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Executive Insights & Innovation
Commentary

Suppliers Held Hostage To Procurement Platforms, Services

Pricing models penalize suppliers for increasing their business with retail, other customers.

You closed that big deal you've been working on for the last six months! Your company is now a designated supplier, which means it will have to get on board the new customer's procurement platform or get with its EDI network provider to exchange data.  

The bad news? Your company is now locked in to that platform/provider, subject to transaction fees that escalate based on how much your company does business with the new customer. There are many examples of this "activity trap," as I call it. I'll focus on a few making the rounds on discussion boards as suppliers complain (rightfully so) about being locked in with no say in the prices they're paying.  

For the record, I have no personal ax to grind here -- I've picked these examples because they're already public.

Target
Target's indirect-spend suppliers are required to use Ariba's eProcurement platform. While it's fairly easy for a supplier to get up and running, the supplier is forced to subscribe to Ariba's practices, pricing, and technology. The "pricing perversity" here is that the supplier is penalized for its success as a Target supplier by having to pay Ariba a percentage of sales, not pay for the cost of the technology it's using. For example, if I'm a successful supplier and increase my revenue from Target 10 times due to volume increases, my bill from Ariba (now part of SAP) goes up 10 times, even though Ariba didn't have to work any harder or face added costs to process the transactions.

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Companies such as Target don't really care how much Ariba is charging because the suppliers are footing the bill. This is a fabulous model for companies such as Ariba, because suppliers are basically held hostage to their platforms if they want to remain Target suppliers.

JC Penney
More than a decade ago, JC Penney started using EDI (electronic data interchange) to order products from suppliers. The JCP model for direct-spend suppliers is more "open" than Target's in that the supplier isn't required to use a specific third party to support information exchange. However, it's required to exchange specific types of documents via an EDI value-added network. Although the supplier can shop for a VAN provider, its charges are typically "per transaction."  

The pricing perversity comes because JC Penney (and other retailers) find great value in collecting more data from their suppliers, resulting in escalating charges by the VAN provider. For example, JC Penney implemented a Transportation Management System and began requiring suppliers to begin to use an EDI 753 transaction (carton counts, dimensions, and weight) document and to accept an EDI 754 response document that tells the supplier how the shipment must be broken up (if needed) and which carriers will handle the shipment.  

On the surface, this system seems simple enough: It reduces the number of trucks needed, amount of fuel used, and so on. But the financial benefits overwhelmingly favor JC Penney. In addition to having to pay the higher VAN transaction fees, suppliers often incur increased costs to create customized processes to capture the information, along with custom integrations to manage and send the messages. If suppliers fail to follow JCP's requirements, they incur fines.

West Marine
Boating retailer West Marine was looking for a new EDI provider, a company to liaise between its IT/integration staff and its suppliers. West Marine settled on SPS Commerce. Part of the SPS message is that it will manage, educate, and support a company's trading partners, even if they use a competing solution. Part of the switchover included testing all suppliers' EDI capabilities.

The EDI message boards were abuzz about a letter West Marine sent to its suppliers saying that SPS Commerce would be managing its EDI going forward and that EDI was required for all suppliers. The letter included contact information and a deadline for action. Suppliers forwarded the email to their IT people (either outsourced or internal), who then called SPS to set up testing. Suppliers that didn't want to switch to SPS but instead wanted to use another EDI provider would be charged $500 per test -- verification of each required EDI document for data integrity and accuracy. So if four documents are involved, that's $2,000. Testing fees vary based on the retailer's requirements and the deal it cuts with the VAN provider, but the fees add up quickly.

So much for the pricing advances of software-as-a-service. While West Marine saved money by handing a large community of suppliers to SPS, each of the suppliers had to either pay out significant fees for testing services or be left out of the mix.

I don't mean to slam Target, JC Penney, West Marine, Ariba, or SPS. Other companies and providers use these activity traps in their pricing. My beef is with transaction-based pricing models. These companies and their suppliers assume that transaction-based pricing models are the only way to think about paying for basic services such as data exchange. They don't stop to challenge their customers or the service providers about the true value -- and impact -- of their services across the entire supply chain. The winner is the service provider.

There's a better way.

A recent University of Tennessee and Sourcing Interests Group white paper, "Unpacking Pricing Models" (a free download), recommends a collaborative, shared-value approach that looks at total costs, not just the price per transaction. It's time for companies to challenge the conventional approach to paying for data exchange services and switch to a more transparent understanding of actual costs and benefits.

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