Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Category: Supply Chain Management Training

  • 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.

  • It Happened Again! Are You Watching Your Customers?

    Purchasing Training Risk
    Eliminate Kickbacks

    I have to tell you guys, I was completely out to lunch, asleep at the switch for 20 years as a purchasing professional.

    I’m talking about one particular area of course.

    There are all these courses on “code of conduct” for purchasing professionals, but whose watching the customer?

    Are you familiar with the psychological concept of projection? Since I would never consider pursuing kickbacks from a supplier, it never occurred to me during that span that my customers might be.

    It’s only since I left corporate America that I have been shocked at the prevalence of customers receiving bribes from supplier, and more importantly, I have realized that these are almost never initiated by the supplier.

    I never saw any of this while I was a purchasing executive. Frankly, I was clueless.

    So, it happened again. I got an email today from a customer inside a major company who has been wanting to broker a large consulting contract with me.

    Nothing out of the norm, right?

    Well, in his last email to me, prior to us getting down to final contract execution, he wrote this:

    “think of a way you can mabe help with backup support to me .confidentially”

    I kept all the fonts and formatting exactly the way it was when I received it for effect. I want you to see exactly what I saw. I’m guessing he sent it by cell phone, because it was sent on a Saturday and because of the broken grammar. None of that matters though.

    Can you read between the lines? I’m not sure I could have 20 years ago. He is asking me to give him kickbacks. This is how it starts.

    I keep racking my brain asking myself who else in my career was possibly receiving kickbacks. All those customers who insisted that the company’s doors would close if we didn’t use a particular supplier.

    All those prenegotiated deals by rogue customers. Was this the real motivation that purchasing is a roadblock? Now I’m really wondering if this is just a manufactured cover-up.

    Now I personally know of people who are millionaires from kickbacks. You read that right. One of them told me that he would only accept such payments in cash or gold. All non-traceable. You can’t make this stuff up.

    And I know sales managers who openly tell me that they bribe their customers. NFL tickets, family tickets to Hawaii to attend a “training” session, trips to Napa Valley, etc. The recipients include people in the most visible of positions, from private to public sector. Nobody is exempt.

    What this tells me is that suppliers need to be told early in the discussion process, prior to negotiations, that if they are ever contacted by someone in your organization with request for kickbacks or bribes, that you are to immediately be notified. Or give them a confidential email address to notify.

    Also tell them that if they ever participate in such an activity, they will be forever blacklisted from your vendor pool. Remember, suppliers don’t like this any better than you do. They want a way out too.

    What really needs to happen is a comprehensive risk assessment process in your department and your end to end purchasing processes, inclusive of the customer piece. I do this regularly for many companies. It’s a huge time saver and a huge results saver.

    Plus, internal audits become a no-brainer activity. No rush to clean things up and put processes in place. Everything’s in order already.

    What I really want to get across is don’t assume that just because you are well intentioned in your job, that your customers are too. Don’t fool yourself and think this only happens in other companies. It took me 20 years to figure out that’s a complete pile of manure.

    Here is all you need to know, and I promise you this is not a scare tactic:

    IT IS HAPPENING WHERE YOU WORK, RIGHT NOW, AND RIGHT UNDER YOUR NOSE.

    It was for me too. I don’t know how to be any more clear about it. Don’t wait for internal audit to find this stuff, they never do. We are way smarter than they are.

    Ask me for training solutions I offer to help you address this and other risks in your purchasing department. You can’t afford to let this stuff keep happening.

  • 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.

  • 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

    If you liked this training, please give Omid a ‘Thumbs Up’.

    Thank You!