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Fee-based Consultancy – The ‘Third Route’ to Furniture Procurement

Thursday, March 28th, 2019 at 5:32 pm | Categories: Commercial, Furniture Consultancy, News.

For those of us who have been operating in the various channels of furniture procurement over the last few decades, we have all witnessed the industry shoot itself in the foot, head, chest, and almost every other limb on several occasions, with its various and complex routes to market, causing confusion and creating mistrust in both inexperienced clients and seasoned property professionals alike.

Often described as ‘the dark arts’, ‘the murky world’ or the ‘smoke and mirrors’ of furniture, it is hardly surprising when trying to explain the myriad of potential relationships (and with it margins) between furniture manufacturers, dealers, agents, wholesalers, distributors, fit out contractors, and consultants – some of whom will buy and sell, and some of whom will receive their cut simply for managing supply relationships. Whilst there is a raison d’etre to (most of) these organisations in the supply chain, it is also understandable that a common scepticism from clients on the end price that they pay in the whole conspiracy.

Project registration processes to favour tied dealers, and fixing discounts on specified products in a tendered package are a daily occurrence used to protect manufacturer’s margins and to favour loyal dealers, but this is surely akin to restrictive practice in legal terms, rather than smart selling techniques?

Don’t get me wrong – I am extremely supportive that good design has a cost to produce, R&D development is a speculative risk that must be recoverable, manufacturing investment must be worthwhile, and that time and expertise that adds value in any process should be properly paid for by the client. I know from bitter experience how frustrating it can be when speculative work is given by a client for free to a competitor. However, the furniture industry’s most common routes to market – epitomised by the inflated manufacturers’ RRP, then discounted by significant percentages more familiar to high street kitchen showrooms – still don’t produce best commercial value or use of time for the end client, or the professional project team.

Over time two common routes to market have emerged as the most popular: either dealing directly with manufacturers; or tendering an architect-or-designer specified furniture package through a furniture dealer or reseller. But in recent years a third way has both emerged and become established: fee-based furniture consultancy.

Purchasing directly from manufacturers

When it comes to certain large volume furniture packages (perhaps desking, seating, or storage) there can be advantages to a client purchasing directly from a manufacturer. In particular this can be in respect of the specific in-depth product knowledge that can come directly from a factory, or perhaps the bespoke product alterations that can be made to suit the client’s specific needs.

However, it can often be a misconception that such a direct relationship will automatically lead to a better price. The principal reason for this is that in such a direct client relationship the manufacturer will need to replace the role of the dealer with their own staff, and with that comes a comparable overhead of employing direct sales staff – one of the main reasons why manufacturers choose to distribute through dealer channels is to eliminate all these direct sales costs, in return for offering bigger discounts.

Another ‘con’ for the client to consider when looking to deal directly with manufacturers is the significant drain on client resource. A large value furniture contract will likely involve up to 25 different purchase orders to different suppliers across all the different applications. That may mean initially considering and liaising with on average 3 options per application (so 75 different products), and that will require both a significant client expertise, as well as a considerable time commitment. Given the likelihood of furniture selection and procurement being just one discipline needing to be managed within a move, then there is unlikely to be this sort of client resource available – nor is it likely to make financial sense to do so.

Other considerations to then mention once the selection process is completed with 25 different suppliers, is the co-ordination of all these suppliers delivering directly, each one installing, and then the administrative burden of paying their deposits, stage payments, and managing the whole invoicing process. So dealing directly for a client can work on specific packages, if the client has the internal expertise to know the furniture marketplace and the available options within that application, but it rarely makes sense across a whole move.

Purchasing through a dealer

As a result of a number of these considerations, 65% of the furniture purchasing made in the UK is done through furniture dealers or resellers. The ‘pros’ are that it gives the client a single point of contact, removing the need for direct contact with all those manufacturers, and it also allows the client to benefit from the resellers market knowledge.

However, as buyers have become more sophisticated this route has also led to a number of purchasing frustrations:

  • Irrespective of the size of the manufacturers involved, the client’s purchasing contract is with the dealer, meaning that they will have little financial security (particularly for large value unsecured deposits paid), and no direct performance guarantees from the suppliers;
  • There will be no transparency, as the client will not be aware of the manufacturers pricing, nor will they know the hidden margin that the dealer will be making;
  • There will be little objectivity, as the dealer will propose the products on which they can make the most margin, as opposed to the ones most suitable to the client’s brief.

In addition, a pre-specified furniture tender – selected by the architect or designer, and competitively pitched for by a number of dealers – will also rarely produce the best commercial outcome for the client, for two reasons: firstly, each manufacturer’s priority is to get their products specified onto the tender package by the architect. Once they have done this, they have effectively won the project, irrespective of which dealer wins the tender. So the discounts that they then offer to the tendering dealers are not their best prices, but ‘standard’ dealer terms. Secondly, knowing that there is little room for product or service differentiation in a tender submission, the dealer will submit a low margin, which will then be fulfilled with a stripped back service if successful. Anecdotal evidence of tender experiences from clients over many years have confirmed these points of dissatisfaction with the eventual outcome.

A third way: fee-based furniture consultancy

The increasing demand for transparency and partnership in furniture procurement has led to the evolution of a third way: fee-based consultancy. This open book approach can deliver a number of benefits for the client, their project team, but also for the furniture consultancy too, by solving the issues associated with the two traditional routes outlined above:

  • The client tenders the consultancy scope at the OUTSET of the project. So the furniture consultant has input and responsibility for the product selection process, which also reduces the architects required scope, and hence costs.
  • The furniture consultant benefits by being appointed earlier in the project, and with this certainty comes a significantly reduced fee as they are not having to account for all the speculative time and overhead spent by dealers pitching for projects over many months that they don’t subsequently win.
  • By appointing the furniture consultant at the outset, the pricing negotiated benefits from double leverage: the volumes of the project, combined with the certainty of an appointed procurement route (as opposed to a tender to multiple dealers). Both of the above help to drive manufacturers down to the best prices and discounts.
  • A consultant is not ‘trading’ the procurement, like a reseller does. They are buying on behalf of the client, putting in place direct contractual relationships between the client and all the suppliers, managed through them as a single point of contact. The client therefore benefits from the supplier performance guarantees of a direct contractual relationship, without the administrative burden of managing this themselves. They also benefit from the financial security of a ringfenced financial arrangement, rather than the risks associated with trading through a reseller’s bank account.
  • By appointing the furniture consultant to the project team early in the process, the consultant can also be responsible for the furniture programme, managing the client decision making process and timescales, and so also avoiding the risk of late deliveries as a result of a squeezing the programme and supplier lead times at the critical point leading up to client occupation.

Although this consultancy route has been available in the marketplace for some years now, it has gained considerably in popularity over the last 3-5 years, now being recommended as the preferred route to clients by a number of the larger established building consultancies, cost consultants, and project managers.

The true pricing and fee transparency, the associated financial and risk management, and the partnership of a consultancy relationship offer a trusted project procurement route, which benefits all the project team – architect, designer, cost consultant, and project manager, as well as the client.

 


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Author

Martin Stocks
mstocks@operandum.co.uk

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