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Grain farmers are
facing significantly lower prices and incomes in 2015 compared to previous
years which have resulted in intense pressure to lower costs by aggressive
negotiation on land rents and purchased inputs.
Much of this negotiation has focused on price--farmers are
asking/expecting price reductions, but suppliers of fertilizer seed and
chemicals in particular are hesitant to adjust prices down. In many cases
suppliers have laid in inventories at costs that provide little flexibility to
reduce prices without dramatically compressing margins.
Certainly price is a
critical component of the purchase decision by farmers and the selling strategy
of suppliers. But there is much more to
the input purchase decision – information, service, trust, availability for
critical components of any input purchase decision are:
1.) Product performance – effectiveness of the product in
enhancing or protecting output (yield, rate of gain,) and
evidence/documentation supporting the performance claims.
2.) Product price – net price including transportation/shipping
charges and any service fees.
3.) Quantity/volume discount – any price discounts or service
fee reductions that depend on quantity purchased or packaging/ bundling with
the purchase of other inputs.
4.) Storage, delivery time and conditions – when and how the
product will be delivered, storage arrangements, and penalties and/or back-up
if delays occur.
5.) Local contact- name and contact information (cell phone,
email, etc) of the specific person to contact if problems occur in fulfilling
the purchase agreement or in the efficacy of the product.
6.) Application services – cost and performance specifications
including timing of any application or other services.
7.) Financing terms – financing or credit terms offered
including cash discounts, interest rates, repayment terms and the approval
8.) Warranty – performance guarantees and terms of reimbursement
for non-performance including documentation requirements and party responsible
for servicing warranty claims.
9.) Technical documentation – product performance documentation
and details of product specification including quality characteristics.
10.) Compliant response time/process- procedure for filing
complaints concerning product service efficacy or effectiveness including
process and time delays in response/resolution.
11.) Technical support - availability of technical support to
answer questions concerning product performance and efficacy including process
to contact technical support personnel.
12.) Information services- availability and provider of any
information or data analysis services including fees charged for such services
and contact person.
13.) Brand – specification of manufacturer, performance
reliability data, characteristics of substitutes.
14.) Training – training that will be provided to staff,
educational materials, support for regulatory compliance.
15.) Proposal response time – required response times for the
supplier to provide needed information and format in which the supplier should
One way to more systemically think about the critical
components of the purchase decision (or selling strategy for suppliers) is to
use a specification sheet. Figure 1
illustrates a Specification Sheet on which a buyer may summarize the
information they need to obtain from suppliers on 15 critical components of the
It can be helpful to decide in advance how important
each of these 15 components are for the purchase decision. For example, in financially challenging
times, product performance may be far more important than technical
documentation. Some components may be
mission critical, while others may have a negligible impact on the decision. By
giving a weight to each component of the decision a buyer will have a better
basis for comparison.
Each alternative supplier can then be rated on the 15
critical components, and their scores for each component can be tallied. Figure
2 illustrates how a weighted specification analysis tool could be used to
evaluate and compare alternative prospective suppliers.
It’s important to remember that solid relationships with
suppliers may provide benefits beyond identifiable components of a single
purchase. A strong relationship may open
the door for cost savings in other parts of the business. For example, a supplier may have less
bargaining room for a single product than they do if more than one product is purchased.
Other considerations include the urgency of the immediate
need, the importance of price transparency, and future needs. The need for a quick response may limit the
ability to compare multiple suppliers, because takes time to gather
information, answer questions, and make comparisons. A buyer may want to consider how wide the
potential list of suppliers should be.
Sometimes it’s helpful to have a frank discussion with suppliers to
understand the cost structure behind an offer. This conversation may lead to
creative methods for reducing supplier cost that could be translated into
savings for the buyer. Direct delivery
to a convenient site could be an example of this. Finally, a buyer should consider their own
future needs. A purchase that drives
margins so low that the supplier can’t survive could lead to less flexibility
and more expensive purchases in the future.
For a PDF of the full paper, click here.