Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

Tag: purchasing training

  • The 3 Procurement Contract Deadly Sins – Part 3

    We are now down to the 3rd Procurement Contract Deadly Sin.  And it’s the deadliest of them all.  If you did not read the prior 2 deadly sins, these all feed upon each other. Here are links to the other 2:

    The 3 Procurement Contract Deadly Sins – Part 1 – Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

    The 3 Procurement Contract Deadly Sins – Part 2 – Global Leaders in Procurement & Negotiations (PSCMInstitute.com)

    This 3rd Procurement Contract Deadly Sin is also the most commonplace.  Everyone is committing this sin, and everyone is suffering from it.  Worse yet, nobody is talking about it. 

    This deadly sin makes you spend 70-90% of every day in unproductive fire fighting activities.  In unplanned activities.   In activities that become the highest priority, but don’t contribute anything to your career, income, or job results. 

    The final Procurement Contract Deadly Sin is this: writing of contracts for goods and services, instead of for *PERFORMANCE RESULTS*.  

    Let’s follow this painful flow:

    • The end user asks for goods and services. 
    • You solicit or tender for goods and services.
    • You negotiate for goods and services.
    • You contract for goods and services.
    • You receive goods and services.
    • Your end user complains, not about goods and services, but about PERFORMANCE RESULTS.
    • Since the contract was written for goods and services, you have no recourse and no remedies, because you got exactly what you contracted for. It just wasn’t what the end user actually needed.
    • You now have to spend your time fire fighting solutions because your end user is unhappy, your suppliers are confused, and the contract you wrote is useless to help resolve.  And somehow it’s all procurement’s fault.

    Sound familiar?  What would you say if I told you the Fortune 100 is absolutely struggling with this?  How about if I said the Fortune 500?  The Fortune 1,000?   Keep going. 

    The procurement profession is struggling with this issue, from top to bottom, in every industry, in every country, at every level. 

    Is that bad enough for you?  

    And what is being done about it?  Answer: absolutely nothing.  The contract templates are for goods and services and the lawyers don’t have it as a part of their scope to address this. 

    The net result is frustrated end users, frustrated suppliers, and exasperated procurement professionals that are full time fire fighters, against their will. 

    The answer is to rearchitect the entire procurement process so that end user demand is articulated in the form of performance results, performance results are solicited and negotiated for, and performance results are contracted for.

    And guess what happens next?  You guessed right: Performance Results are received.  

    No more frustrated end users.  No more frustrated suppliers.   No more full time fire fighter roles for procurement.  Much more free time on your schedule. 

    This is not just a theoretical panacea – we’ve taken over a hundred companies down this path and helped them transform.  Not a single one has looked back.   It’s the only way to go. And with all those employees no longer spending 70-90% of every day in wasted activities, productivity levels have gone through the roof. And they actually have time to work on strategy.

    If you aren’t working on this transformation, then you are a slave to this profession. It needs to be your #1 focus as a procurement leader.

    Now go off and do something wonderful.

    Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    P.S.  The CPSCM™ IS THE ONLY certification program on earth that does a deep dive on this contract transformation that we just covered. Omid G is your private instructor for 32 very dense and fast paced hours – see the materials and hear his voice throughout – online and on demand!   Learn these skills to put your career and departmental results on the fast track for success.   Contact my office at support@PurchasingAdvantage.com for a free demo for your department or to discuss in-house Procurement & Negotiation Capability Building efforts for your team. 

  • 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.  

  • Here’s Why Your Legal Dept Holds Up Negotiations

    Here’s Why Your Legal Dept Holds Up Negotiations

    I’ll cut to the chase on this one: The problem is not the legal department.  The problem is you and your procurement dept.  Let me explain.

    There’s really a few pieces involved.  We’ll knock one of them out now.  The legal dept is viewed as overhead.  That means they will never be sufficiently funded, and all stakeholders get impacted by that.  But we can easily overcome this by doing some other things right.  Lets keep going.

    Another part to this problem is that procurement throws red-hot contracts over the fence to legal and asks them to swiftly approve.  You might ask “what else are we supposed to do?”. 

    Well, you have to remember that contracts are risk shifting vehicles, and there are two basic types of risk: legal risk and commercial risk.

    Legal risk includes the potential for financial loss, litigation exposure, vulnerability to damages, public relations exposure, etc.  In short, the legal dept is really focused on limitation of liability, damages, indemnification, insurance, dispute resolution, and intellectual property. That’s their basic scope. 

    And with all the endless hours the legal dept spends in negotiating those clauses, how often have they actually gone wrong for you?  The answer is never.  Most procurement professionals go an entire career without needing any of the provisions that legal negotiated for those clauses.

    So why do we negotiate them at all?  Because they’re like seatbelts.  You put them on 500,000 times in case something happens once.  They’re important, and we need them. 

    Now the remaining clauses are all related to supplier performance.  Clauses that define what the supplier is to deliver, tying payment to performance, and ensuring that there are pre-defined remedies for failure to perform to these measures.

    Do you know how often these factors go wrong? How about almost every single contract you sign!  And do you know how much training your legal dept has in negotiating these clauses?  How about almost none at all! 

    And it’s not their fault.  It’s out of their scope.  It’s in your scope exclusively.  Did you know that?

    Read this twice: The #1 mistake procurement professionals make is to assume that when a lawyer approves a contract, that means it’s a good deal for the business. 

    WRONG.  It could be a terrible deal for the business. The lawyers are just focusing on the legal terms.  The commercial terms, which you are supposed to own, the ones that always go wrong, aren’t a part of their focus at all. 

    And so all the supplier performance trainwrecks that you have are because of the above.  Contracts that are highly effective in mitigating the risk of things that NEVER go wrong, and highly ineffective at mitigating the risks that ALWAYS go wrong!

    Now we get to the third part of the problem.  Our profession likes to save the contract language for last.  We tell the supplier “let’s negotiate price/warranty/leadtime/etc first, then we’ll get to the Ts & Cs.”

    Well, I have news for you.  When you tell that to a supplier, you’ve just become red meat in front of a lion. 

    What they hear you saying is “let’s finalize the commercial terms so you have the business in the bag.  Then once you’ve fully secured the business and have nothing left to lose, we’ll review the contract, and you can redline the entire contract because there’s nothing I can do about it.” 

    Read this twice: Contract terms that are “saved for last” in negotiations will always result in endless heartache for both you and the legal dept.  And those contracts take three times as long for the legal dept to process, because so much more is redlined. 

    And why does the supplier redline so much more when you save the contract for last? 

    Answer: Because they can.  Because you encouraged and incentivized it.  Because they’ve already won the business. 

    The final piece that procurement does wrong which results in the legal morass above is to not be legally savvy themselves and to not have a Service Level Agreement (SLA) with the legal dept. 

    The procurement dept needs to know contract law the same way a mechanic knows a wrench.  The relationship must be that intimate.  And once this knowledge level is established, then an SLA can be negotiated with the legal dept whereby many of the clauses can be negotiated by procurement, absent legal dept involvement. 

    And if you do all the above correctly, by the time the contract goes to legal, the contract will have far fewer redlines, many of the issues will have been resolved by procurement already, and the supplier will not yet have the business in the bag, because the contract terms were negotiated first and not last.  Also, the commercial terms, negotiated by procurement, will be rock solid. 

    Lets move this profession forward together. You can do this.

    Now go off and do something wonderful.

    Be your best!

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp. 

    P.S.  We are pleased to announce our new brand: Procurement and Supply Chain Management (PSCM) Institute.  Our new website is www.PSCMInstitute.com.  We have a special offer waiting for you: sign up for Free Membership and get exclusive access to our Power Purchasing Pro course, normal price $397.  Many other benefits await.  Register now!

  • The Fallacy of At The Table Negotiations

    The Fallacy of At The Table Negotiations

    I saw an article just this last week in LinkedIn describing different scenarios for buyer and seller to go back and forth on negotiation terms for best outcomes – offer, response, counter offer, counter response, etc. 

    It was touted as a game changing system, and was even given a name and trademarked, indicating it was something new and innovative. 

    It’s something I’ve been familiar with since the early 90’s, and I regret that it’s still being taught.

    If you go back to the invention of currency, and probably much earlier, this is how we always negotiated.  Each party trying to get more of the pie in return for less of what they have to offer in return. 

    This was the earliest form of what I call “At the Table Negotiations”.

    Meaning, this trademarked system is hardly new.  Yet it’s highly glorified.  It’s what we picture when there are the greatest stakes of all – with parties intensely negotiating at the table. 

    But all of that is for people who learned how to negotiate by watching TV shows and movies.  Or perhaps as a child, watching your parents barter at the local market. You’re not going to win any negotiations this way.

    Read this twice: Negotiations are won and lost before they ever start.  They are won FAR before you ever engage in At the Table Negotiations.  Anyone who tries to teach you how to win negotiations at the table is at best still stuck in the 1950’s.

    There really needs to be a well rounded approach for achieving success in negotiations.  In fact, the very definition of negotiation success needs to be redefined.

    The 1950’s and prior definition of negotiation success is how much of the pie you can get.  It’s parasitic negotiations.   You gain at the other party’s expense.  Value is being transferred instead of created.

    Negotiation strategies need to involve value creation before going to the table.  This involves researching what keeps the other party awake at night, and creating strategies to help make them more successful out of the deal, while costing your side very little. 

    This is why you are paid the big bucks, and it’s not optional in high stakes negotiations. 

    The other piece that has to be done is bargaining power analysis.  If you find yourself in a negotiation where you lack bargaining power, then you’ve driven yourself to the middle of the desert knowing you have no gas or drinking water.  You can’t let it get to that stage.

    You need to do an in depth analysis of what the source of their bargaining power is.  What exactly and specifically is it that gives them their bargaining power?  You need to understand this FAR in advance of negotiations very, very well.

    What might it be?  Almost anything.  Here are just a few:

    • Perception of highest quality
    • Monopolistic supplier
    • Switching or startup costs associated with adding or switching to new supplier
    • End user or business unit allegiance
    • Production capability
    • Access to critical material(s)
    • Etc.

    Then you need to architect a strategy to change that bargaining power to your favor.  The shift may not happen right away – it may even take years – but you can conspicuously lay the seeds right under the supplier’s nose.  They’ll get the picture. 

    Then there’s internal negotiations.  Most external negotiations fail because of failed internal negotiations.  Being fully aligned on the SOW/Spec hardly qualifies as internal negotiations alignment. 

    There’s alignment regarding procurement and negotiation strategy, sourcing approach, business shifting, standardization, alternative materials, timing, external communications, internal communications, management influencing, deal positioning, cost modeling, vendor evaluation criteria, and so much more.

    This is just skimming the top of things that need to be done in advance of At the Table Negotiations.  If all you are doing is getting trained in and executing to At the Table Strategies, you are stuck in some very old quicksand. 

    The CPSCM™ Certification Program – already invested in by half of the Fortune 100 – will position you to fast track your career and be a Negotiation Godfather.  In exactly 32 days, a huge announcement is coming and all of you need to be paying attention.   CPSCM™ Certification is going to be attainable by everyone.  Don’t miss it.

    Now go off and do something wonderful.

    Be your best! 

    Omid G.

    “THE Godfather of Negotiation Planning” ~ Intel Corp

    www.CenterforPSCMexcellence.org

  • Purchasing Training ~ Managing Currency Risk

    Are You Managing Your Currency Risk?

    I’m vacationing in Italy and France right now with my wife, but being the dedicated guy that I am, I’m sneaking in a blog – being typed as I fly from Venice to Paris.

    After feeling the personal sting of currency exchange using the once mighty dollar (and it’s interesting to note that the root cause of the collapse of the dollar is all purchasing Purchasing Training - Managing Currency Riskrelated – by consumers, businesses, and government – but let’s not go there in this blog) here in Venice, I’m more sensitive to this topic.

    I had my US Dollars converted to Euros at pretty bad rates for the first few days.  It wasn’t until I took the time to do a quick internet search and found out that the market rate is .74 that I started to negotiate and convert in larger quantities – getting the best rates in the process.

    But what I realized was I made a rookie mistake.  My wife and I spent so much time researching and planning tickets, hotels, tours, etc that had good early rates with high reviews, that we totally overlooked currency exchange as a huge cost sucker.

    (Note: Keep reading and you’ll understand the connection to your job in a few paragraphs – there is a purchasing parable here)

    Until we figured out the system here, we were first getting .52 Euros for every dollar.  By the third day, I was getting .7 Euros to the dollar.  For you math geeks, the exchange companies were making 35% extra currency exchange profit off of me early on.

    So while my focus was on not getting ripped off on everything from a PRICE perspective, unbeknownst to me, I was getting ripped off not on price (well, I was, but not more than anyone else), but rather on exchange ratios.

    I also figured out that Europeans practice the “nibbling” strategy when selling things (e.g. try booking an inter-Europe flight and see how much the total cost comes out, as compared to the ticket price you were quoted up front), but we’ll save that for another blog.

    The bottom line is this:  virtually all supply chains are global now.  It’s an inescapable fact.  And with that, one of the costs we rarely spend time looking at are currency fluctuations, yet it’s one of the most impactful.

    I challenge you to find one person who knows that China’s exchange rate has increased from ~ 8:1 to around ~6:1 over the last decade.  And they are gradually making their currency stronger and stronger, through a pegging process – which means your country currency will buy less and less Chinese goods, Ceterus Paribus (“all things being equal” – an economics flashback for some of you I bet).

    That also means massive inflationary pressures for supply chains that run through China.  How many of those do you think you have?  TONS.   And the Chinese government plans to keep on bringing the exchange rate closer and closer to natural equilibrium – which means again more inflation for those buyers in other countries.

    Same thing with Brazil – their currency strength relative to the USD has doubled in the last 8 years.  DOUBLED.  That means the price to you doubled if you are paying in USD.  Not to mention world cup related inflation that’s happening now.

    Even if you aren’t sourcing internationally, your suppliers probably are.  And guess who that currency risk gets passed onto?  You guessed it!

    Well for starters, if their exchange rate becomes more favorable, your suppliers are going to quickly enjoy a fatter profit margin.  They’re certainly not going to contact you and let you know that you are due a currency driven discount.

    However, if currency rates change to a supplier’s detriment, you are the *first* person your supplier is going to call.  So if you aren’t paying attention, what will happen is you will bear the brunt of currency risk, but will never reap any benefits when it changes in your favor.

    You should also be looking at taxes and tariffs.  I know of one Fortune 50 company that legally has as many of their purchases go through their Oregon based purchasing department as possible, because Oregon doesn’t have sales tax.   Hey, if there’s a legal loophole that your company approves, why not take it?

    So don’t just look at your own currency risk management strategy, look at your supplier’s as well.  If your company is of reasonable size (say, Fortune 1000), then you should have a treasury department of sorts with at least one person who has professional training, experience, and current job scope related to management of currency risk.

    Talk to this person!  Make them earn their money!  Find out who is paying attention to currency risk for your materials and services purchases.  Is anyone?  It’s not enough for your price in USD not to change, you total cost has to not change.  And for that matter, if exchange rates change to your benefit, then your costs should improve.

    So now here I sit with Euros in hand, purchased at a favorable rate for current economic conditions.  It doesn’t mean I’m going to get a good deal though.

    Chances are, Parisian vendors of food, local transportation, and various trinkets all have ensured that my work is cut out for me.  While I’d like to tell you that I’m going to issue an RFQ for lattes, croissants, museums, and taxis…..it’s just not so.

    I’m afraid this is one market for which multiple sources are available for everything, but due to unique market conditions, all suppliers act like sole source vendors – they have you over a barrel and they know it.

    It’s all good.  My only objectives are to have a good time and not gain weight.  I already know a blanket PO is the only thing that works on these kind of trips.  For once, I’m not going to negotiate.  Not too hard, anyways.

    I’ll be back with you again next week, from someplace in Italy. Until then, be your best!  Ciao!!

    Omid G

    Special Offer! This month’s Special Offer is for readers of this purchasing training blog. If you don’t have Omid’s flagship training product membership, then here’s your chance to join us and save $100 now. To see what you’re going to get, Click Here but DO NOT buy from that page! Use This Link instead and save $100 instantly!

    We’ve reserved only 25 of these special membership discounts and once they’re gone, they’re gone. So hurry and grab your Power Purchasing Pro Membership and Join Us Now! 

  • Do You Cost Model? Why Not?

    Procurement, Purchasing & Supply Chain Management Training

     

    Procurement training, purchasing training, supply chain management training, cost modelingLast week I wrote about cost modeling as an overall activity that all purchasing professionals MUST be good at. A lot of purchasing professionals tell me “I have a really good finance department and they do all of our cost models.” 

    This sounds great, but it’s a huge disservice to your investment in yourself, your career, and your results when you fail to develop cost modeling skills in this profession.

    It’s not something you can have the finance department do for you. You have to be the one doing them.

    Having the finance department do cost models for you is like a pilot asking some other employee to do takeoffs and landings for them. It’s a showstopper. Even worse than that though is not doing cost models at all!

    This week we are going to talk about Must Cost Models. This is one of the most underrated and misunderstood types of cost models.

    There are certain times when your customer just doesn’t have enough budget for the good or service that they need. It happens.

    In some cases, the budget is actually less than fair market value for what you are trying to buy – meaning, it would require a win/lose “sock it to the supplier, hard” type of negotiation to get the customer what he or she wants for the amount of budget that they have.

    That is not a good approach. Even though many of the negotiation courses out there are proponents of maximizing personal gain in negotiations, suppliers will be bitter after such negotiations, and they will nickel and dime you to death until they make their money by the end of the deal.

    So no level of benchmarking or other type of cost model will do. The one very powerful tool at your disposal is what’s called a “Must Cost Model”. This means that you do the unheard of – you make your position completely transparent, and you tell the supplier your problem and tell them your budget.

    You heard me right. The cardinal rule of “never disclose budgetary availability” has an exception, and this is it.

    When the available budget is less than the most aggressive assessment of fair market value, then you should look at disclosing your budget to the supplier. Your budget is what the supplier’s quotation “must cost”, hence the name.

    What this does is a few things. First off, the supplier will appreciate your position. If the fair market value for a piece of capital equipment is $320K and you have $200K budget, a negotiation position of $200K may actually make the supplier angry, because they will perceive a win/lose agenda.

    However, if you disclose that your budget is $200K and ask them for their help, then the supplier becomes a part of the solution.

    This is where the real breakthroughs can happen. Remember, suppliers are a lot smarter than you are regarding total cost. They sell that product or service ALL DAY LONG to an entire planet full of customers.
    You are just negotiating this contract a couple of times a year at best, and probably a lot less than that.

    The types of breakthroughs that can come about are things such as the following collaborative cost reduction ideas, in return for reduced supplier pricing that is closer to your “must cost” requirements:

    • Use of a different type of material
    • Different lead time and shipping requirements
    • Substitute components
    • Buying fewer of the items but still meeting customer requirements
    • Switching from custom components or services to standard goods and services
    • Having less “bells and whistles” on goods being purchased
    • Simplify services model and scope of work
    • Paying earlier to secure a better price
    • Making an aggressive early payment before the end of the supplier’s fiscal cycle
    • Adopting specifications or SOW components from other customers of the supplier that reduce cost

    The list goes on and on. My favorite example is that a client of mine was working with a PVC supplier to try and do a must cost model, based on my guidance. I helped them with the supplier engagement.

    It turns out that we were able to slash 40% off of the PVC costs, getting down to our Must Cost Model requirements.

    How did this happen? Well, the specs required that the clients name be stamped on the pipe every 3’. This pipe was going….. underground.

    The supplier made this kind of pipe all day long, but in order to meet customer requirements, they had to have separate procedures to stamp the pipe.

    A standard product became a custom product, and this added cost. Had we just negotiated for lower prices, maybe we could have gotten 10% lower. And that would mean the supplier makes 10% less, because the costs don’t change.

    However, when you do must cost modeling, you can dissect costs and find innovation and breakthroughs that benefit both parties, while still meeting budgetary requirements. We used it carve 40% of the price, and my client was buying miles and miles of this product!

    If you are not doing cost modeling, you need to start. It is not an optional skill set or purchasing process step. It is vital to your career, your results, and ultimately, your income in this profession.

    I offer in depth cost model training – a full 8 hour course in fact – to companies who are interested in private seminars, and also in private coaching sessions as well of course. I also have a 7 hour cost modeling video coming out soon. Look for it!

    Next week, we will talk about Should Cost Models. See you then!