Dealing with low cost overseas competition is certainly no easy task. However, there is far more to your customer's inventory costs than just the price paid for finished goods.
The issue isn’t whether your company can compete - you most likely can. Rather, the issue is whether you can get your customer to understand their costs of buying from overseas competitors, versus the lower costs and higher value that comes from dealing with your company.
Defining Your Customer's Inventory Costs
Simply put, you’re going to get your customer to better understand their costs of inventory when dealing with suppliers outside their borders. In essence, you’re going to lead your customers to making a decision in your favor, one that defines your true value and one that outlines the saving you can provide them.
First, it’s important to understand what’s included in your customer's holding cost of inventory. These holding costs include obsolescence, damage, theft, financing, rent, inventory counting, electricity and other miscellaneous warehouse management costs. Second, your customer’s costs to hold inventory increase the longer they retain that inventory. Keep inventory for too long in your warehouse and damage, obsolescence, theft and financing increase.
Instead of understanding these aforementioned costs, your customer likely bases their decision to buy solely on your competitor’s price. It’s up to you to get your customer to understand the real costs of buying from an overseas supplier. If successful, you’ll be able to get your customer to think about how they can reduce these costs with you as their primary vendor.
Step 1: Define Competitor’s Offer
You must understand your competitor’s offer and get your customer to confirm that offer in person. Now, this doesn’t mean you force them to tell you what your competition's price is. Instead, you make factual assertions based on your understanding of your business and your market. You then use these assertions to put forth leading questions. In some cases, you won’t have to ask your customer too many questions - you'll have the answers beforehand.
- Is there a minimum order quantity (MOQ)?
Most companies are forced to purchase large volumes from overseas suppliers in order for it to be cost effective. You must determine whether your customer understands the inventory holding costs of purchasing more than they need.
- What is the lead time?
Will lead times become an issue? For instance, if your customer relies upon time-critical parts, then purchasing product from an overseas supplier is a costly proposition - no matter how well they plan. In fact, it’s often a gamble. You must get your customer to define the value of a shorter lead time with your enterprise, versus the risk and costs of waiting for an overseas shipment from your competition.
- Does price include freight (is it a landed cost)?
It’s not uncommon for overseas competitors to provide a price that doesn't include delivery. Make sure your customer clearly defines the competitive bid in terms of whether it includes delivery, is a landed cost to their door, or if there are additional costs they have to cover. If there are additional costs, what are these costs?
Step 2: Outline Customer’s Cost of Ownership
This is where you get your customer to define their cost of ownership. For instance, if your customer has to purchase more than they need, then what are their costs of financing? What are their costs of obsolescence on parts, inventory damage and theft? After all, the longer your customer holds these parts, the more costly managing them becomes. Finally, get your customer to think about their cash flow. Purchasing more than they need is guaranteed tie up capital in inventory. They may be saving on the per-unit price of the part, but this savings is often eroded by the costs of holding inventory for extended periods.
- Financing: Get your customer to think about their costs of inventory financing by linking your competitor’s offer with your customer's higher costs of capital.
- Inventory Management Costs: Have your customer define their biggest concerns with respect to this particular part they're purchasing. Is it theft, damage or obsolescence?
- Cash Flow: This may, or may not, be an issue. If it is an issue with your competitor’s bid, you can use it to your advantage by getting your customer to confirm that maintaining a positive cash position is important to them.
Step 3: Explain How Your Offer Reduces Costs
This entire approach is about planting a seed in your customer's mind. Your first step is about helping to define your competitor’s offer. The second step is about getting your customer to understand what it costs them to purchase from your competitor. This third step is about explaining why your offer is more cost effective and ultimately, why it's better.
- Define lower financing costs: Your customer only purchases what they need. They don’t finance inventory for longer than they need to.
- Define lower inventory management costs: Your offer allows your customer to reduce the costs of obsolescence, damage and theft. They don’t buy too much, so these issues aren’t as big of a concern.
- Outline stronger cash position: Ultimately, your offer helps your customer with managing their cash flow. It’s not uncommon for overseas suppliers to insist on prepayment. However, your offer likely has terms and you may be able to extend those terms to save your customer even more money.
- Define stronger service & support: Finally, define the value of your offer in terms of your company’s ability to provide stronger service and support. What does it mean to have a supplier that is able to immediately respond to issues as opposed to one that is a world away and always 24 hours behind? Help your customer understand your value. If possible, dollarize the benefit of dealing with your company.
The purpose of this entire exercise isn’t to try and compete on price. Instead, it’s to get your customer to think about more than just the price of the product they’re buying. It’s to get your customer to understand the high costs of financing inventory, the issues of high freight, issues of damage and obsolescence, and the impact of failure rates on product coming from an overseas supplier. Unfortunately, these are costs that don’t immediately jump out at a company. In a sense, they’re somewhat hidden. You must uncover these costs and help your customer understand why your offer is better.
This is ultimately about planting a seed. Even if your customer doesn’t immediately purchase from you, they’ll forever be thinking about these inventory costs as you’ve defined them. Gradually, if these issues become more prevalent, your customer will eventually come back to see what you can offer.
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