I taught a full day public seminar this week on the topic of “Catapulting Your Cost Savings Results”.

There are so many opportunities buyers leave on the table. It’s my job to get purchasing professionals past that and to help them see all the big TCO areas they’ve never even looked at.

For instance, purchasing professionals spend so much energy trying to reduce price, and through really sophisticated measures too, such as supply base reduction, expenditure aggregation, reverse auctions, bidding, cost models, benchmarking, negotiation techniques, etc.

So what’s the problem, you ask?

Well, If the only thing you have in your bag of tricks is creative and sophisticated ways to reduce supplier price, you’ve missed the boat. Completely.

There are an entire supply chain worth of unnecessary or bloated costs that are getting passed straight onto you as the purchasing professional. Your goal is to get those costs out of the supply chain, agreed?

So what happens when you negotiate a price reduction? You reduced price, but did you reduce cost? You did not. All you did was push costs back up the supply chain in reverse gear. As a consequence of your actions, no matter how brilliant and effective they were, you have not made the supply chain any more cost effective, agile, or effective.

In the final analysis, it was a pretty self serving move. So before you blow up at me, let qualify my comments: We are ALWAYS going to ask for and pursue price reductions, and this should never change. Are we friends again? 🙂

OK, but let’s continue with this thought process. If you really pay attention, what we have been doing in purchasing is getting more and more sophisticated at pushing costs back UP the supply chain, rather than focusing more energy on the much larger opportunity of taking costs OUT of the supply chain.

And we talk about Win/Win a lot in purchasing. Is it really Win/Win if you are pushing costs back up the supply chain? If so, who is winning? Even the end consumer doesn’t win, because they still bear the burden of those costs, because all supply chain costs still roll down hill, even if purchasing claims a cost savings on those same costs.

So my point here is not to point fingers at purchasing. We deserve credit, and you deserve credit, a lot of credit, for how well we have developed the art and science of purchasing, negotiations, and supply chain management. Now it’s time to take the next step.

So what kinds of things are we talking about? How do we take costs out of the supply chain?

The surprising thing is that some of these opportunities are really low hanging fruit and are right under your nose. For instance, one of the biggest ones is ensuring the specs and/or SOW are written for TCO.

If the specs involve custom parts or the SOW involves custom services instead of standard, you will pay for the nose for that. Even if you negotiate the best price in the world, you will still save tons of money.

Want proof? Compare the Mercedes S Class to the Mercedes CLS class. These are two cars that are nearly alike in every way, from a features, engine, luxury, and quality perspective. The S class has 4 doors and the CLS has 2 doors, and the CLS is more aerodynamic looking, but they are about the same size actually. They are pretty comparable in most every way. Except one costs about $25K more than the other.

Why? It’s simple. The S class comes any way you like it, with or without such options as heated seats, rear camera, ventilated seats, navigation, dual zone climate control, and so on. This means it is made to order. The production line has to constantly make adjustments and incur set up costs and productivity loss in order to accommodate such adjustments. This adds cost. LOTS of costs.

The CLS comes with one standard package. All you choose is inside color and outside color. The production line goes much faster. No thinking has to happen, no real customization has to happen, and in fact they can produce the same exact type of car many times in a row (including color) before they’ve built enough and move onto the next color car. Nothing changes but color. Fewer machines, fewer parts, almost no customization, no significant setup costs, and so on. This takes tons of costs out of the supply chain.

Now do you see that the cost advantage of the CLS has nothing to do with getting suppliers to charge less and pushing those costs back up the supply chain? Instead, costs are surgically removed, and you never see them again. In this case, we are talking in the neighborhood of 25% cost savings, without negotiating with suppliers at all!

There are many other examples, and I’ll go through them in my blogs over time. For now, ask yourself the following:

Is your exclusive means of achieving cost savings derived through pushing suppliers for a lower price? How long do you think you can keep doing that with the same suppliers? Are you focusing on taking cost OUT of the supply chain instead of just pushing them back up the supply chain?

Keep being your best, and help us make this profession better. Work with me, and I’ll take your game to an entirely new plateau. We’ll talk again next week.

I just recently had lunch with one of my business partners. He’s a sales executive for a major IT company. He was telling me that in his sales positions for the various companies he’s worked for, his customers (I’m not talking about purchasing mind you, I’m talking about the internal customer who is generating the demand) would regularly call him and casually invite perks.

The conversations would go something like this (I’m using the name Mike – not his real name): “You know Mike, my department gave you $3 million in spends last year. There’s a 1 hour course I want to take in Honolulu, can you set me up for that? Also, I want to take my family, and I want have about 3 days before and 3 days after the course to adjust for jet lag. Can you do that for me?”

And you know what? He would! He’d fly their entire family over to Hawaii for the week, all expenses paid. He didn’t just do this kind of thing once, it was a regular sort of deal with all of his biggest customers.

Another big customer of his would always want to hit the town and run up celebrity like bills at the most expensive restaurants that money could buy. He was game.

You see, you and I know that purchasing department personnel go through rigorous code of conduct training to avoid not only conflict of interest, but even the false perception of conflict of interest. That means purchasing professionals typically can’t accept any gift unless it’s both less than $25 AND has the supplier’s logo on it.

However, if you venture into your own company’s sales department, you will find that they are being trained and funded to engage in these exact same activities that they are telling purchasing not to do– to wine and dine the customer to develop continued allegiance and, therefore, continued revenue. They WANT the customer to develop a conflict of interest.

Every single company talks out of both sides of their mouth in this manner. One pitch is for the purchasing department, and the other pitch is for the sales department. It’s a fascinating dichotomy, and it invites all sorts of questions about ethics.

So who squeaks under the radar in all of this? Your internal customer. The big focus is on purchasing, and making sure purchasing isn’t engaging in such activities. But who’s policing the customer? Do you know if your customer is accepting such gifts? It might be against company policy, but it’s not against the law. And the supplier is more than happy to do it. That’s what their customer budgets are for. They’re expected to spend it.

I personally have witness countless purchasing professionals get fired due to a conflict of interest. One got fired because he accepted tickets to a golf tournament and went with the supplier. He was one of the best, but it wasn’t tolerated. Another got fired because he had his landscaping supplier start doing his property too. All eyes are on purchasing, but who’s watching the customer?

Suppliers know the game. They keep this stuff quiet. A dog never bites the hand that feeds it, and everything that suppliers are taught centers around pleasing the customer. Nowhere in their training does it say to please purchasing.

So be aware. The question is, have you set expectations with your suppliers? Have you told them, in writing, that they may not give gifts of greater than $25 to any employee of your firm, and than any such gifts must have their logo on them? Better yet, have you put this into your contracts, so that failure to perform becomes a breach of contract , and therefore a performance issue?

There’s more to this than just conflict of interest. We all know how customers try to force particular suppliers on purchasing. Now you have to dissect and understand the business drivers. If there is competition and the customer doesn’t want it, then you need to dig deeper. Left unchecked, this can end up causing your TCO proposition to lose value, because something other than TCO may be used as a supplier selection criteria by your customers.

Pay attention, and don’t fool yourself into thinking this only happens in countries where corrupt business practices rule. It happens here and it’s probably happening in your company. Take preventative measures and don’t wait until something happens – because you’ll probably never figure it out anyways. Everyone involved keeps it quiet.

Set expectations with suppliers and the internal customer and be accountable for the results. As corporate stewards for how the company’s money is spent, this is your obligation to the board of directors and the shareholders of the company.

I was doing work for a client last week on the East Coast. Someone there asked me if today’s strategic sourcing strategies are here to stay. My answer caught her off guard. “Absolutely not” is what I said. In fact, I think we are mostly behind the curve.

Before I get into why, I really do have to acknowledge all the progress made in our profession. We’ve gone from expediting purchase orders (1970’s) to driving a wealth of strategic TCO oriented strategies today. “We’ve come a long way, baby!”

However, what I still see is that even the most sophisticated purchasing strategies are largely predicated on using influence, economies of scale, and competitive practices (all really good things, mind you) to get suppliers to lower their prices.

What’s not to like? Well, getting a supplier to lower their price, all other things being equal, means they need to lower their profit margins. That’s really what it boils down to. They are willing to do it in the right circumstances, and it can still be a win/win deal.

Still all upside for both parties, right? Not necessarily.

My big issue is this: when you focus on reducing supplier profit margin, no matter how sophisticated your strategy is, all you are doing is pushing costs down the supply chain. You haven’t really improved the supply chain in any way.

There are an entire supply chain worth of costs that can be assessed, and that is really the next big breakthrough we have to make it to as purchasing professionals.

Here’s the thing though. You read articles about supply chain management and it is so daunting, so unwieldy, so complicated that you just don’t know what to do differently when you get back to your desk.

That has to change. There are simple things that we can and should be doing that don’t require sophisticated tools, systems, or supply chain expertise.

You see, suppliers are unfortunately taught that “the customer is always right”. Sounds good, except what this means is that when your internal customer produces a SOW or Spec that wasn’t designed for TCO, your supplier won’t say anything.

It also means that everything you specify as a part of your manufacturing and service requirements will be adhered to 100% – even if it is unnecessarily adding a tremendous amount to your cost proposition. Why? Because “the customer is always right.”

So we need to start looking at opportunities to take costs out of the supply chain. When you take a cost out, it’s gone. You haven’t pushed them anyplace. Assuming you didn’t cause some other TCO problem, you have actually made the supply chain better.

Here are some examples you can look for now (I took this part from a longer article I wrote that’s being published in an ISM journal later this month – I encourage you to look for it and read it):

Redundant costs: Supplier is doing outgoing quality inspection and supply manager is doing incoming quality inspection; both parties are insuring shipments to supply manager.

Excessive costs: Expedited shipping instead of standard shipping; products or service comes with unnecessary functionality or features (“bells and whistles”) that customer doesn’t need to fulfill business requirements.

Unnecessary costs: 5 year warranty on products that have 3 year obsolescence (such as PCs); 24 x 7 customer support model for an 8 x 5 business.

Costs that can be eliminated: excess supplier inventory buildup due to infrequent or inaccurate forecasts from supply manager; setup costs associated with custom requirements that could be eliminated by using standard parts or processes instead where possible.

Challenge yourself to see if you are truly driving innovation with your suppliers to take costs out of the supply chain, or if you only using sophisticated techniques (or worse yet, unsophisticated techniques!) to get suppliers to lower their price.

We want to have our careers grow and prosper in the field of purchasing. This means doing things better than how you were taught. Leap forward and into the opportunities that await with supply chain cost analysis.

It really is an opportunity to take your capabilities and your career to the next level.

I bought my wife a new tv for her recent graduation. She got her Bachelor’s degree in Business Administration. I’m really proud of her. I want her to become a purchasing professional. Unfortunately, she doesn’t, but I won’t tell anyone if you don’t.

Anyways, when I was a kid, all you needed was an antenna for this TV to get some reception. And some aluminum foil. And a wire coat hanger. And a martyr to hold the antenna for maximum clarity while you watched. Nowadays, all of that is woefully insufficient. We needed to get our dish service connected to this TV, which of course requires appointments…. and costs.

There were two appointments needed. One to change out our satellite dish (we were changing our channel package), and the other was to connect the new TV to the dish service. From a purchasing perspective, it really bothered me that two appointments were needed. I asked the first technician if he was qualified and authorized to do both jobs, and he said “yes”. I asked him “well then, why don’t you save your company some money and do both jobs right now then?” He looked at me like I was a box of rocks and said “we don’t do it that way”.

This kind of stuff drives me crazy. I want to take the CPO of this company to lunch and tell him or her how much money they are flushing down the drain with this practice. Then I’m going to make him or her pay for the lunch, just to remind them what money leaving their wallet feels like. (note to self: if they go for it, next time go to a fancy restaurant)

Anyways, the technician visits were $150/each. The satellite upgrade was $125. I also needed another remote, that was $20. Are you keeping track? That’s $445 so far. And then the upgrade in channels was an extra $20 a month. It was part of the graduation gift to my wife – the gift that keeps on giving (ask me in 6 months if I’m still getting credit for that though, LOL).

So we have $445 in fixed costs and $20/month in variable costs. Do you know how much I paid? Nothing. I got all the fixed costs waived, one by one, and I got the first 6 months of the variable costs waived. The only thing I agreed to pay extra was for four months of maintenance services, for a grand total of $28. That was my “big” concession. Why would they care about $28? Because it is an annuity, and many people just forget to cancel it.

That’s not the reason I got the discounts though. The actual reason is really simple: because I “just asked” for it. I went through each cost line item and asked them to waive the costs, with an intonation that indicated that I fully expected them to do so. I used a technique that sales people use, called a presumptive close. I assumed they would do it when I asked. And they did!

The “just ask” strategy is not new, but it does help to increase the TCO proposition. Years ago when I was a purchasing executive for Intel, I told my staff of purchasing managers that I wanted the transaction order placement personnel to start asking for extra discounts when they were placing purchase orders with suppliers.

The response was “we’ve already spent all this energy using benchmarking and cost models and bidding to get suppliers down to their rock bottom position. An administrative personnel with no negotiations experience is not going to get it lower.

My perspective was, if the supplier is already going to be on the phone anyways validating order information, what’s the damage in asking for an extra discount while we’re already talking to them?

Guess what happened? It worked! Close to 50% of suppliers threw the transaction placement person a bone in the form of a slightly larger discount or an early payment discount, or they waived some fee they were going to charge. Was it because the order placer used advanced negotiation techniques? No! It was because they “just asked”. I started tracking this as an indicator and it turned into a great cost savings deliverable for the department.

By the way, I drive a pretty nice jet black convertible 911 Porsche that has a lot of upgrades. It’s my baby, and it’s also a head turner. The check engine light went on recently, and that is never a good with a Porsche. The bill was for $11,000 because the entire engine needed to come out to fix the problem. I got it down to $7,000. The reason? I just asked, but I did it in detail, on every single line item of labor and parts. I presumed that I had the right to do this, and I didn’t care that nobody else exercises this right. I also presumed I’d get the discount, and I did!

Mind you, “just ask” is NOT a replacement for benchmarking, cost modeling, bidding, and negotiation strategy development. It IS a tool in your arsenal to improve TCO, usually in a matter of seconds. In the world of low hanging fruit, this is watermelon.

Are you using “just ask” as a part of your purchasing arsenal? Does your PO placement personnel employ this strategy, even when everything has already been expertly negotiated by someone in purchasing? Don’t assume the well is dry. Sometimes you have to “just ask” to find out…

Come back and tell me about your successes with this, I’d love to hear your stories.

Procurement Training By Camel

 

I spent the last 10 days in Egypt on a purchasing training and consulting assignment with one of the biggest companies in the country. I spent most of my time in Alexandria, a beautiful Mediterranean-like city on the water. After my work was done, I found time to sight-see a bit in Cairo, prior to flying back.

No trip to Cairo is complete without a visit to the pyramids, and of course I did just that. I had a few options in visiting them. One was to walk, the other was to drive, the third was to go by horse, and the final option was to go by camel (I know, I know, you were dying for me to get to the camel topic…. keep reading and I’ll eventually make this topic relevant to purchasing).

Since I already get enough exercise walking back and forth to the refrigerator at my home, walking was out of the question. Many triathlon competitors will tell you that exercising too much (over-training) is a big problem, and I refuse to fall victim to it. Going by car seemed too mundane and also too quick. Going by horse felt so, well, un-Egyptian. As they say, when in Rome, do what the Romans do. Therefore, I went by camel.

I learned a lot about camels from my guide. One thing is that they go the entire Fall and Winter seasons without drinking a single drop of water – not one drop! The water is there, they just choose not to drink it, for a full six months. I was awestruck by this fact. During the Spring and Summer seasons, they drink infrequently, but when they do, they drink 40 liters. I was like that in college, only with Diet Coke. Of course, camels also have humps as a source of energy for their long treks. I have my belly, but it is of no such use.

One other thing I learned was through my own observations. My guide was on a horse. His horse did what all horses did when walking: it would look at the ground. Curiously however, my camel never once looked at the ground. He kept his head high and straight. He would look far into the distance the whole time. This piqued my interest.

I asked my guide why this was the case. His answer was fascinating (to me, anyways). He said that camels have to cover incredible distances, and they know it. What’s happening a few feet in front of them isn’t important to them. They have to focus on where they need to get to in a few months, not where they will get to in a few feet. As a consequence, they hold their heads high and focus on their destination.

This got me thinking. There is a lot to learn from camels. Camels are strategic thinkers. They plan everything ahead. They don’t let themselves get bogged down by the short term. They look far ahead and focus on their goals and objectives – getting from where they are to someplace very, very far away. They are unencumbered by the present. It is vital to their very existence.

Of course, I saw a purchasing corollary in all of this. Here I am in front of the one of the Seven Wonders of the World, and I’m busy philosophizing about purchasing. I really need to get a life.

Anyways, the best purchasing and supply managers that I have seen are the ones that don’t get bogged down in daily fires. And it is my experience that most purchasing professionals are spending up to 75% of their time in “fire fighting” activities. What I mean by that is not that they lack purchasing skills, but rather that they’ve allowed themselves to get sucked into unplanned short term activities – mails, IMs, customer issues, supplier issues, phone calls, etc.

How often has it happened that you started a day with a list of things you wanted to accomplish, and only got to one or two items at best because of unplanned activities? How many of those unplanned activities made it to your monthly status report? To your annual performance review? Chances are, they made it to neither. That’s the nature of fire fighting in our profession. Nobody got on the fast track to being the next director of corporate purchasing because they were so adept at putting out fires.

The answer of course is not to ignore these daily issues. The camel doesn’t do that either. The camel finds solutions that result in the ability to focus on the long term. We all need to do that. I teach many such principles in my seminars. It’s not enough to have great purchasing skills. We need to structure our workload and manage our customers and suppliers such that we can spend our time on strategic activities that do end up in status reports and annual reviews… and ultimately, in promotions and career growth.

To be honest, I never thought I would write a blog extolling the virtues of camels. Here we are though. Incidentally, in case you are curious, here’s a picture of me and my camel. Who knew I’d learn so much from him?

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How interested are you in the starter in your car? How about in the motor in your hair dryer or the hinges to your front door? Not very much interest there either, that’s what I thought.

How about if any of those don’t work? Then do you have interest in them? Suddenly you do! These are things that are supposed to “just work”, and you should be spending zero calories thinking about them in any capacity.

Why am I talking about this? Well, I attended a presentation from a purchasing trainer the other day where he said purchasing’s #1 objective was to exceed customer expectations and delight the customer. It was a packed house, and nobody blinked or questioned him. I like the guy, and he’s actually really smart and good at what he does, but I couldn’t disagree more.

We call the person inside our company that generates the demand and has the budget to fulfill it the “customer”. That’s really a misplaced term however. Think for a second who the real customer is, who you are really supposed to serve. Purchasing does not have a fiduciary responsibility to the person who generates the demand and has the budget (the internal customer). However, purchasing does have a fiduciary responsibility to the board of directors, internal audit, the shareholders, the owners, the taxpayers…. whoever it is that ultimately runs or owns the company or agency that you work for. THEY are the real customer.

Now, back to the starter, hair dryer, and hinges topic (I know you were dying to know how I was going to close the loop on those; let me tell you, it wasn’t easy!). Isn’t there a problem if you are either delighted or disgusted with how these items work? Even if you are delighted with their functionality, that still means you are spending too much valuable brain-time on something that is supposed to “just work”, right? Your real goal is to be disinterested, and to be able to carry on with more meaningful and value-added activities in life than extolling the virtues of that marvelous hinge in your front door. I’m sure it really is a marvelous hinge though. Just don’t tell me about it. I’m serious.

Purchasing is not much different. If we are trying to delight the internal customer, or if the internal customer is delighted, it is likely we are rolling over on key decisions where we are instead supposed to be taking a hard stand where needed on behalf of the REAL customers of the company.

If all internal customers had their way on every purchasing related need or issue, they would indeed be delighted. Your customer satisfaction scores would be through the roof. What would purchasing look like in that model though? It’s likely that most every order would be placed at the last minute with express shipping, their preferred suppliers would always be the selected suppliers, corporate commodity strategies would cease to exist and there would instead be customer driven purchasing strategies, and so on.

I don’t mean to paint a black picture. There are many customers out there who are well aligned with purchasing on doing the right thing for the company. It didn’t happen overnight or by accident though. It took blood, sweat, and tears on the part of purchasing before this end state was achieved.

How much do you think about the HR department in your company? Accounting? Finance? Legal? How much should you be thinking about them? These are all service providers for which you are the customer. Isn’t disinterest really the best state? They should “just work”, like the starter in your car, right?

Are you mixing your allegiance to the internal customer with your greater allegiance to the people who ultimately run or own the company or agency you work in? Are you being graded on your ability to delight the internal customer? How much time do your internal customers spend having to think about purchasing? You need to challenge yourself in all of these areas. None of this precludes you from having a great relationship with your internal customer by the way.

I know this is a difficult topic. It flies in the face of most everything we’ve ever learned. Customer service is supposed to be off the charts in every business. Dig deeper however, and you will see that it doesn’t or shouldn’t work that way for business units that have a fiduciary obligation to the company and owners. All the rules we learned about customer service were made for sales department personnel, and that’s not us.

It’s a good thing too. We have dream jobs. It’s much more fun shopping all day long with somebody else’s money!

While in the beautiful country of Bali, Indonesia, I went to a coffee plantation and tried a rare type of coffee called Kopi Luwak.

It’s rare because it first passes through the intestines of a civet, which is a member of the mongoose family, before being roasted.

Hopefully they wash it first, but I don’t know that for sure and I didn’t ask.

It’s supposed to be the smoothest coffee on earth, and it’s also the most expensive – up to $600/lb.

As I understand it, the term “Java” comes from Java, Indonesia. I figured these guys must know something about coffee.

Before drinking this mystical coffee, I got to watch a civet in a cage “produce” the beans for roasting.

To this day, I still don’t know who was more disenchanted with the Kopi Luwak production process, me or the civet.

The moral of the story however is that in order for me to experience this coffee, I had to embrace change, and this was no small change.

In the right circumstances, usually not involving wild animal droppings, people can embrace change. People are motivated when listening to compelling speeches about change.

In fact, in one way or another, almost every president in history has probably used the idea of “change” to get themselves into office.

For some reason however, when change hits the workplace, or when it becomes personal, the reaction can be much different. It’s too close to home maybe.

While doing a guest speakership at a purchasing conference last week, there were about 4 students (out of roughly 70 attendees) who were really resistant to my concepts, and vocally so.

After all, I was teaching them that the way they were doing purchasing was in fact what was causing the problems.

Nobody likes to hear that. Of course, I don’t get paid to tell people what they want to hear.

I dug deeper to find out why they felt the way they did.

We are talking about an organization that has 4 scattered implementations of ePurchasing, and not all with the same vendor.

Independent agencies of this organization were also looking at procuring their own ERP systems.

I asked why there couldn’t be ONE ERP system for the greater organization, and they emphatically explained to me that it wouldn’t meet their unique local needs.

I just listened. It wasn’t the right time or place to debate, although I’m sure they had some great reasons for their perspective.

My take away from this discussion was that some people don’t like change when it comes from the outside.

If there is change, they want it to come from within their immediate scope of control. More specifically, they want it to come from them.

Even if they negotiate independent ERP solutions for each agency, they might individually get great deals – maybe even world class deals – and they may do a great job solving problems that have been haunting them for years at the local level.

Their customers and local management may love them as a result. It still doesn’t make it the right thing to do.

The challenge in purchasing is to shift away from doing the right thing for a *part* of the organization and instead do the right thing for the whole company or organization.

That means not everyone involved will be happy. It also means that the solution may not be perfect for all parties involved.

However, it does mean that TCO will be optimized for the entire organization – and that’s what we’re getting paid to do as purchasing professionals.

Are you making purchasing decisions that are the right thing to do for your customer, but are the wrong thing to do for your company?

Are you ensuring an organization wide unified approach in your commodity purchasing strategies wherever possible?

You really have to challenge your customers and management – and even yourself – to make sure you are.

Remember, the ultimate customers you are trying to please are the board of directors and the shareholders, or the taxpayers in the case of government agencies.

The worst possible case of course is doing the wrong thing for all parties involved, like when I bought that dreaded wild animal intestine processed coffee.

In case you are wondering, it tasted awful.

…I guess not all change is good.