Prepare Your Company for Global Pricing

“Give me a global-pricing contract, and I’ll consolidate my worldwide purchases with you.” Increasingly, global customers are demanding such contracts from suppliers. For example, in 1998, General Motor’s Powertrain Group told suppliers of components used in GM’s engines, transmissions and subassemblies to charge GM the same for parts from one region as they did for parts from another region.1

As globalization increases, customers will rachet up pressure on suppliers to accept global-pricing contracts (GPCs). Purchasers may promise international markets, guaranteed production volumes and improved economies of scale and scope. But what if they fail to deliver or if suppliers’ global-price transparency inspires them to make unrealistic demands?2

Suppliers must make three key decisions: whether to pursue a GPC, how to negotiate the best terms and how to keep a global relationship on track. We have found that the best tool for suppliers is solid information on customers. Information can help the supplier make a sensible counterproposal to demands for the highest levels of service at the lowest price.

Ignorance is dangerous. Consider an advertising agency we’ll call Proscenium XL. In 1996, Proscenium XL agreed to a global contract to manage worldwide advertising for a U.S. Fortune 100 company. Having no significant business with the client in non–U.S. markets, Proscenium XL saw an opportunity to expand its relationship. However, the contract stipulated that Proscenium XL would charge lower fees in anticipation of higher volumes and would not represent any of the client’s non–U.S. competitors.

Upon inking the contract, Proscenium XL discovered new information. The client’s managers in non–U.S. markets had considerable autonomy. They demanded localized programs and services — and resented having to displace their old agencies. When many of the client’s managers abroad stopped using Proscenium XL, the agency’s U.S.–based global-account-management team was powerless, fearing to jeopardize U.S. business with the client. Soon the client dropped all non–U.S. business with Proscenium XL, which then was in a worse position in markets where it had sacrificed existing relationships with the client’s competitors.

Managers can learn much from other companies’ GPC experiences. We saw a need to extend current globalization research and study how suppliers approach global-pricing contracts. (See “Research Methodology and Data Collection.”)

Research Methodology and Data Collection »

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References

1. “GM Powertrain Suppliers Will See Global Pricing,” Purchasing 124 (Feb. 12, 1998).

2. E.R. Silverman, “Adding Value Anytime, Anywhere — Channel Players Have Different Ways of Handling the Challenges of Offering VA Services Globally,” Electronic Buyers’ News, January 2000, 18.

3. C. Zarley and J. Rosa, “Going Global,” Computer Reseller News, Sept. 8, 1997.

4. S. Helper, “How Much Has Really Changed Between U.S. Automakers and Their Suppliers?” Sloan Management Review 32, no. 4 (summer 1991): 15–29.

5. S.C. Frey Jr. and M.M. Schlosser, “ABB and Ford: Creating Value Through Cooperation,” Sloan Management Review 35, no. 1 (fall 1993): 65–73.

6. D. Asmus and J. Griffin, “Harnessing the Power of Your Suppliers,” McKinsey Quarterly 3 (1993): 63–79; and

J. Stevens, “Global Purchasing in the Supply Chain,” Purchasing & Supply Management, January 1995, 22–25.