Is The Failure of Ron Johnson at J.C. Penny a Sign Anchoring Wins?

I posted an article about Anchoring a while ago.  For a refresher, anchoring is all about the seller trying to establish a starting price for a product or service.  To put it in transportation terms we see this all the time.  When an executive at a transportation company publicly states "rates are going up because capacity is going down" they are, very strategically, anchoring the conversation he or she will have with a buyer.  They are hoping, going into the conversation, the buyer will start with the premise above then they work from there. 

The alternative, as I advocate all the time,  is "should cost" modeling which means the buyer goes into the conversation with no preconceived notions established by the seller.  The only thing the buyer brings to the table is cost data down to the lowest level possible.  That starts the conversation.  If the seller ignores this data and just goes back to supply and demand dynamics then they are effectively establishing themselves as a commodity. Which is a place I am sure they do not want to be.

Ron Johnson tried "should cost" on the consumer side with a twist.  Rather than create artificially high prices (see the transportation exec comment above) he tried to tell the consumer exactly what the every day price is based on cost and a reasonable mark up - profitability.   Unfortunately, the consumer would have none of it.

The consumer, by leaving Penny in droves, signaled to the sellers (the retailers) that they would rather have the retailer anchor the discussion at a ridiculously high price then they can play a silly game of "how has the biggest coupon" to get to some equally artificially low price. 

In the end, the consumer loses big in this.  The consumer is saying they would rather be played by sophisticated sales manipulation techniques.  A sad day for the consumer.

Ensure, as a commercial buyer, you do not fall into the same silliness.

Should Cost Modeling Comes to Logistics

I wrote back in January, embedded in another article about why people should do "should cost" modeling prior to negotiating rates.  This has caused me to do a lot more thinking about this topic and after doing some analysis I have come to the realization this is the best way to get to what the true cost of freight should be.

It also eliminates all the emotion, speculation and hype of the industry when you read about capacity constraints, driver shortages and other macro economic issues.  Here are the basics:

1. Break down your suppliers costs into the big driving buckets.  For transportation it is clearly fuel, driver wages and equipment.
2. Make sure you have calculated in offsets to costs.  For example, the industry is very prone to discuss how much more the acquisition cost  of equipment is with new emissions requirements and other adds.  However, they very rarely (unless you conduct deep research) discuss the vast reduction in operating costs due to better maintenance and fuel consumption.  Each element has to be accounted for. 
3. Ask what is really going on with driver wages (not what "could" happen).  Many will say the driver shortages will lead to higher driver wages however this has not really panned out.  So, find out what is really going on with the driver wages. 

This does not mean you are trying to ensure the supplier does not make a profit. What it does ensure is you fully understand the true costs driving the pricing, it ensures you understand what the reasonable profit margin is and it ensures you understand what the market is for the products you are buying. 

This process has been used by direct procurement people for years.  Also, I can assure you this is the process your transportation suppliers are using to decide how much to pay for a truck, trailer or container.  There are different components to measure but the process of "should cost" modeling is exactly the process they follow.  You should not be afraid of it nor should you be ashamed of using it.