Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Category: Supply Chain

  • Negotiating with Suppliers that have ALL the Bargaining Power

    I have more and more clients that are struggling with pandemic negotiations with suppliers who hold all the bargaining power.  There’s really only 2 things that can be done to address this:

    1. Change the bargaining power dynamic
    2. Drive Investigative Negotiations and Value Creation

    Or you can keep hammering the supplier on price, but you are already doing that, and you were doing it before the pandemic too.   And right now it’s not working, or you wouldn’t be reading this I suppose. 

    Changing the bargaining power dynamic comes down to identifying the source of the supplier’s bargaining power, and then taking steps to reduce the value of that source and/or increase your bargaining power in turn. 

    The end goal of changing the bargaining power dynamics is to create a circumstance where your offer is perceived as being more desirable than it was previously. 

    I remember something Carlsberg Beer did with their soda ash suppliers (glass bottles are made of 70% sand and 30% soda ash).  The sand was plentiful, the soda ash was not.  They were dealing with a powerful oligopoly – almost a cartel of sorts.

    The soda ash suppliers were dictating the terms and getting them, because there were few alternatives.  Carlsberg didn’t know what to do.  The source of the supplier’s bargaining power was the oligopoly and Carlsberg’s lower volume. 

    Carlsberg couldn’t change the oligopoly, they couldn’t use something other than soda ash, and they couldn’t wave a wand and suddenly increase their volume requirements.  

    Or could they…..

    Carlsberg decided to take a disruptive sourcing move and talk with supply chain partners buying soda ash as well.  They put their requirements together and went to the oligopoly with a massive volume that was irresistible.  All in one take it or leave it contract offer.

    Now the oligopoly companies were going head to head for the business and a sweet deal was landed.  The bargaining power dynamics, once hard as steel, were melted away and the tables were turned.  

    This is just one example of how to change bargaining power dynamics.  You have to dissect the source of the bargaining power and take moves to undo it.  

    The other thing you can do is to drive Investigative Negotiations and Value Creation.   I have endless client examples of this.

    One example is with Tata Steel.   Tata is probably the biggest company in India – a massive conglomerate that has no equal elsewhere in the world that I’ve seen.  You can’t breathe air or drink a cup of coffee in India without Tata being involved.      

    They were negotiating with a German mining equipment supplier, the best in the business.   The Germans tend to do business cut and dry.  They had a hard as steel fixed pricing schedule.  Tata wasn’t going to get a single penny deviation from that schedule. 

    Tata thought about this problem, did some research – Investigative Negotiations – and realized that the mining equipment supplier had zero foothold in India.  How could this be?  But it was true. 

    That meant that they didn’t understand how commercia precedents worked in India.  They explained to the supplier that the volume at stake was not just that of Tata’s. 

    They explained that when Tata buys from a given supplier, this is an implicit seal of approval that the entire country of India uses to start buying from that supplier.  They then went through a myriad of examples. 

    They explained to the supplier that whichever company wins this business also wins the whole of India’s mining business.   This suddenly made the pie much bigger – Value Creation. 

    The rigid German supplier came back on their hands and knees with an incredible proposal to win the Indian marketplace.  Their first deviation ever from their hard pricing schedule.  

    Tata signed the deal, whereby the German party made far less money at the transaction level, but stood to gain FAR more in the aggregate from this new marketplace.   Both parties were thrilled with the outcome. 

    That’s exactly  how you do Investigative Negotiations and Value Creation. 

    If you are trying to solve your supplier bargaining power problems with management escalations and hammering the supplier, you’ll lose a lot of hair, but you won’t accomplish much else.     

    Read this Twice:  Doing what you’ve always been doing in negotiations will only deliver you the same results that you’ve always been getting.  And that’s not good enough.

    Now go off and do something wonderful.  Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    www.PSCMInstitute.com 

    P.S. If you want to be a ROCK STAR at driving strategies like the above, check out the 100% online CPSCM™ Certification Program at https://pscminstitute.com/certification/.  You will see the materials and hear my voice throughout, as your own private instructor.  With almost 50% of the Fortune 100 having invested in CPSCM™, there is no equal in the marketplace.  Invest in your career and results today.  

  • Supplier Negotiation Strategies, Part 4

    Purchasing Training - Counter Intelligence
    Purchasing Counter Intelligence

    This is the last in this series for now – a series about supplier negotiation strategies. It’s all about counter-intelligence, and knowing what suppliers may do, and being able to anticipate, respond, and diffuse such strategies.

    Of course I have a multitude of content on such counter-intelligence strategies, but there is only so much I can do in a blog. Consider this an appetizer. The main course can be found in my Award Winning Online Training Solutions.

    The topic we’re going to focus on today is a big one. “Value based pricing” is what sales people spend hours, days, months, years, and eventually decades trying to perfect in their careers.

    Suppliers know the only way to do this is to appeal to the right hemisphere of your brain. The one that is responsible for emotions.

    For instance, when was the last time you saw a soft drink commercial that talked about their product having more bubbles per cubic inch? No way.

    They want you to buy their product based on them showing people having the best time ever while consuming their soft drink. It makes no sense at all. But guess what, it works.

    In order to sell you something based on its value, then the perception of value has to be built up. This is what salespeople excel at. Marketing and perception management.

    Ever compare a supplier glossy brochure to what the product or service actually delivers? Now you know what I mean.

    In order to maximize value based pricing, suppliers can’t sell you goods and services, because goods and services can be benchmarked. They will start calling their goods and services “solutions”.

    To quote Dilbert creator Scott Adams, “a solution looks suspiciously like a good or service, except it costs a lot more.” Right on the nose, Scott.

    There are a few ways to deal with this. And all of it has to do with letting the left hemisphere of your brain take over.

    Think of that gum commercial.. “nine out of ten dentists recommend chewing our gum”. That’s data. You need to make decisions with data. Salespeople are masters of manipulating the perception of value, but they can’t argue with facts and data. It’s their kryptonite.

    The first strategy is to make sure your supplier selection matrix is performance results and specifications based. Glossy brochures and marketing pitches and fancy suits should not be a part of the consideration model.

    Counter glitz with data, and negotiate pricing and total cost based on the documented and measurable performance results you will be receiving.

    The second is to take the supplier’s glossy brochures and marketing presentations and tell them “I’m sure you won’t have any problem if I make this an addendum to the contract and make it a material breach of contract if any of these capabilities are not met by your solution, right?”

    Don’t say it with attitude, just be matter of fact. What should the supplier be afraid of? Their solution is supposed to do all these wonderful things, right? If they get nervous and start to jumble their word in response, it’s because you caught them.

    They are not used to anyone connecting the dots and making their sales pitches a part of the contract. This is your right. They are trying to pitch a powerful solution and they want you to pay for a powerful solution. So what you should receive is a powerful solution, right?

    The third way is to bring them down to earth and say something along the lines of “here are the specifications we are measuring. Can you please confirm for us how you are committing your product and service support will perform to these? We’re going to compare suppliers based on price competitiveness to this criteria.”

    What you’ve just done with this third strategy is to take them out of solution space and pull them straight into specification space, which is where they don’t want to be. Let that left hemisphere take over.

    Take control, and don’t let marketing presentations and fancy hype and glowing testimonials bias your negotiation and decision making process. Put that left hemisphere in high gear and force the supplier to negotiate with you on your terms.

    From now on, every time you hear suppliers use the words “solution”, race back and read this blog again.

    I have a special announcement. I’ve launched a 5 hour Purchasing Contract Law online training series, personally taught by me. This is the last few days for special Members Only pricing.

    In addition, I will also give you a free e-copy of my latest book on the same topic – Purchasing Contract Law (227 pages). World Class Contract Management

    Click here to find out all the details. Prices go back up in a few more days. Don’t miss out!

    Omid G

  • Supplier Negotiation Strategies, Pt 3: Location Control Strategy

    Purchasing Training ~ Supplier Negotiations
    Don’t Split the Pie!

    So we are talking about supplier negotiation strategies. This is a counter-intelligence series.

    Instead of talking about what strategies are in the purchasing arsenal, we are talking about what is in the supplier’s arsenal.

    In doing so, we will learn how to anticipate and respond to such tactics. It’s a critical skill. Recognize though that I can only go so far in a blog.

    My online training solutions and face to face seminars are what provide true “deep dive” analysis.

    Let’s say you go to a virtual stranger’s house for dinner, somebody you’ve recently met and don’t have an established comfort level with.

    How does that feel? Are you comfortable opening their refrigerator? Their food cabinets? Strolling to the restroom without asking permission first? How about taking a spin in their car?!! None of that is very comfortable.

    Well, suppliers are no different. They don’t like having negotiations at your office or facility. It’s not comfortable for them. On top of that, there’s a lot more than dinner on the line – their entire financial livelihood is on the line!

    So it should be no surprise that suppliers want negotiations to happen at their facility. Of what benefit is this to suppliers? Let me count the ways.

    There are logistical benefits. Access to conference rooms, free access to roam the facilities, access to hard copy files, and so on. There is also control of the agenda and what gets covered.

    There are psychological benefits. Suppliers are in their “house”. They are comfortable. Relaxed. At ease. They are intimately aware of and in control of their surroundings. They can also overwhelm you with large numbers of people from their end, and they can even control where you sit.

    There are human resource benefits. Suppliers can access anyone they want, in person and on the spot. They can also decide who attends and who does not, and where and when they attend.

    There are schedule benefits. Suppliers can control the schedule and cadence of activities, who attends, and what gets discussed – and what doesn’t.
    Don’t underestimate the importance of these factors. And suppliers work very hard to get them to work to their advantage.

    However, suppliers are also very smart. They will never actually say “let’s negotiate at our facility” (unless they are completely untrained).

    What they say instead are things like this:

    “This deal is unprecedented. Our COO wants to personally meet you. We’d really like to have you at our facility, as a sign of our commitment to making you and your company successful.”

    “We run world class manufacturing lines, and we really want you to see them. We’ve arranged for a VIP tour of every facet of how we run them. You can bring your engineers too.”

    “I want to put every resource at your disposal. I have players in operations, manufacturing, planning, and logistics that I want at your beck and call. I can’t fly them all to your facility – it just wouldn’t make sense – but I have arranged for them all to block out their schedule to have a full day dedicated just to meeting your needs and requirements.”

    All of these are comments that are designed to make you think going there is all to your benefit. And since they own the agenda, they will naturally work negotiations into them.

    Do you want to hear a story?

    In my first year as a purchasing professional, I naively agreed to meet at a supplier facility. The goal was not to enter into negotiations, but location control allowed the supplier to work that in.

    This was a Fortune 50 company we were meeting. No games were expected.

    It was me and my engineering manager, who was my customer. The day was packed. We were moved like sardines in a packing facility from one room to another, jumping from one topic to another.

    Every meeting was packed with strangers, all of them evidently important to these discussions, but none of them saying much. It was all a part of their strategy.

    When it finally came time for negotiations at the end of the day, we were both tired from the whirlwind of activities. They had put us in a large and long room. They managed to separate me from my customer, and he sat far away, so I couldn’t even confer with him. I was alone on an island.

    The VP of Marketing sat in the “power position” at the end of the table, and bellowed across to me, where I was sitting off on the side, surrounded by his employees, where I was barely even able to make eye contact with my own customer.

    Where was my finance manager? My go-to-guy in engineering? My logistics person? My laptop and all my files? None of them where there, because we were there for a “VIP tour”. They weren’t needed. But there I was in a negotiation room.

    All the forces were working against me. Somehow, despite my lack of experience, I realized something was very, very wrong. I got my wits about me called the negotiations to a halt. I told them that negotiations would resume at our (my) facility and I would let them know then.

    If this strategy doesn’t work, suppliers will then say “let’s do this fair for both sides, let’s pick a location neutral location”. They are trying to say that the pie should be split down the middle to make it fair for both of you.

    The problem is, this isn’t their pie to split. This is your pie. YOU are the one with the money, and they are only one of a parking lot full of suppliers trying to get it. They don’t have rights to split the pie. They don’t even get to pick what type of pie it is.

    Do not pick a neutral location for negotiations, and if it can at all be avoided, do not negotiate at a supplier’s facility. Separate the issues.

    If you need to do a manufacturing tour, then separate that from negotiations, and hold the negotiations back home. They are two different things. There is no need to “kill two birds with one stone”, because one of those birds will be you!

    Next week, we will talk about “Supplier Time Pressures” as a supplier negotiating strategy.

    Meanwhile, Click this link and join our Power Purchasing Pro Group now. You’ll be glad you did!

    Be your best!

    Omid G

  • 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

  • Have You Completed Your Purchasing Expenditure Plan for 2014?

    Purchasing Training ~ Goals
    Smart Goals

    It’s a new year, and everyone is setting their annual goals. You need to be doing the same. But first, a quick true story:

    I have a very good friend who sets all sorts of goals for himself every year, none of which ever get achieved, and he always wonders why.

    I constantly tell him that the reason is that he identifies the ends (the goals), but not the means – i.e. what specific actions must he take to achieve these objectives.

    Purchasing professionals fall victim to this same mistake all the time.

    It’s not enough to just tell management how much cost savings you will achieve in 2014. If that’s all you are doing, you are making the exact same mistake as my friend – focusing on the goals, but forgetting to specify what specific actions you must take to achieve those goals.

    The way we do this in purchasing is with an annual Purchasing Expenditure Plan (hereafter, PEP). It’s time to do your PEP for 2014. Don’t put it off!

    If nobody else does one in your department, be a leader and start. Don’t wait for someone to tell you to do it. Complacency is a killer in our profession.

    The PEP can be regionally focused, customer focused, or commodity focused. It all depends on how your organization structures its purchasing function.

    At a minimum, you should be looking at the following types of things:

    1. Supply base structure – how much of your business is going to what % of your suppliers, and are you aggregating your expenditures with the fewest # of suppliers possible
    2. Market factors – analysis of costs related to labor, materials, currency fluctuations, supply and demand fluctuations, relevant legislation, etc.
    3. Sourcing strategies – how are you sourcing today for your most critical and high dollar needs. Do you have ONE strategy or do you have many.
    4. Planned expenditures – by commodity, customer, or region. You should look at trend data as well.
    5. Savings strategies – given the above, what concrete and specific actions are you going to take to bring your total cost savings to another level.

    #5 above is the big one of course. Everything else is analysis and information that helps you make better decisions and commitments for achieving your cost savings goals and objectives.

    The PEP does not need to be a long document. In fact, the shorter, the better. 1 page is perfect. You want people to be able to quickly read and internalize exactly what you want to achieve and how.

    Just as importantly, you want to be able to reference it yourself, regularly. Put it on your cubicle wall, in fact. Remember, the PEP document is a TOOL for you, not a deliverable to management.

    The PEP document should guide your schedule for the year. You need to break your goals and the strategies into actionable activities you need to engage in over the course of the year to ensure success.

    For instance, let’s say one of your goals is to achieve $150K savings by aggregating all of your global cafeterias to be managed by one supplier. What does this mean to you? Break it down!

    January/February – align with internal customers and with corporate services organization to understand key issues with aggregation of this business with one supplier. Make sure all concerns are understood so you can address them.

    March – come up with a standardized SOW that addresses all concerns and requirements and captures them to the satisfaction of the internal customer base.

    April – scour the market to see who are the top 5 qualified companies out there who can support this business. Contact them and send an RFP.

    May – go through RFP assessments. Select a supplier by the end of the month. Notify existing suppliers and process terminations with sufficient notice per contract terms.

    June – Manage global transition to new supplier. Ensure score card in place for continuous quality improvement.

    There you go! Now, this is still not enough detail. You need to nail this down to what you need to work on *and complete* each week to support these objectives. The aggregation of activities from your various PEP commitments then comprises how you spend your time.

    Sound like too much work? Here’s what too much work is:

    Going into the office every day without a plan, and letting your day be run by phone calls, voicemails, emails, instant messages, and text messages that you get, while also reacting to customer and supplier excursions that were caused by lack of planning.

    That’s what you don’t have time for, and that is the kiss of death in our profession, because you will have happy customers and partners, but unhappy management, because you won’t have accomplished anything strategic that you got hired to do.

    Go put your PEP strategies in place now for 2014, and share them with your management, customers, and business partners. Most important of all, make it your guiding light for all of your activities throughout the year.

    Talk to you next week and 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

  • 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!

  • Are You Managing Your “Under the Radar” Spends?

    Purchasing & Supply Chain Management Training

    Managed Marketplaces

     

    Supply Chain Management Training - Managed Marketplaces
    You, the Maestro

    Purchasing professionals put so much energy into managing their top expenditure suppliers and contracts. Makes perfect sense, and that will probably never really change.

    However, I am increasingly seeing that purchasing is experiencing “death by a thousand cuts” by the suppliers and expenditures that don’t individually merit attention based on spends levels alone – what I’m calling “under the radar spends”.

    We’ve got to figure this out in our profession.

    One solution that has been put in place is procurement cards (p-cards). These allow for purchasing to remain undistracted by small expenditures that would present too much opportunity cost for purchasing to pursue.

    In other words, chasing after savings on these “small deals” would be at the expense of getting to the big deals, so we use p-cards.

    However, absent NAICS industry code blocks, p-card proliferation can result in unauthorized purchases. Also the financial and management review process doesn’t kick in until AFTER the purchase is already made. You never want to wait until an accident happens before you find out something is wrong.

    Further, the funds may still go to the wrong suppliers and they may also go un-negotiated. And do you know what terms and conditions go to the supplier when you do a procurement card transaction?

    In 20 years of asking this question above, I’ve yet to find a purchasing professional who knows the answer for their purchasing organization. It’s a big mystery inside every company. I’m sure it’s not your PO Ts & Cs. So what is going out? Credit card terms? And how could those possibly protect your company?

    Still other companies go the consolidator route. They contract with companies that sell everything from coffee filters to construction equipment to try and funnel this business in a one-stop shopping manner. These companies are all resellers, meaning none of the product is actually theirs. They specialize in fulfillment only.

    This has problems too. Rarely are these items coming at a good price or TCO. You are paying for convenience, like buying milk at a convenience market. This is still true even if you negotiate a corporate discount model. You will still pay through the nose for this convenience, and almost every company is doing it.

    ePurchasing offers some solutions for these “below the radar spends”, but once again, this usually necessitates having to contract with purchasing consolidators and adding them as a vendor in the ePurchasing application. It’s an awesome solution, but as it pertains to consolidators, all this does is automate a bad process.

    In the final analysis, the purchasing professional has a choice: Do I lose time chasing these one-off deals or do I lose money chasing convenience through consolidators? Neither one is attractive.

    Most recently however, I’ve found that there is another way, and it’s got me fairly excited. I plan to become one of the foremost industry experts on this topic. I’m talking about managed marketplaces.

    A managed marketplace is like a reverse auction, but only in the same way that a motorcycle is like a bicycle – they both have 2 wheels and you sit on them both, but the similarities pretty much stop there.

    Managed marketplaces are an end to end platform solution whereby a third party vendor manages these “under the radar” transactions on your behalf, aggregating the business and putting them out to bid to a global set of qualified vendors that they do financial checks on.

    Reverse auctions are merely a platform for running an auction, but the buyer still ends up doing all the work before and after the auction. All you get is automation of a very small part of the purchasing lifecycle. It’s also pretty stressful for the suppliers involved; just ask them.

    In contrast, the managed marketplace solution provider will sort through the supplier responses and take the top bidder responses and qualify those bids, making sure that all buyer specifications are being met. There is a full cycle quality control check in place.

    They also track in amazing detail all relevant small/minority/veteran/disabled/woman owned business revenue details (diversity spends) and actually make your indicators in this space take off. One less indicator to have to worry about hitting at work!

    In my research, I’ve been seeing around 12% average savings from purchasing’s target price, while also having dramatic improvement in diversity spends figures. That’s pretty good, considering somebody else does the work for you. Finally, purchasing can just be the maestro instead of trying to be the orchestra too! Not bad, huh?

    I’d like for you to really start asking yourself how much “under the radar” spends you have, how they are being managed, and where they are going. Do you know? Do you care? Why not?

    I plan to do more blogs on this topic, and will have a publication on the same topic coming out soon in Supply Management magazine, an acclaimed international purchasing journal. Stay tuned!

  • Do You Cost Model? Why Not? Part V

    Supply Chain Management Training

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  • Do You Cost Model? Why Not? Part IV

    Supply Chain Management Training

    “These activities have to take place. If you don’t do them, you are making yourself irrelevant in the field of purchasing. “

    Purchasing & Supply Chain Management TrainingSo we’re on a multi-part series about cost modeling. We’ve already covered why cost modeling is important, and why cost modeling MUST be a part of your arsenal, an area where you have strength and an area in which you excel.

    It’s funny, I was reading an article this last week, one meant to give deep insight to negotiation strategies, one piece at a time. The advice given in this last piece was to make sure that you (the purchasing professional) arrive at the negotiation room after the supplier, to give the illusion of being important.

    I get frustrated reading this kind of stuff. I really do. Hello, this is not 1978 anymore. Do you really think that in the supply chain management model that we are trying to move towards that supply chain partners plan and perform such ridiculous gimmicks against one another?

    Make it stop.

    Achieving lowest TCO is not about psychological warfare or “getting what you deserve” or trying to act really important, it’s about building a case through data and using influence techniques that motivate the other party (not scare, intimidate, or make them paranoid). Period, end.

    We said that should cost modeling would be used when the goods are service are unique and cannot be benchmarked or put out to bid, and that must cost models should be used when fair market value by any analysis far exceeds available budget.

    So now let’s move onto Total Cost Modeling. Total cost models should be used when post acquisition costs are a substantial portion of total cost.

    We’ve all made this mistake before. I always refer back to the mistakes from very early in my career. Remember, you always learn more from your mistakes than from your successes. I once negotiated a killer deal on a large software contract. Every single aspect of what was being negotiated; I nailed it all.

    However, I turned around a year later and found out that our spends with the supplier went through the roof. How could this happen? Well, the end user spent well over $100K with the supplier in consulting and training costs for implementation! How come nobody told me about this when we were doing the SOW?

    It’s not the customer’s fault. It was my fault. Remember, the customer wants to buy goods and services. You are supposed to be buying PERFORMANCE RESULTS. You have to ask all the questions. A critical component of TCO was missed. And it happened AFTER the goods were acquired.

    Fast forward to another negotiation I worked on. The company stock price was through the roof, and we were considering buying a fleet of jets. Good times. Anyways, the cost model I put together showed that, on a pure cash flow basis, it was cheaper to have employees keep flying commercial. Management was satisfied and wanted to put the idea to bed.

    However, I said I wanted to do a total cost model as well. Everything changed. The reason? It turned out that flying commercial meant longer drives for employees, more unproductive airport time, and most importantly, it necessitated rental car expenses and overnight hotel stays for what should have been day trips.

    I did a study of the average time savings of going to the nearby private airport and also on how many trips based on real data could have had rental car and hotel expenses avoided. The figures were staggering. It became a no-brainer to get the jets.

    Acquisition price vs commercial flight costs painted a different picture however, and none of this was clear until post-acquisition costs were analyzed.

    I worked with a company that made the decision to outsource some of their operations. They had a cost model that showed costs of outsourcing, and the numbers made sense. However, I told them that this was an incomplete analysis. And it was.

    You see, most companies aren’t very good at outsourcing. They want someone else to do the work, but they don’t want to let go of the work at the same time. So they kept a large staff still focused on the outsourced function, and also incurred frequent travel back and forth to the outsourced company.

    Once I guided them on how to calculate the REAL cost of their outsourcing model, they were left wondering why they ever outsourced in the first place. The problem is, they didn’t account for post-acquisition costs.

    There are so many factors that can come into play with total cost modeling. You have to fully comprehend implementation with the good or service being purchased and then assess what post acquisition costs may be incurred. Here are some of the types of costs to look at:

    Warranty, maintenance, obsolescence, scrap value, resale value, training, consulting, insurance, utilities, switching costs, sunk costs, opportunity costs, controllable costs, uncontrollable costs, administration, personnel, travel, and there are still many others.

    Then, as stated before, you need to label all your data sources and classify each data point as a fact, estimate, or assumption, following which sensitivity analysis should be performed on all estimates and assumptions.

    These activities have to take place. If you don’t do them, you are making yourself irrelevant in the field of purchasing.

    Next week, we will talk about benchmarking. Keep reading and try to apply these concepts.

    I also offer in depth courses and seminars on these topics that will catapult your departmental capabilities and results to the next level. Contact me any time if you want to find out how to make your purchasing department world class.

    Side note: Pretty soon, I will make an announcement that will shock you all, and will dramatically change the purchasing and supply chain management landscape as we know it.

    Stay tuned.