Faced with growing competition and commoditization of its core aftermarket business for industrial bearings, SKF develops a sales tool to document, measure and guarantee its customers financial benefits from the use of its replacement products and related services. The strategy is based on justifying premium unit prices that lead to a lower total cost and an attractive return on investment for the customer.
However this strategy is not likely to impress Steelcorp, an important end user of bearings buying upwards of $12 million annually. A new procurement VP is asking suppliers of bearings, including SKF, to submit to on-line reverse auction where the lowest unit price is likely to win big orders. SKF senior management is considering a response to Steelcorp’s invitation which is supported by the company’s distributor but opposed by those inside the company who committed to value selling and total cost pricing.
The students are to resolve the dilemma and make a decision whether to participate in the auction or refuse to do so and risk losing potentially big orders during recessionary market conditions.
The case and its video supplement can be used for the following learning objectives:
- Demonstrate the mechanics of value (total cost) pricing and the strategic logic of it
- Show the limitations of value pricing (e.g. in face of procurement strategies targeting reduction in per unit cost of goods purchased)
- Illustrate how commoditization can be fought back under certain conditions
- Provide insights on how industrial buying-selling and distribution work and the trends reshaping both
- Practice role play and negotiation with a key customer
- Introduce the concept of reverse auction in industrial procurement
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