Nov. 13, 2013
 
Fehr: Add Value Through Smarter Purchasing

When service center operators talk about adding value, they are usually referring to the processing of metal on their shop floor. Yet there are ways for service centers to add value to each transaction long before that, during the purchasing process, says Gary Fehr, a longtime service center executive who spoke this week at CRU’s North American Steel Conference in Chicago. The consultant and former executive for Ryerson discussed how buyers for service centers can better use their purchasing power to capture value for their organizations.

Most buyers go into negotiations looking for four factors: best price, best delivery, best quality and best customer service. That is the wrong approach, Fehr insists. Instead, they should consider the general economic climate and specific conditions in each market. Once they have ascertained what suppliers are generally offering, they can make an informed judgment on what they can likely negotiate.

To determine what the purchasing department should be negotiating for requires an understanding of the service center’s basic operational strategies, Fehr explained. For example, a company that is cash flush may choose to negotiate for discounted early-payment terms, while a cash-strapped company is better off negotiating for extended terms. “It doesn’t make a lot of sense to get an attractive discount rate if the company will never use it,” he noted.

Likewise, a company’s philosophy on carrying inventory should factor into the negotiating strategy. If a service center is comfortable keeping large tonnages on the floor, the buyer may want to negotiate for bigger quantity discounts. In contrast, if the service center prizes inventory turns yet also promises customers quick deliveries, buyers should look for suppliers with short lead-time or consignment programs or lower mill minimums.

“You can’t negotiate in isolation. You’re often wasting your time negotiating for something that has no value for your organization, or in some cases is counterproductive to the core strategies,” Fehr said.

More from Fehr and other speakers at the CRU conference will be featured in the December issue of Metal Center News.

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