Monthly Archives: October 2006

What makes a Procurement Professional?

Even though it had a very academic bent, a good presentation at the Fourth Annual International Symposium on Supply Chain Management was Paul Larson‘s presentation on “A Survey of Professionals on Topics, Tools, and Techniques for SCM”.

In this presentation, he overviewed a number of surveys carried out over the past few years that, as part of their design, attempted to determine what skills were required by a procurement professional. All of these surveys demonstrated that an effective procurement professional requires a broad cross section of skills to succeed. This indicates, at least to your author, that a procurement professional needs to be a very talented and skilled employee and that a good procurement team has the potential to be the superstars of your organization.

A study by Giunipero and Percy in 2000 identified the following skills:

  • Strategic
  • Process Management
  • Team
  • Decision Making
  • Behavioral
  • Negotiation
  • Quantitative

A study by Gammelgaard and Larson in 2001 identified:

  • Teamwork
  • Problem Solving
  • Supply Chain Awareness
  • Ability to see the BIG picture
  • Listening
  • Speaking
  • Prioritizing
  • Motivation
  • Cross-functional awareness
  • Leadership

And the recent study performed by the presenter identified the following top ten tools, topics, and techniques:

  • Communication
  • Negotiation
  • Teamwork
  • Computer (Analytics) Skills
  • Leadership
  • Contract Management
  • Price and Cost Analysis
  • Purchasing and Supply Management
  • Supplier Selection / Evaluation
  • Relationship Building

In other words, your average procurement professional needs the same breadth of skills required by a senior manager in any other department of your organization. Thus, it should be no surprise that a best-in-class procurement organization can make unparalleled contributions to your bottom line.

The Internet and the Purchasing Knowledge Revolution

A great presentation at the Fourth Annual International Symposium on Supply Chain Management was Rod Sherkin’s presentation on The Internet & the Purchasing Knowledge Revolution.

Rod Sherkin, of propurchaser.com started off by reminding us that purchasers are very busy people and that shorter planning cycles (as a result of flexible manufacturing), smaller inventories, and unreliable information can make them busier by the day.

Then Sherkin reminded us that one of the best way to reduce your time as a purchaser is to manage one of the major time traps – price hassles. Do this by:

  1. Tracking suppliers’ input costs and
  2. Tying what you pay to their costs.

For example, if you are buying steel office chairs – find out what percentage of their cost is raw materials and tie your overall cost to their cost of steel. Every time steel rises or falls by a fixed percentage during the term of the contract, your price should go up or down according to a fixed amount, depending on the percentage that steel contributes to your supplier’s total cost. For example, if steel is 50% of your supplier’s cost, and you set a threshold of 3%, then every time steel goes up by 3% you should accept an increase of 1.5% in product cost but, more importantly, every time steel goes down by 3%, your supplier should concede you a cost reduction of close to 1.5%.

Furthermore, the best suppliers should see an advantage to linking your prices to their costs and prefer to compete in a transparent arena where they can win by keeping their costs down and their productivity up.

They should be more than willing to agree on a base market index and, furthermore, tie that to a neutral currency index. After all, if they are buying from China and a neutral China steel index shows steel going up by 4%, but you are buying in American dollars and the dollar has risen 13% in the same time period, then your costs should actually decrease since your buying power has increased by 8.65% (1.13/1.04).

And with the internet, you should have no problem keeping a watchful eye on your supplier’s relative cost increase or decrease on an agreed upon time period (every shipment, month, quarter, etc.). (After all, neither your accounts payable or their accounts receivable are going to be overly interested in calculating cost differentials on a daily basis.)

In addition, if you track your suppliers’ inputs, you can, in addition to negotiating automatic price reductions:

  • attract low cost producers (as they live to compete in open markets),
  • strengthen the supply chain,
  • reduce suspicion and acrimony, and
  • benefit sellers as well as purchasers.

The Talent Series V.V: Breaking Update!

Two pieces of news to report to you today.

First of all, Jason Busch, The mighty Prophet of the spend management space, has started his own mini-series on the issue. You can read The Spend Management Talent Game (Part 1) through the link. I’ll summarize and post my thoughts when he finishes the series in a later post.

Also, NextLevelPurchasing, which was recently recognized as the Innovative Business of the Year by the Pittsburgh Airport Area Chamber of Commerce (PAACC) is going to launch the first video installment of their Purchasing & Supply Management Podcast Series next Tuesday (October 17, 2006) on the importance of contract management. Be sure to take advantage of this free educational opportunity!

The Talent Series V: Driving Competitive Advantage thru an Effective Talent Supply Chain

Another great presentation at the Fourth Annual International Symposium on Supply Chain Management was Head2Head Purchasing‘s talk on Driving Competitive Advantage thru an Effective Talent Supply Chain.

The presentation by Wayne Burgess & Paul Dodd, Managing Partners, pointed out that the human element makes talent procurement distinct and volatile. According to them:

  • Attraction is Critical
  • The best talent is most at risk of flight
  • Talent is extremely volatile & unpredictable
  • Ownership is complex; you need to consider
    • Physical Asset Nature
    • Knowledge and Skills Retention
    • Intellectual Property
    • Work Product
  • Appreciation in Value over Time
  • Expensive Maintenance
  • Expensive Disposal Costs

Furthermore, some markets are even tougher than others. Right now, the countries that are worst off are Mexico (78%), Canada (66%), and Japan (58%). In Canada, Calgary and Vancouver are the hardest hit (over 80% in some industries). Furthermore, each market has its own unique skill pressures.

One of the high points of the talk was where they pointed out that most companies with client acquisition issues had one or more of the following issues:

  • Poor attention to employment and job brand
  • Poor understanding of the best supply channels
  • Supply strategies are stagnant
  • Supply and Demand are rarely linked
  • Reactive recruitment is typical
  • Little attention to supply surety
  • Workforce competition is often an afterthought

Why was this a high-point? Knowing the issues allows you to identify mitigating factors. In particular, these issues identify the following key success factors in the attraction of talent:

  • marketing of employment and job brand
  • supply channel knowledge
  • effective talent sourcing strategy
  • integration with demand generation
  • effective resource planning
  • relationships
  • market and internal data management

Furthermore, attraction, through marketing and PR campaigns, is often the differentiator. Good PR campaigns that create the buzz … continuously … across multiple supply channels.

Everyone knows that some channels work better than others, but one thing that surprised me was how much better some channels were than others. The presentation highlighted the following statistics that serve to indicate just how effective your marketing dollars can be expected to be:

Channel Avg Success Rate
Referrals 50.0%
Career Site 13.3%
Agencies 11.4%
HR Database 10%
Campus Recruitment / Events 9.8%
Advertisements 5.5%

In other words, your most effective channels are often your lowest cost channels. When you consider the cost of an agency, a job fair, or an advertisement, an employee referral program, even at 5K a head, is cheap in comparison. And when you consider the national, and sometimes international, visibility of a career site, their four figure fees pale in comparison to the number of applications you can receive if your ads are appropriately placed.

Key Concepts for Major Procurements

In the humble opinion of the doctor, one of the best presentations at the Fourth Annual International Symposium on Supply Chain Management was Paul Emanuelli‘s presentation on Key Concepts for Major Procurements.

Most of the time in procurement, you’re procuring orders of direct materials, indirect materials, MRO, or services – basic acquisitions which, with a few notable exceptions, will not break the bank if something goes wrong. However, sometimes your purchases are bigger – much, much bigger. For example, a new office building. A new fleet of aircraft. New heavy machinery. These procurements, if not handled properly, could, literally, break the bank, and the business, if not handled properly – possibly even before the law suits start flying.

The very nature of major procurements implies that legal counsel should be involved from day one – not brought in during final negotiations. When you consider Mr. Emanuelli’s checklist for empowering major procurements:

  • The Role of Lead Legal Counsel
    • Expanded in Major Procurements
    • Embedded in a Multidisciplinary Team
    • Multi-Faceted Legal Advice
  • Internal Governance
    • Awareness of Internal Governance Issues
    • Approvals Roadmap
    • Decision Making Framework
    • Roles and Responsibilities
    • Distinguishing Internal and External Audience
  • Plans and Strategies
    • Providing Strategic and Tactical Advice
    • Distinguishing Process from Purpose
    • Building a Business Plan
    • Developing a Procurement Strategy
  • Selecting the Appropriate Format
    • Critical Decision Point
    • UN Model Procurement Law
    • Three RFP Formats
    • Selection Depends on Circumstances
    • Impact of Pro Forma Agreement
    • No Negotiations Calls for Certainty of Terms
    • Criteria for No Negotiation Format
    • Major Projects Require Flexibility
  • Critical Project Details
    • Front-Line Considerations
    • Disclosure Duties
    • Reconciling Requirements
    • Coordinating Concurrent Drafting
    • Horizontal Integration
    • Tailoring a Legal Agreement
    • Developing a Negotiating Strategy

… it quickly becomes obvious that legal counsel is crucial from day one.

In order for a major procurement project to succeed, roles and responsibilities must be hammered out from day one. This is where good legal counsel can be of significant assistance. They can help you identify all internal stakeholders and create a solid decision-making framework and governance structure to provide direction to the cross organizational procurement team during all facets of the project.

Solid legal counsel can also help you distinguish process from purpose, separating the means from the ends, which assists you in drafting documentation that clearly differentiates between the procurement process rules that lead to the selection of a preferred service provider and the objectives that should be achieved under the contract once awarded. Unclear language alone has been the basis for a slew of lawsuits north and south of the border, especially in the public sector, and well drafted documentation up front effectively mitigates your risk.

Legal counsel can also assist in the creation of a solid business plan at the beginning of the project as well as the definition of a customized procurement strategy tailored to the project, including the selection of an RFP process and associated drafting. This will also help prevent problems down the road.

When it comes to RFPs, you essentially have three options, as recognized by the UN Model Procurement Law:

  • No-Negotiation RFP
    invitation to tender style commonly used in the public sector
  • Simultaneous Negotiation RFP
    allows the purchaser to negotiate with all bidders
  • Consecutive Negotiation RFP
    allows the bidder to negotiate with the highest ranked bidder and proceed down the ranking until an agreement is reached

The No-Negotiation RFP is one of the strictest formats and requires absolute certainty of terms in order to prevent problems down the road. Considering that it needs to:

  1. include all of the general governing terms and conditions;
  2. incorporate all of the purchaser’s business and technical requirements;
  3. enable bidding based on the same set of common assumptions regarding performance terms and conditions; and
  4. enable contract formation without recourse to any post-bidding negotiations that materially change the terms contained in the tender call;

I would submit that you should never embark on any significant no-negotiation tender without the advice of legal counsel from the beginning. In summary:

The complex and multi-faceted nature of major procurement projects requires legal counsel to play an intensive role in the project team. By integrating into that team and understanding the broader context within which these project operates, legal counsel can be a key contributor to the success of a project. To increase their chances of success, project organizers would be wise to retain this key player at the early stages of their major initiatives.

For those of you in the public sector, Paul Emanuelli has recently produced a textbook on Government Procurement and, even though it was written from a Canadian perspective, I would suggest that the advice is sound whether you are in Canada, the US, the UK, Australia, etc. Paul also produces a free quarterly National Tendering Law Update which can be electronically subscribed to on request to paul<dot>emanuelli<at>sympatico.ca.