions.

These can have a cumulative effect on pricing, but can also help you explain to customers why your pricing is by necessity higher.

The next step is to provide reasons for your customer to purchase your higher-priced products. This requires a look at benefits that can come only from businesses located close to the customer’s needs—businesses like yours.

Call this your home-field advantage. It can consist of supply chain benefits, in-person access to your customer’s business operations, locally available technical support provided by your own trained staff or by your suppliers, and quick-response customer services.

Consider the supply chain. Buyers purchasing from offshore sources will have to carry sufficient inventory to cover immediate replacement needs—or else deal with the prospect of extended equipment downtime.

Product shipments from Finland, for example, typically take eight or more weeks, and that’s assuming that product is in stock. Meanwhile, mission-essential machinery can sit idle, often costing your customer thousands of dollars per hour.

In contrast, your distributorship’s response time can likely be measured in hours, especially with backing from supplier partners who maintain North American stocking centers. Your local presence virtually assures quicker delivery and eliminates the need for customers to maintain heavy inventory.

Your local presence likewise facilitates in-person customer contact. Periodic visits to a customer’s plant can yield a host of distributor benefits, including firsthand knowledge of your customer’s product, inventory and service needs.

In addition, you are positioned to swoop in with technical assistance on short notice, accompanied, if needed, by a technician from a supplier partner’s department of engineering.

Evaluate your offering with that of an offshore distributor whose customer contact is a continent away and whose engineering and customer support is limited to phone and e-mail.

Similarly, match it against a distributor in, say, Indonesia, whose access to professional engineering resources may be a fraction of what you can muster from your supplier partners.

These comparisons make strong points in your favor. But they are certainly not the only points.

What about those low offshore prices? Ask your customer if they cover importation expenses, such as duties and tariffs, freight and insurance. Chances are these costs of doing business with offshore distributors are not included in your customer’s comparison.  

Add to that the time, cost, records maintenance and necessary legal expertise, and the burden of compliance may well be an issue your customer would prefer to avoid.

When your customers attempt to cherry pick the lowest global price, challenge them at the service level, at the engineering support level and at the ease-of-doing-business level. 

Make sure you are including the total cost of ownership in comparison to global market pricing. Chances are good that your overall product offering’s business advantages will overshadow most low-cost offshore options.

William Moore is senior vice president of sales development and channel management, SKF Service Division, based in Kulpsville, Pa. He can be contacted at William.C.Moore@skf.com. (215) 513-4851.