Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Category: Purchasing Process

  • Purchasing Training – Supplier Negotiation Strategies, Pt 2 – “Puppy in the Window”

    Purchasing Training Puppy Dog Trick Puppy In The Window Trick

    OK, so this series is about counter-intelligence. In this context, that means knowing exactly what tactics and strategies suppliers like to use, and being able to anticipate, recognize, and diffuse those attempts.

    Mind you the goal is not for you to win so they can lose. The big name courses out there pushing this concept are still stuck in the 1950’s.

    I cover how to achieve your biggest TCO objectives while still allowing the supplier to win in my award winning training solutions. For now, we are focusing on how suppliers try to shift negotiation advantage to them.

    Last week, we talked about “Nibbling” as a supplier negotiation strategy. This week, we will talk about the “Puppy in the Window” supplier negotiation strategy.

    Puppies are cute. There is no denying it. They just have a teddy-bear like quality and an innocent and clumsy behavior that makes them absolutely irresistible.

    When you buy a puppy, the left hemisphere of your brain – the side that is responsible for logic and reasoning – is on vacation. It’s a complete ghost town on that side.

    The right hemisphere of your brain – the side responsible for emotions – is meanwhile working in overdrive. It’s swimming in emotions and even releasing chemicals that are making you excited.

    The last thing you are thinking about is the total cost of owning a puppy, which is sure to become a dog, which is sure to have vet bills, breed specific issues, behavior problems, and more.

    If it’s a Dachshund, back problems await. If it’s a German Shepard, hip dysplasia is highly common. Bull Dog? Respiratory problems. And so on.

    The goods and services you buy are no different, except it’s the *suppliers* that come with different problems.

    And these problems almost always arise AFTER the supplier has received full payment. And that’s when the heartache begins.

    And while the right hemisphere of your brain goes on vacation, because it was satisfied a long time ago, the left hemisphere of your brain now has to figure out how to solve this mess.

    So what does “Puppy in the Window” have to do with all of this? Well, when you take that cute puppy in the window and put it in your arms, you’ve pretty much already bought it.

    If you’ve taken it home for a 24 hour trial, that “trial” lasts a lifetime. Who can return a cute innocent puppy?

    So how do suppliers use this concept to their advantage? Simple: they put the good or service in your hands for a trial, even a free one.

    Suppliers know that it takes time and energy, on your part and your customer’s part, to use their product or service for the first time.

    They know that you can’t resist just trying out their product or service for free, with no obligation to buy. What have you got to lose?

    They also know that once you’ve taken that puppy home, you’re not bringing it back, and you’re not even going to look at other puppies. Other puppies don’t exist anymore.

    Once you’ve taken the supplier’s puppy home, the search is over. This is no longer a trial. The supplier has just won your business.

    Even if you keep a cool head, your customer probably won’t. They’ve already gotten attached to this puppy, and of course they needed this puppy yesterday, or your company’s doors will close – right?

    From your customer’s perspective, time is short, and this puppy will have to do.

    You are stuck. The “Puppy in the Window” strategy WORKS MIRACLES for suppliers.

    So where does this happen in purchasing? Everywhere! Capital equipment, software, site services, technical support, staff augmentation, hardware, and so on.

    So how do you handle this? It’s simple. You have to hold your customer accountable to do complete evaluations of the product and service offerings of ALL target suppliers BEFORE supplier selection.

    In other words, you force the left hemisphere of the brain to make a rational, in depth, and data-based evaluation of the strengths and weaknesses of ALL supplier offerings (not just one supplier’s offerings, in the form of a free trial), and then make a decision.

    In puppy speak, this means you would have done enough research on breed specific behaviors, illness, hyperactivity levels, exercise requirements, vet requirements, etc. before ever putting yourself in the highly vulnerable position of holding one in your hands inside of a pet store.

    Recognize when suppliers offer to do this and make sure if you are going to do an evaluation, the evaluation is happening with all target supplier offerings and not just one.

    Use the left hemisphere of your brain and make a rational, logical, data-based decision.

    If you don’t, be prepared to have that initial excitement and feeling of victory followed up by the polar opposite experience of coming down like a roller coaster when reality hits.

    That’s a terrible place to be as a purchasing professional. Don’t let it happen. Recognize and diffuse supplier “Puppy in the Window” negotiation strategies before they ever start.

    Next week, we will talk about the supplier “Neutral Location Negotiation Strategy”.

    Be your best!
    Omid G

  • Purchasing ~ Are Your Single/Sole Sourced Suppliers Price Gouging You?

    Supply Chain Management Negotiation Training
    Are You Being Price Gouged?

    I was presenting at an International Purchasing Conference in South America this week.

    This is for one of the organizations of the IFPSM – The International Federation of Purchasing and Supply Management – and this organization is chartered to drive purchasing excellence for the entire region of South America.

    I was their headline speaker for this two day international conference. None other than the founder of this purchasing association – and long time purchasing veteran – said that mine was the best presentation on purchasing practices he’d ever seen in all his years in the purchasing business.

    Talk about humbling.

    It’s my honor to teach my systems and strategies. Our industry can be so much better and it’s my goal to help you in this endeavor.

    Anyways, one of the questions that came up repeatedly was the following:

    “we have a single/sole source supplier that won’t cooperate with us on price because they know we have no other choice but to use them, how do we regain control of TCO given this fact?”

    This is a problem that plagues purchasing and supply chain managers the world over. But it doesn’t have to.

    You see, in these situations, what you need to do is to call the supplier on exactly what they are doing – firmly, but diplomatically – and let them know exactly what the consequences of their behavior is going to be. You can do this really wrong if you are not careful though.

    Here’s how it works. You tell them “We both know that we are in a sole/single [<–pick the right one] situation in our business relationship. I want to be very honest with you and tell you that the perception inside our company, and there is data to support this, is that we are paying a premium to your company because your company knows we can’t get this product or service elsewhere at the moment.”

    Then continue, “Now as of this moment, this strategy is working for you, and you are right that there is nothing we can do about it. However, I want you to be really clear on what’s happening as a result of this premium pricing model.”

    “We’ve been in this situation before with other suppliers. The suppliers that wanted to continue to benefit financially from the single/sole source situation that they thought would last forever got a rude awakening. We went off and developed another source. That’s right. It wasn’t easy, but we had no choice.”

    “And guess what happened after we developed another source? The supplier’s business with us fell off a cliff. Sometimes they still maintained a healthy share – 50 or 60%, but that is a big drop off from 100%. Other times they were cut off altogether.”

    “And the common denominator? All of these suppliers did not give us competitive pricing because they had a customer without options. All of them thought that good times would last forever. But I want you to know that our company can and does create options in these situations.”

    “By the way, this is not a threat. Far from it. This is courtesy advance notification of what’s coming. I’m actually trying to do you a favor. In fact, I’m giving you an opportunity. Come back to me in two weeks with a substantially revised proposal that sends a message loud and clear to my management that your company is committed to this relationship.”

    “And if you decide you don’t want to, that’s OK, but please just recognize that I will be forced to start working on the development of a second source until I get one in place. This is not punishment. It’s just good business. For the next two weeks though, you really have your destiny in your own hands.”

    And that’s it. You call them on it, and you make THEM COME TO YOU and say that they want to lower pricing, so that you don’t feel like they’re taking advantage of the situation. They need to do it because they want to, not because you put a gun to their head.

    On a related note, you really shouldn’t let yourself into these kind of situations in the first place. If supply line is critical, single/sole sourcing is usually a completely unacceptable strategy.

    And don’t believe that you can’t get better prices or lower TCO by spreading business over two to three suppliers instead of one. In fact, the competition can take your TCO to places you never dreamed. I can teach you how to do that as well. Let’s just say that it doesn’t happen by accident!

    Thank you for your readership. It’s because of you that I have the best job in the world; catapulting the purchasing and supply chain management profession to the next level, one company at a time. Yours should be next.

    See you next week!

    Omid G

  • How Suppliers Let Themselves Off the Hook for Poor Performance

    Supply Chain Management Contract Training
    Beware of Force Majeure

    Suppliers perform poorly everywhere. Sometimes it’s their fault, sometimes it’s not.

    Ever see a sports star go to another team and then suddenly lose their magic? You have to wonder if it’s a coaching problem. In our case, a poorly performing supplier may be a purchasing problem!

    In any event, the one thing you have to remember is suppliers are in the business of making money. Period, end. The more you write your contracts to allow them to be guaranteed the money without contractually having to deliver performance, the worse off you are.

    Just one of the clauses you really need to pay attention to, and what will be the focus for this week’s blog, is the Force Majeure or Contingencies clause in your contract. Force Majeure means “major force” in French. That’s the only French I know, don’t get excited!

    What does this clause do? Well, it gives one or both parties a “get out of jail free pass” when they fail to perform due to certain circumstances that are undeniably outside of their control. These are called “Acts of God” in the legal community.

    Put your religious beliefs outside and just keep your focus on the intent here. What this means is if it’s an “Act of God”, then it is not an act brought about by you or the supplier.

    What kind of things qualify? Tornado, hurricane, natural flood, tsunami, earthquake, war, attacks by foreign enemies, mass civil riot and unrest, things like that.

    Now this clause can be unilateral (applying to the supplier only in our case) or bilateral (applying to both parties). It’s better to have it bilateral, because your company may be hit by one of these things and then be unable to pay the supplier on time. Instead of being a breach of contract, you’d be able to claim temporary exemption due to Force Majeure, without damages being invoked.

    Here’s a typical Force Majeure clause that a supplier would like to see inserted in your contract, and they will very frequently try to slip some tricky things in, just to see if you are paying attention. See if you can catch it:

    If either party hereto is prevented in the performance of any act required hereunder by reason of act of God, fire, flood, or other disaster, malicious injury, strikes, lock-outs, or other labor troubles, supplier late deliveries, supply line interruptions, riots, insurrection, or war, then performance of such act shall be excused for the period of the delay and the period of the performance of any such act shall be extended for a period equivalent to the period of such delay except that if any delay exceeds six months, then the party entitled to such performance shall have the option to terminate this Agreement.

    Did you catch it? Read it again if you didn’t.

    The supplier wants YOU to be responsible if THEIR labor goes on strike, or if THEY choose to lock the building and keep employees out or if THEIR suppliers deliver late to them or if THEY experience a materials supply line interruption.

    They also included things like fire or flood. Now, if an entire city was flooded or on fire, then that would be acceptable. However, if their building was not to code and they flooded their own building or the building caught on fire as a result, the supplier would once again want to chalk this up as an “Act of God” and be off the hook for performance. Not a bad deal for them, huh?

    In other words, suppliers want their own mismanagement of their labor force and their supply line and their building to be considered an “Act of God” and for YOU to pay the consequences without right or recourse. Not going to happen!

    But the sad reality is that purchasing professionals sign up to this all the time, and suppliers laugh all the way back to their office afterwards. My purchasing friends and followers,we are better than this.

    Now, let me make this a little more dismal. This is just ONE clause that makes us vulnerable in the contract when we don’t have proper knowledge. There’s probably 100 such clauses and potential “gotchas” in every contract you sign.

    And you never realize you got duped until way after you signed the contract…. when something goes wrong. And if you get duped bad enough, you tarnish your results and your perception inside your company. You may even have to brush off your resume and look for a fresh start elsewhere.

    Does it really have to get to that point though?

    The ground shaking announcement coming from me personally on January 1st, 2014 is going to solve this and all your other purchasing and supply chain management nightmares. It is going to give you the tools to catapult your career, your income, and your results forever.

    I can’t wait. Don’t you dare miss it.

    See you next week!

  • Are You Buying Performance Results From Your Suppliers?

    “Pays for Performance” Purchasing Training

     

    Supply Chain Pays For Performance
    “Pays for Performance”

    Go look at your corporate contract templates. I can already see them in my mind: Goods, Services, Goods & Services, Construction, and Software.

    You might have some other boutique contract templates, but these are the standard norm for big companies.

    The problem is this: all of them are written to buy “stuff” (i.e. goods and services) instead of buying performance results.

    Suppliers want to sell you goods and services, and then move onto the next customer. What happens next is your problem, not theirs, or so they hope. They’ve already got your money, and that’s how they like it.

    Why am I talking about this? Well, I talk about it all the time with in my client engagements, but I’m talking about it today because of an article I just read. It was about Obamacare, specifically about the website. You’ve heard about it too – where the Obamacare website is unresponsive and overloaded, resulting in a rather forgettable launch.

    So what’s the correlation? Well, as I understood it from the article, suppliers were doing all this programming for the website. The article said that the suppliers were having cost overruns AND not performing. What? How does that happen?

    Unless purchasing is totally asleep at the switch, a supplier should never have both cost overruns and performance problems at the same time. Those are supposed to be mutually exclusive events (just like inflation and unemployment – they are never supposed to happen at the same time). If it does happen, it usually means a bad contract was put in place.

    Can you imagine being billed extra for a meal at a restaurant when the meal itself was burned to a crisp? Uh….not gonna happen, right?

    Which makes me assume that the Obamacare website programming contracts were written for the delivery of goods and services (“a website”) instead of for performance results. Mind you I don’t have any inside information on this – I’m just speculating based on what I’ve heard and read.

    Let’s look at how a website development contact might be written for goods and services, what the corresponding issues might be, and how to shift the focus to performance results:

    Purchasing Training - Performance Results Chart

    Remember, you never want to find yourself in a terrible situation – one in which the supplier is being paid to not perform, or even worse, where they are being paid extra to not perform. That’s why you should write your contracts to pays for performance instead of paying for goods and services (“stuff”).

    Now the table I put together above is really incomplete. There are many other areas that need to be addressed, and even what I wrote was not in sufficient depth. I’m limited by the practical length and depth of a blog entry.

    What I want to see from all of you as transformational purchasing and supply chain management professionals is to start writing agreements for performance results instead of agreements for “stuff”.

    The goal is to never find yourself in the unenviable position of owing money to a supplier that isn’t performing to expectations, while having no contract remedies to save you.

    REWARD: Because you have read this blog, it shows that you’re serious about your purchasing career. I’d like to reward you with a huge discount for a copy of one of my books, “Purchasing Advantage – Running a World Class Purchasing Organization”.  

    The regular price for the downloadable PDF copy of this book sells like crazy for $19.97 but you can get your copy today for only $7 with coupon code: 10da9a9260

    CLICK HERE TO SAVE!  When you click that link, you’ll see the regular price, but don’t worry, just click the Add To Cart button. You’ll go to the Order Details page and see a link that says, “Have a coupon? Click here.” Just click that link and enter you code: 10da9a9260 and the price will automatically change from $19.97 to $7.00. 

    This is a very limited time offer to Click Here Now to see what you’re going to get and order your copy now. You’ll be glad you did!

    Work with me to find YOUR purchasing advantage. You can spend 20 years trying to learn these strategies on your own, or you can work with me and catapult your career in a few weeks.

    See you next week.

     

  • Are You Smarter Than the People Selling To You?

    Supply Chain Management Counter Intelligence

     

    Supply Chain Management Counter Intelligence
    Counter Intelligence

    I think I’ve mentioned to you before that I’ve stopped reading purchasing books.

    At the risk of sounding arrogant, I don’t learn anything from them anymore, and haven’t in a long while. Heck, that’s why I started writing my own.

    So what I do now, actually what I’ve been doing for a while, is attending sales seminars and reading sales books.

    Why? Well, it’s counter intelligence. Could you ever imagine the US going into a war without counter intelligence? (Ok, I know what you want to say – just tell me what the answer should be).

    The point is, simply developing your strategy without counter intelligence is a pretty bad move. There are two types of sales counter intelligence. One is generic to the sales community, and the other is specific to the company you are buying from, and the person or persons who are selling to you.

    I’m going to focus on the generic side, because that is where the vast majority of the focus is by the sales community, and all the books and seminars are focused on this angle as well, by design.

    Here’s some of what I’ve learned:

    Sales people want to focus on VALUE, and use that to charge higher prices. This is the whole concept behind pharmaceuticals and software, both of which have a marginal cost of almost zero.

    • Your response: Shift the focus to cost structure and market competitiveness, and if there is no salient difference between their products/services and that of their competitors, tell them that “my customer does not perceive a difference”. Nobody can argue with perception.

    Sales people want to sell you SOLUTIONS. A solution looks suspiciously like a good or service, but it costs a lot more.

    • Your response: “I like solutions. But if I’m going to pay for a solution, then we’re going to need to contract for performance results, and I’m going to deliver progress payments that will be tied to the measurable delivery of performance results over time, not to the delivery of items to my dock.”

    Sales people will want to negotiate at their facility under the auspices of “we need you to see our facility to really see how we do things.” Then they gain psychological and logistical leverage in negotiations, as well as control of time. If this fails, they are taught to secure a neutral location for negotiations.

    • Your response: “We only do negotiations at our facilities, and we don’t deviate from that practice. If we need to see your facilities, let’s schedule a separate trip and agenda to do that, but it won’t include negotiations.”

    Sales people will want to ask you a lot of questions that force you to bring out painful aspects of how you do business now, and also do “shaping”, whereby they ask questions that force you to paint yourself in a corner such that you are basically telling them that the big weakness in your business model today is that you are not buying the seller’s product or service.

    • Your response: Publish an agenda before every supplier meeting (not just negotiations) beforehand and own strict control of the meeting. If questions or comments arise that are outside of this scope, indicate so and get back on track. If the question is of value, write it down and tell them you’ll get back to them after the meeting. YOU dictate the flow and content of meetings, and drive them to your TCO objectives.

    These are just a few, I could write a book on this. Heck, I might just do that, not a bad idea!

    But the point is, sales people are not dumb. Don’t forget, sales is a revenue generating department. What does that mean you ask? It means they have FAT budgets for training and for wining and dining your customer.

    It also means they have much more refined and sophisticated tools and processes than purchasing, who is typically underfunded because they are not viewed as a revenue generator. What we should be viewed as is a value added center of profit, but that’s a different blog – or maybe a different book, ha!

    The other point is that purchasing often engages in inbreeding of thought and strategy. If you sit and strategize, alone or with a team, on how to negotiate with a supplier, you are still engaging in inbreeding of thought.

    You need to know how the other side operates. You need counter intelligence. This needs to be both generic (sales side in general) and specific to the company you are working with.

    The last point is that 99.9% of purchasing negotiation courses focus on behavioral/psychological techniques to achieve negotiation success. It’s the same for suppliers. This is a damn shame. For us anyways. 2/3 of your negotiation strategy should be cost based, not behavioral or psychological.

    In fact, the behavioral piece will nearly cease to exist in a supply chain management model where all the links are to partner together as one entity that make decisions for the good of the chain.

    Take control of the power you harness in negotiations, take control of supplier discussions and negotiations, and most of all, take control of information on both sides of the table.

    See you next week.

    P.S. THANK YOU so much for the overwhelming global response to the 4 Day Sale I had on the Power Purchasing Pro Membership. I am so lucky to work with people like you, in the BEST profession in the world!

  • Purchasing Contract Training

    Is the Purchasing Contract Your Best Friend or Your Worst Enemy?

     

    Purchasing contract training
    Best Friend or Worst Enemy?

    A friend of mine recently was going to sign up to a lease for a business location for her family counseling business. Business was booming for her. She had a non-profit organization that was funneling lots of money her way. Life was good.

    I asked her “why don’t you let me take a look at the contract for that leased space before you sign it?”. She gave me a copy. It looked good, really good. All except for one thing: there was no termination clause. She didn’t have a way to escape the lease if business went sour.

    I told her this, and she insisted it wasn’t necessary. After all, times were good for her.

    I quite literally forced her to have a clause put in. We made it as termination for cause clause, sometimes also called termination for default. This is different than termination for convenience, which no building owner would ever sign up to in a lease agreement.

    The termination for cause trigger was related to her losing business contracts or otherwise becoming unprofitable. In her mind, this could not and would not happen, and it was a totally unnecessary exercise that was only meant to appease me.

    However, it did happen.

    About six months into this three year lease, her big non-profit funding agency pulled the plug, and she was left holding the bag, with no path to recovery. She was able to get out of the lease just like that.

    Had we not inserted that clause, she would have been financially devastated, because it was a big space. And it happens.

    Another person I know shut down a pizza shop they owned, and they did not have a termination for cause clause in the contract. As a consequence, they made lease payments for 18 months on an empty shell of a building. How painful is that?

    The point is, contracts can be your best friend or your worst enemy. The fact that this was a building lease example is irrelevant. The interesting thing is that it was not what was in the contract that was the problem, but rather what wasn’t in the contract. You have to know what you are doing to look for both.

    Want another example? A government contract was put in place with a road and bridges building contractor in California. The government agency wanted to make sure the supplier would not finish the project late, so they put a delivery/delay incentive clause in the contract.

    A delivery/delay incentive both gives a penalty for finishing late and a bonus payment for finishing early. If you call it a “penalty”, then the courts will look for there to be an incentive clause as well. However, if you call it a “price reduction”, then you don’t need the incentive clause. I’ve yet to meet a purchasing professional who knows that.

    The project was to take 137 days. The supplier worked around the clock and shocked the government purchasing department by getting it done in 66 days (!!). As a result, the contractor got a whopping $14.8 MILLION incentive payment (not a typo), over and above payments due for the actual work performed. Oops.

    I define “purchasing hell” as when the supplier is doing exactly what the contract states, and you are mad as hell about it. And guess who the only person to blame is? Yes, we need to be accountable.

    There are a wide assortment of contract clauses that can create really bad situations for you, and for the vast majority of them, the legal department is not going to catch them for you. The reason is that they are looking for legal risk, not all risks. A contract with legal approval can still be a terrible deal for the business.

    Some clauses that can give you a one-way ticket to “purchasing hell” if you are not careful include warranty, acceptance, insurance, termination for cause, termination for convenience, indemnification, limitation of liability, definitions, identified breaches and remedies for breach of warranty, and many others.

    The point is not to scare you actually. My biggest regret on behalf of our industry is that, in general, purchasing professionals have a huge gap in contract law knowledge, with insufficient recognition of how big of a problem this is.

    Are you allowing lack of contract knowledge to hold you down? Are you relying on the legal department to catch issues for you? Are you just attaching a SOW or specs to the contract and calling it done? Are you looking at both what terms are in the contract and also what terms are not?

    Remember, the contract is just a generic template until you bring it to life. It has NO idea what you are buying, and only you can customize it to meet your specific requirements. If you are buying office supplies, your needs will be very different than if you are buying manufacturing capital equipment. Buyer beware.

    Don’t let lack of contract knowledge be a crutch for you. Make contract knowledge your biggest asset. If you do it right, you will save tons, and I do mean tons, of time on the back end. Almost all customer and supplier excursions are due to poorly written contracts that don’t specify performance and remedies for breach of performance.

    Develop knowledge in contracts, invest the energy up front, and enjoy the benefits on the back-end. Educate yourself and take these steps to find your purchasing advantage!

  • Fatal Practices That Drag Cost Savings to a Halt

    Purchasing Training ~ Fatal Practices

     

    Purchasing Fatal Practices
    Purchasing Fatal Practices

    I was teaching a couple of seminars this week at a purchasing conference in Albuquerque, New Mexico. They were training on Purchasing Contract Law (slashing contract cycle time and catapulting TCO results) as well as on Supplier Management for Agility/TCO.

    The feedback was awesome; it’s a big part of what makes my job so fulfilling.

    Anyways, there were some public purchasing professionals in the audience.

    I asked them why they don’t aggregate their demand across like agencies and negotiate mega-contracts that deliver far greater savings…. You know, aggregation of demand. Most government entities don’t do this, so I just made the presumption that they weren’t either.

    The answer was interesting. I’m used to hearing “but we’re all different” (which I don’t buy), but that’s not what I heard this time.

    They kind of read my mind and told me “we’re all buying the same things, you are right.” “So what’s the problem?”, I asked. Aggregating demand under this scenario should be a slam dunk, I was thinking.

    “You see, it’s not that we need different things, it’s that our customers ask for the same things differently.” What? What does that mean? She went on to explain:

    “It’s true our county purchasing departments are right next to each other and buying the same things. There are some normal challenges, such as separate budgets, separate local level leadership, etc, but there’s something else that’s a much bigger problem.” I asked for further clarification.

    She basically went on to say, in different words, that the problem is that there was too much innovation. But how can innovation be a bad thing? I immediately knew what she was talking about.

    Here’s the problem: The engineers in each county are allowed to design their own specs for the same basic things. She gave me examples of this.

    In one county, the light poles might be 1 INCH taller than in another county. You read that right. Also, the wiring that is used for the same application in one county must have a “special coating” whereas the wiring for the same purpose in the adjacent county needs no such coating.

    They also said that in one county, a particular city amenity may be designed so it can come off the side of a delivery truck, while in the adjacent county, the same item was designed differently so it could come off the back of a truck.

    This results in extreme customization. Customization is a money sucker. It’s also a time sucker. More time to create custom specs. More time to bid custom specs. More time to select suppliers for custom specs. More time to contract with custom suppliers. And finally, more time to manage custom spec suppliers.

    Is anyone winning in this deal? I seriously doubt suppliers like being forced to have a manufacturing line that goes at a snail’s pace because they can’t churn out standard products at higher volumes. So they add on tons of cost to pay for this “death by customization” purchasing model. Can you imagine how much they must hate it? They can’t say anything because they don’t want to lose the business over non-compliance to bid specifications.

    Now here’s the irony: These are smart people making these requests for extreme customization. They are making what is probably the best design for their specific needs. They just don’t see the big picture at all.

    So while this may make sense for an individual business entity (public or private), it is completely unacceptable when you have hundreds of like entities in the same corporate structure (once again, private or public) creating costly custom specifications to solve the same problem.

    If you think this is only happening in the government, think again. Internal customers, especially engineers, like to tinker. They like to leave their mark on big purchases. There’s no pride in submitting some standard specification or just adopting someone else’s specification. Nobody gets rewarded or recognized for that. They want to design it their way, whether it’s a good or a service. It’s THEIR specification, they rationalize.

    That is what I call “the bad kind of innovation”. We have to educate our internal customers that REUSE is much better than innovation in many cases. Innovation is only good if it solves a problem better than it is already solved today. That kind of innovation creates progress.

    Innovation for the sake of innovation, when there is already a PROVEN solution that someone else created, is a big fat waste of time and money, especially when the innovation creates little to no improvement in results, but comes with a huge price tag, both in extra processes and in extra costs.

    We need to be educating our internal customers, especially the engineers, that REUSE is more important than innovation when there is already a proven solution in place. Similarly, standard parts and components and services are always preferable to custom parts and components and services. Or at least the benefits need to outweigh the TCO negatives.

    Internal customers need to start getting recognition’s and rewards from purchasing for their efforts in driving reuse, not innovation.

    Have you ever seen a car with “fake” buttons on the dash that can’t actually be used? That’s because the dashboard template mold is reused for that whole model series, instead of customizing each dashboard to fit the specific options that the end user ordered. It would look nice that way, but at what cost? Reuse is where it’s at in purchasing and in specification design.

    Are you driving specification and services design reuse with your customer base?

    Are you rewarding your customers for reuse strategies that reduce TCO?

    Are you standardizing good and service components wherever possible to allow for aggregation of demand and TCO reduction?

    This is just one piece of the TCO puzzle, but it’s an important one. You need to nail this as a part of your overall individual and departmental TCO strategy. Make it happen.

    Ask me about products and services I offer to catapult your TCO results, your career, and your income. I do personal coaching, in-house seminars, and I have many online solutions. If you are not more capable every week than you were the week before, then you are stagnant in your career.

    Best of all is that “shake the world of purchasing” announcement that I keep telling you is coming. I keep getting mails asking what it’s all about. I’m not even going to let the cat out of the bag on that yet. Not even a little. Look for an announcement around the end of the year.

  • Data Analysis to Catapult Your Cost Savings – Are You Doing This?

    Purchasing Training ~ Data Analysis

     

    Purchasing Training - Data Analysis
    Purchasing Training – Data Analysis

    I’ve spent over two decades making a living off of the fact that our profession is in complete disarray.

    I want to fix that problem of course. It doesn’t matter what company or agency I go to, I leave thinking “wow, they are leaving so much money on the table”.

    Yesterday was the first time that I visited a client and didn’t get this impression. Ever.

    I was completely unprepared for this, because prior to that, it was just like watching a series of bad re-runs.

    I was supposed to talk about negotiation planning practices today (that’s what I promised in my last blog anyways), but I just can’t do it. I have to talk about what I saw. It’s everything I’ve been pushing companies to do for the last 20 years.

    And it changed everything for this company.

    You see, the problem in most purchasing departments is not lack of competent people, it’s a lack of competent practices.

    What I see over and over in big, spread out companies is a lack of ability and knowledge on how to look at corporate spends and analyze them to make strategic purchasing decisions.

    Purchasing professionals KILL themselves trying to find data. Data on commodity spends, supplier spends, existing contracts elsewhere in the company and actually accessing them, and so on.

    Riddle me this: If I were to ask you how much your company spent on office chairs at a particular location in (say for instance in your Singapore branch only), how long would it take for you to tell me? Or if I were to ask for a copy of all global contracts your company has for copier toners, landscaping, and carpet installation, how long would it take you?

    Or what if I asked if there was a corporate agreement in place for curtains and blinds and wanted to know the pricing and terms, right now? Or if I asked you to sort all outstanding contracts by dollar amount and expiration dates, how long would it take you to tell me?

    The business I went to, which is spending $11B/annually in total, could do all of the above with the stroke of a mouse, literally on demand. I watched it, and I’m going to leverage them as a use case in the future.

    And guess what, they were a government agency. I’m not kidding.

    And all of this spends analytics and spends aggregation and contract sharing was being done across all of their sister agencies, not just in their own agency. In other words, they were acting like one big purchasing organization across these various agencies in the state of California. What a concept!

    How did they get all of this? Well, someone at the top “got it” and took a leadership position on the behalf of all the agencies.

    There was a massive budget crisis coming 5 years prior, and so instead of cutting purchasing (which is the normal response), this person said “the only way we’re getting out of this is through having better purchasing tools. Purchasing holds the key to us coming out of this budget crisis ahead. The time to make this investment now, because we are having a financial crisis.” (note the powerful paradox)

    And so they invested in elaborate tools that allowed real time business analytics, dramatic aggregation of spends, a best in class ePurchasing implementation, true cross agency commodity management models instead of decentralized purchasing like most other agencies do, and real time access to information that slashes cycle time and catapults TCO.

    And they even had their modules set up to allow them to select lowest TCO vendors instead of being forced to go with the lowest bidding vendor, like most other government agencies do.

    These tools have resulted in this agency now saving an additional $200M a year for taxpayers. Wow!

    But if you think your company can also just buy a bunch of systems, plug them in, and then stroll into a rose garden of cost savings right afterwards, you will be sorely disappointed. If you just buy systems and quickly implement without doing process and controls redesign, all you will be doing is automating a bad process.

    I’ve worked with companies who’ve done these implementations, and helped them find these rose gardens. But they take work. Burning calories has never come free. But the payback is phenomenal if you do it right.

    What you really have to ask yourself is, how much time do you spend looking for information, and how many times do you move forward with a purchasing decision while lacking the right information?

    If you really start paying attention, you will be shocked.

    So let’s be honest here. If you don’t have such a system in place now (and remember, system means not just the application, but also the right information and business processes and controls), you probably won’t be getting one real soon either.

    But there are things you can and should be doing to completely revamp how you go about doing purchasing, absent these tools and investments.

    True aggregation of spends, development of centralized global commodity structures, development of forward looking commodity expenditure and savings plans, having contracts in place that aren’t seat belts but instead enable supplier continuous quality improvement, driving 90% of your business to 1% of your suppliers, spending 80% of your time in strategy and only 20% of your time in tactical mode, taking costs out of the supply chain instead of trying to get suppliers to cut profits to give you a lower price.

    All of these shifts have to happen if you want to be a world class purchasing professional. I’m going to do as much as I can through blogs, but I can do much more if we work together.

    Ask me about professional coaching services and in house purchasing and supply chain management training seminars.

    I’m also coming out with a game changing, purchasing training solution near the end of this year that’s going to shake the foundation of this whole industry. Hang tight, it’s going to be a really wild ride!

  • Selecting Negotiation Team Members – Are You in Control of the Process?

    Purchasing Negotiation Team Training

     

    Purchasing Negotiation Team Training
    Choose Your Negotiation Team

    Are you struggling with too many people wanting to be a part of your negotiation team? People who feel like they have to be represented? I’m talking about the big-deal negotiations here.

    When it comes to negotiation team development, sometimes there are too many cooks in the kitchen, or worse yet, too many people who want to be in the kitchen, but can’t cook, don’t have time to cook, or don’t actually want to cook.

    Still worse than that is some want to be invited to the kitchen, and want to say they are in the kitchen, but don’t actually plan to ever step foot in the kitchen. These are the people who get offended when they are not invited to be part of the negotiation team but make no attempts at contribution when they actually are.

    Too many negotiation team members can also make it hard to get anything done. Someone is always on a business trip or tied up in a critical project or on vacation when you want to meet. Too many opinions and too many voices also make it hard to agree on anything.

    How do you handle all this when so many groups want to feel “represented”, and want to have a seat at the table? How do you satisfy all these groups and still get anything done?

    You have to take control of the reigns and the process. There is ONE negotiation process and results owner, and that is you. Period.

    You can’t do this by throwing your weight around and burning bridges with people you don’t want on your team. What you need to do is to exercise a bit of diplomacy.
    For the purpose of this blog and this particular topic, diplomacy is the art of creating the illusion of inclusion on other people’s terms, while actually having it be on your terms.

    Actually, that’s a pretty good definition of leadership – the ability to get people to adopt and evangelize your ideas while making them feel really good about the whole process. Difficult stuff.

    Recognize that not all negotiation team member positions should be created equal. What you need to do is classify them by ‘core’ and ‘extended’.

    Core members are those few members who really need to be a deep part of every step throughout the negotiation process. For smaller negotiations, this may just be you. For bigger deals, it may include you, the customer, and possibly players from finance, engineering, receiving, etc.

    Suffice it to say however that more is not better when it comes to core. Keep it to the people that YOU really want engaged in the process. People don’t vote themselves to core, you assign them to core.

    Extended members are those who are copied on the agendas in advance and are copied on the minutes following meetings and are also copied on the calendar hit, but invited as an ‘optional’. They then only attend meetings where they see a topic of particular interest or you ask them to be there on an exception basis for a particular topic.

    Absent attendance at a meeting, they are also asked to voice any opinions they may have in advance of any given meeting, by email or or by other communication method. That’s why they see the agendas in advance. If they have issues with the content of the minutes, they need to voice that right away. Otherwise, silence = acceptance. You need to tell them that.

    How do you sell this to people you want to be on the extended negotiation team, such that they don’t get offended? This is especially important for people who you don’t want/need on the negotiation team, but insist their participation is necessary, or will cause you endless heartache if they are not included.

    The simple answer is that you just need to stroke their ego. Something like this:

    “You know, I am really seeing the value of having you participate in the entire negotiation planning process for this big deal we have here. Your inputs are going to be absolutely critical to the process. However, I’m concerned about using your time properly.

    I really want to save my silver bullets with you so that when I pull you in, it’s to help nail a particular angle of our strategy and objectives that you have exception insight into, but at the same time, I also don’t want to waste your time when we’re covering the many other areas that don’t tie into you as much.

    The best way I can figure to do that is to have you on my ‘extended’ team, which gives you full insight to everything we’re doing, full input capabilities, and also allows me to recognize the value of your time overall for the company. You’ll get agendas beforehand and minutes afterwards, and you can cherry pick which discussions you want to be there for, or I may ask you to be at a particular discussion – burning one of my silver bullets.

    All I ask is that if you have any concerns or inputs at any point in time, you voice them right there and then. Otherwise, my assumption throughout the process is going to be that you are fully on board with what we’re driving.

    I can’t think of a better way to harness the value you bring to the table. Does this work for you?”

    You can do this. Don’t let anyone else dictate any aspect of the negotiation planning process. You are the undisputed leader and decision maker.

    This is just the start, of course. There are many other things we need to cover as it relates to negotiation planning and team/organizational dynamics.

    I want to talk next week about establishing negotiation ground rules so that all team members are aligned and you are in charge of negotiation strategy. Stay tuned.