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Closer look: Use a ‘procurement mentality’ to buy crop inputs

Mike Boehlje
“Farmers are becoming more analytical,” says Purdue economist Mike Boehlje. “It means they make more decisions based on information and data, not just intuition.”
A data-driven, analytical approach sets you up for profit next year.

In grain farming the most important marketing decision you make is not how you sell your crops; it’s what and how you buy the inputs that make the crops.

In a commodity industry rife with uncertainty, you have more control over how you buy, and the price you pay for inputs or services. It sets the cost structure, which is critical in a commodity industry where you must be a low-cost producer for long-term success.

A procurement mentality is more about analysis and less about gut instincts, says Purdue ag economist Mike Boehlje. You focus on what you want the product, service, or provider to do for you that you can’t or won’t do yourself. What feature or attributes are you buying, and why? If you’re not buying on price alone, what values are you focusing on – relationships? Product performance?

A procurement mentality starts with a bid, or ‘spec’ sheet. “In the industrial world, a spec sheet allows us to move the conversation beyond price, to create value for the customer,” Boehlje says. “A spec sheet has the potential to help farmers and retailers both to move the discussion beyond just price.”

Using a spec sheet to obtain competitive bids can help determine who you will do business with, and more important, why. But you first must determine what’s more important for any purchase: price, performance or relationships.

Who uses bid sheets?

2017 Purdue survey of 1,300 commercial farms found that only one-fifth of farmers frequently use bid sheets to make procurement decisions. However, 40% of large farms said they use them always or most of the time, twice as frequently as mid-sized farms.

Interestingly, nearly 40% of younger farmers will use bid sheets most or half the time, while only 27% of older farmers use them most or half the time. Seven out of 10 farmers who say they are analytical regularly use bid sheets.

The Purdue survey found that very few farmers make buying decisions on intuition alone. About a third of farmers had a balanced approach (intuition plus analytical), and a little more than half made decisions based solely on analysis.

However, the survey found that nearly two-thirds (63%) of large-scale farms made decisions on an analytical basis, compared to 45% for mid-sized farms. For farms with annual revenue of $5 million or more, 65% made analytical decisions, compared to just 47% of farms making $100,000-$500,000 annual revenue.

“This just confirms that analytical thinking is more common place in our industry than we used to think,” Boehlje says. “It’s consistent with the idea that we are professionalizing management in farming at a fairly rapidly rate.”

What farmers want in retailers

What’s your approach? According to the Purdue survey, most farmers make buying decisions based on product performance, price, then dealer relationships – in that order.

If most farmers are buying inputs from an analytical approach, Purdue’s survey results might make sales people who don’t understand this a little nervous. Nearly three-quarters (71%) of those who said they make decisions based on analysis say they want a dealer who can offer multiple brands – in other words, choice. Second, 60% of these farmers said service availability was important. Past positive experience (58%) was also important, followed by a desire for return warranties (57%) and service quality (47%).

Dead last on the list? The salesperson, at 45%.

“The message here is, ‘I like you, but not enough to necessarily do business with you,’” says Boehlje. “Bring me all those other things and then I’ll do business with you.”

Whether you use a spec sheet or not, shopping around has become more popular with farmers. According to the Purdue survey:

- About 45% of farmers compare three or four or more potential outlets to market what they produce; they don’t necessarily switch, but they check and verify.

- For capital purchases, 48% said they check three or more suppliers. Only 9% looked to just one source.

- For expendable farm inputs, 39% check multiple suppliers.

- To obtain financing, only 16% check with three or more suppliers.

“Farmers are content to get money from one or two suppliers, perhaps because switching costs are high in moving from one lender to another,” observes Boehlje. “On the other hand, they’re eager to check what’s out there for places to sell their stuff, or places where they will buy capital items or seed and chemicals.”

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.

TAGS: Management
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