Consumer Damnation 72: Corporations

In consumer damnation 71, we talked about governments and how government customers can not only be very demanding, but how they can be quick to pass on the blame to your company when something goes wrong even if it’s not your company’s fault. In addition, they generally mandate that you provide bill of material data, shipping manifests, country of origin determinations, quality inspections, and other information with every product that you provide the government so they can meet their accountability mandates — a paperwork nightmare, especially if all you are selling is office supplies. And if that’s not enough, if the government runs out of budget and can’t get agreement to run a deficit, there can be an indefinite spending freeze while the situation is resolved — and if you are waiting on a few million dollars for products and/or services delivered, you could be waiting quite a long time. They can be your organization’s best and worst customer.

That is, until your corporate customers are taken into account. Government customers will always give you headaches, but corporate clients will often give you nightmares. But that’s partially a story for different post. In this post, we are going to talk about specifically how they can be a nightmare for your Procurement organizations.

They can demand the SLAs be met — or penalties be applied.

If a big corporation knows that a good chunk of your organization’s revenue needs are dependent upon getting their contract, they will be very demanding in their negotiations and your sales team might end up agreeing to rather unfair SLAs that Procurement will be expected to deliver on. For example, there might be a penalty for every day a shipment is late, which could be something out of your control if a port closes, a primary transportation company’s drivers go on strike, or the supplier’s source of raw material dries up due to a mine collapse and there is no way to get a new shipment of the product produced on time to transport from the new supplier’s factory in Shanghai to the distribution facility in San Francisco, but yet Procurement will be held accountable when the shipment is late and penalties are applied to the invoice.

They can not only insist on extreme corporate responsibility requirements and demand not only end-to-end supply chain transparency, but that every supply chain participant be one that has been vetted by an accepted third party audit in the past two years.

This can make complying with the documentary requirements that the local government will insist on a walk in the park. As a good corporate citizen, you would have mapped your supply chain and vetted all of your tier 1 and critical tier 2 and tier 3 suppliers, but considering there could be over ten thousand suppliers in your corporate supply chains when you consider every purchase from the 50M you spend on your primary electronics retail products to the 50K you spend on miscellaneous office suppliers, its an almost insurmountable task to identify every organization in the chain and map them against a list of audited suppliers. If your choices are do your best to comply or lose a third of your revenue (because you are CPG and they are the biggest of your big box retailer clients), it might be the case that you really don’t have a choice.

They can be a real pain in the backside.

If they are a big customer, in addition to the huge discounts they negotiated during the sales process, they might expect free service, warranty support beyond the warranty period, and the ability to make additional purchases at a moment’s notice. And who has to arrange that free service, deal with the manufacturer to try and negotiate additional warranty support, convince the supplier to add a second shift, or find an additional source of supply at 7 pm on a Friday night? That’s right, Procurement.

Corporate customers don’t just make hell for Sales, they often make hell for Procurement too. And when they decide to spread the damnation, Procurement is the organization that really feels the burn.

It is NOT Direct or Indirect — It is Strategic and Complexity!

Now that we’ve set the record straight on sourcing, it’s not a suite, it’s just sourcing; and optimization, it’s not optimization, it’s strategic sourcing; it’s time to set the record straight on another rampant misconception perpetuated by vendors who make their living off of the ignorance they perpetuate.

It is not direct or indirect — it is strategy and complexity.

The right way to source a category has absolutely nothing to do with whether it is a direct category for your organization or an indirect category for your business. Nor does it have anything to do with whether or not it is a category regularly sourced by your GPO or whether or not the GPO has it under contract.

First of all, as we elucidated in our most recent paper on “Complex Sourcing: Are You Ready“, even the categories that were traditionally seen as the simplest indirect categories are sometimes actually among the most complex “direct” categories that the organization possesses!

Secondly, what is indirect for your organization is direct for another organization, and a supplier in particular. Calling it indirect only masks the fact that, at some point in the supply chain it is a complex direct category and if your supplier, or GPO, is not approaching it correctly, a significant amount of money is being left on the table.

While there are some that would very much like to forget that before the introduction of e-Negotiation (e-RFx and e-Auctions), a number of “indirect” categories used to cost organizations millions — such as tires in automotive, lights in aviation and printer ink in back offices everywhere — this is not the right thing to do. We have to remember that these organizations never understood how much these “secondary” categories were really costing them and that, sometimes, 100% profit margins were the norm, because they often did not have the ability to go out to market like we do today.

Thirdly, while a product organization might see services as indirect as such a category would be labelled as non-core, and, similarly, while a service (or financial) organization might see a product category as indirect as it too would be labelled non-core, if such service, or product, is essential for the organization to deliver the product, or services, the organization profits on to the end consumer, how can such a service, or product, really be non-core?

For example, if successfully selling that next generation cellphone requires augmenting the supplier’s design team with a new design team that can enhance usability above the competitor’s product without sacrificing a low-price point or quality, that is a critical service and should not be treated as a secondary outsourced indirect category. Similarly, if delivery of your big data analytics services requires a specific high-end laptop configuration that can not be easily met by all providers, and a sub-par configuration would result in delays or service degradations, this is not a category that can be thrown over the wall to a GPO either.

In other words, direct or indirect has no correlation to the complexity of a category or its strategic importance to the business and, thus, should not be used to determine the appropriate sourcing strategy. The right way to initially classify a category is to use a basic measure that that captures its strategic importance and its complexity and any category with a measure that exceeds a certain threshold must be strategically sourced. The rest can be sourced using simple spot-buys or other traditional methods provided that they are not too complex, or too strategic in someone’s view, for these traditional methods.

Regulatory Damnation 37: Industry Associations and Standards

One would think that the regulatory damnations would stop with the ever increasing onslaught of regulations being passed around the globe that restrict the organization on:

  • raw materials,
  • production processes,
  • available labour, and
  • third party providers

that collectively cover

  • environmental regulation,
  • energy and water usage,
  • slave labour, human trafficking, and child labour,
  • oversight and documentary requirements,
  • taxation and reporting, and
  • corporate social responsibility and ethics

among a few dozen other regulatory requirements. But they don’t.

To top it all off, you have to deal with industry association standards that you have to include in your products or face becoming the next pariah. In today’s hyper-connected, mega-corporate world where a few big companies determine the fates of thousands of smaller companies who sink or swim on as a result of their boycott or their support, your company’s fate could rely on another companies whim. So if that company enthusiastically supports a standard that you don’t, that could be the end for you. But that’s just the beginning of the damnation.

Newly enacted standards could be the exact opposite of the protocols you built your product on.

For example, you could have designed your electronics product to work on DC current but the new standard for the GPS system, designed to be used in the car and on the trail, is AC with an AC to DC adapter. All of a sudden, you can’t get the Industry Association seal of approval and your product is dropped by all of the major electronics retailers.

Newly enacted standards could redefine the communications interface.

You might have spent years developing a custom communications protocol to interface with your new mobile weather data reader, but then the major software packages adopt a new standard you weren’t expecting and drop support for your standard faster than a hot tomato and your product can’t even be sold through the discount outlets because there is no support for it.

Newly enacted self-imposed regulations could prohibit the purchase of raw materials from producers expected to violate fair-wage and human rights principles.

If you already locked into a contract with a producer that has been banned, all of a sudden you could be the target of competitors negative advertising campaigns that target you as a consumer of unfairly produced goods. This could destroy your brand value if you are buying raw materials that might be harvested by child or slave labour, even if the claim has no evidence to back it up.

While industry standards are not as damning as regulatory damnations, as industrial competitors cannot seize your goods, levy fines, or press criminal charges, they are still damning as we noted above because if you fail to honour the industry association’s boycott, you could be the target of negative advertising. And the right negative advertising can considerably damage your brand, plummet your stock, and bring sales to a trickle. This damnation, that likes to hide in the shadows, doesn’t emerge often, but when it does, it’s a doozy.

Do You Know the Rules for Ethical Supplier Interaction?

You might think you do, because ethics are just doing the right thing, and doing the right thing is just using common sense to apply your morality to the situation at hand. But do you? For the most part, you probably do but I’d bet there are situations where you don’t. Because ethics aren’t hard and fast like regulations and laws. There are no well-defined lines to push or cross. And if there is no well defined ethics policy at your company, it can be trickier than you think.

This is made clear in Next Level’s Purchasing great express course on 15 Rules For Ethical Supplier Interaction, which is free as part of a premium Next Level Purchasing Association Premium Membership (which is $99.99/year) or $14.99 as a standalone purchase. (SI would strongly suggest the annual membership as you then get access to over 18 express courses, over 100 articles, dozens of archived webinars [and transcripts], white papers, and the salary guide.)

The NLP express course covers bribes, which are usually (but not always) obvious, (personal) relationships, stock ownership, donations, and gifts. Bribes are usually obvious since, under laws like the FCPA (Foreign Corrupt Practices Act) and the Modern UK Bribery Act, they are illegal, but sometimes bribes can be hidden in (seemingly) legal transactions and not even appear as a bribe to anyone investigating a purchase decision because the briber and the bribed might have hidden information. For example, instead of offering you $10K or an all-expense paid trip to Hawaii for awarding the business, the supplier might make a large purchase from a business you are the majority shareholder in (and, from which, you would get a large dividend or bonus) at above market rate. From a third party perspective, the supplier made an unrelated business decision to buy its new office equipment from an unrelated company, that just happened to occur before it was awarded the (much) larger contract from your organization. But even though there might not even be a perceived conflict of interest in this situation, there is, because it’s hard to not see a supplier favourably who awards business to a company you control, even if you are making an conscious effort to try and be unbiased. But this is just one example where ethics can get tricky. The short course does a great job of outlining others.

Donations for charitable organizations are less obvious because everyone just wants to help a good cause, and what does it hurt if a supplier makes a decision to support your favourite charity? Well, it depends. How much? Does the supplier expect favouritism for the donation? Will the donation unconsciously bias you toward the supplier? Will there be a perception of bias? It’s tough.

But toughest as all is the question of accepting supplier gifts or meals. A meal is just a meal and a gift with nominal value is just a polite introduction, right? Well, maybe. Is it just lunch to discuss a proposal, or is it a fancy dinner at the up-scale private club at the local sports stadium that just happens to overlook the big game? And what is nominal value? It’s shaky ground, which is made even shakier by the fact that refusing a gift could be considered rude and damage the relationship. What do you do then? It’s a much tougher subject than you first think it is, and the more you examine it, the harder it is to define ethical versus non-ethical behaviour and good business rules vs. bad. This is a subject the course spends a considerable amount of time on and a subject you as a Procurement professional need to spend a considerable amount of time on to really understand the intricacies. At the end of the course, you will have a much better understanding of the, sometimes hidden, ethical dilemmas that you will face on a daily basis and, as a bonus, get a starting list of 15 rules that you can use to jump start the creation of a Procurement ethics policy that will help you and your team to always get it right.

Next Level’s Purchasing course on 15 Rules For Ethical Supplier Interaction is a great course on the subject matter and SI recommends that you check it out if you can get access to it.