Monthly Archives: October 2010

Vendor Reference Checks

Do you know the right questions to ask?

For example, of the following eight (8) questions, four (4) are good, and four (4) are not so good. Do you know the difference?

  • What’s your relationship with the vendor?
  • How well has the vendor worked out for you?
  • Would you recommend the vendor?
  • Describe a situation where the vendor disappointed you and how they rectified the situation.
  • What are some things you’d like the vendor to do differently?
  • Have you had any major problems with the vendor?
  • Give one reason you wouldn’t recommend the vendor.
  • How do you interact with the vendor?

If you don’t know which of the questions will yield the answers you need to make a good decision in vendor selection, check out Charles’ recent piece on Vendor Reference Checks: Worthless or Worthwhile, because it’s not only what you ask, but how you ask it. (After all, a vendor will never give a bad reference.)

Cultural Intelligence VII: Japan

This series is edited by Dick Locke, SI’s resident expert on International Trade, author of Global Supply Management — A Guide to International Procurement (which was the definitive guide for almost a decade), and President of the Global Procurement Group which regularly gives seminars on International Trade and working with International Cultures.

As highlighted in last year’s post on Overcoming Cultural Differences in International Trade with Japan, the Japanese are very different than anyone else. They were historically isolated, crowded by geography, and their language is pretty much its own language group, despite the fact that they have three writing systems (kanji, hiragana, and katakana). Furthermore, the beginning of Tokogawa rule in 1603 marked the beginning of 250 years of almost complete isolation, until 1853 when Commodore Matthew Perry arrived.

With respect to Locke‘s seven key cultural differences (first outlined as six in his classic text on Global Supply Management), power distance is present, as there is a defined hierarchy and no decision can be made without approval from the top, but the power distance is not as great as one might think, as an approval will normally not be granted until a consensus decision has been reached at the lower levels and pushed up. Time is fluid. They are punctual to a tee (monochronic) but will never commit to a decision date (polychronic). The buyer always outranks the seller, but negotiations will continue only so long as their rules on social and business conduct are followed. Harmony is a fundamental foundation of their web society and face must always be maintained. Despite the appearances put on by the younger generation in the big cities (like Tokyo and Osaka), individuality is actually quite low and privacy is highly valued. Finally, uncertainty is to be avoided at all costs.

With respect to verbal communication, they are very indirect, even though, like the Chinese, they will ask you very blunt personal questions in order to determine how to best maintain harmony with you. Communications and negotiations should remain calm and soft, and you should never raise your voice.

With respect to non-verbal communication, your body language conveys your respect, and you should learn how to bow, stand, and even sit (suwari and seiza) appropriately. Despite the large number of gestures used in Japan (which you will not understand for quite some time), your gestures, facial expressions (as smiling and frowning have multiple meanings), and emotions should be reserved and your body position should mirror those around you. You should maintain as much distance as can be afforded, and reduce eye contact which is seen as disrespectful, especially to someone who is seen as your senior. Don’t touch in public, and especially don’t touch someone of the opposite sex. (Or, as indicated in Part II, you might end up with a new girlfriend or boyfriend.)

You should take notes in meetings (as it shows seriousness). It may take several meetings before you get down to business, as they will want to get to know you first. With respect to negotiations, your best offer is expected up front, and concessions are rare. Business is often discussed over meals, but you must wait for them to initiate. At a meal, do not empty your glass or plate as it is a signal to refill it, but do empty your rice bowl, as leaving a small amount is a signal that you want a refill.

Finally, the business card carries a pre-eminent importance in Japan, which has an elaborate custom around giving and receiving, and you should carry no less than a hundred for every week you plan to be in the country (with an English side and a Japanese side).

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A Most Favoured Nation’s Rant

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

News yesterday:

U.S. Sues Michigan Blue Cross Over Pricing

The US Department of Justice and the State of Michigan have sued Michigan Blue Cross over their practice of having a clause in their contracts requiring that hospitals never charge other insurance companies less than they charge Blue Cross. In some cases they allegedly required the hospitals to charge 25-39% more than they charged other insurance companies The plaintiffs charge this is anti-competitive behavior.

US purchasing shorthand calls such clauses ‘MFN’ (Most Favored Nation) clauses.

My response:

Well duh, it's about dxxx time! These clauses are a refuge of lazy-axx purchasers who rely on their competitors to do their price negotiations. The clauses I've run into also would require sellers to open their books to audit so buyers can actually check what a seller charges others. If that isn't anti-competitive, I don't know what is.

It's also futile and, in some cases, comical. I had a major client who wanted me to agree to such a clause. They were some of the most lackadaisical price negotiators I've seen. They had just asked me to become an employee of their temp agency (for the same consultant rate) because they didn't have a process to reliably send 1099 tax forms reporting my income to the US Internal Revenue Service. That raised their cost 20% and increased my profit by 7% because now they didn't have to pay the employer's share of Social Security and Medicare. I was waiting for them to ask for a 7% price reduction but the request never came. Sure I signed their agreement but I made sure that my services to them were 'different' than services to others.

So if anyone thinks you're accomplishing anything with these clauses, look again. If it's not a more or less standardly defined good or service, all you've done is increase bureaucracy. If it's a standard product, I agree with the plaintiffs that it's anti-competitive.

Thanks, Dick!

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How Low Can Strategic Sourcing Go?

In the beginning, strategic sourcing and supporting applications were for the Fortune 500 only, not only because they were the only organizations that could afford the multi-million dollar price tags, but they were the only organizations that theoretically had enough spend to see a significant ROI after the (very) significant product, process, and people costs were taken into account. (And whether or not you agreed with the viewpoint that strategic sourcing was only for the rich and famous, you couldn’t argue that unless you were among the rich and famous, you couldn’t afford the price tag.)

Then the Sourcing 2.0 providers, who said we can use the web to deliver solutions on-demand for a fraction of the cost of the on-premise behind-the-firewall model (which, in the beginning, was six figures instead of seven), hit the scene and strategic sourcing broke into the (high end of the) mid-market. It wasn’t applicable to every category, or to every project in the categories it was applicable to, but made a significant impact in those categories it was applicable when best practices and the right expertise was applied.

Then costs went down, as features increased, and (strategic) sourcing solutions slowly permeated the mid-market, starting with the companies with revenues in the high nine-figures and ending at the companies with low nine figures in revenue. At this point, most of the “leaders” had these solutions, as well as a few of the learners, and the laggards still did not give a damn one way or the other. The market started to saturate. So what was a vendor to do?

Push strategic sourcing down into the small business market. Simplify the solutions, make them true self-serve cloud-enabled multi-tenant applications, and price them so that everyone can afford them. But is this really strategic sourcing?

While you can argue that the market was starting to stagnate because it was saturated, you can also argue that the market was starting to stagnate because most of the market wasn’t benefitting from the solutions (to the extent that they adopters of the technology thought they would). And if the latter is the case, you have to ask if strategic sourcing truly exists in the mass market. After all, if the solutions aren’t working, there can only be three reasons:

  1. the solutions being sold don’t support strategic sourcing
  2. the solutions being sold do support strategic sourcing but aren’t being properly utilized
  3. strategic sourcing isn’t possible at a company below critical mass

If we assume that a critical mass isn’t required to effect strategic sourcing, then if a company isn’t getting results, it’s either because the solutions don’t support strategic sourcing or they do but aren’t being properly utilized. I think we can quickly rule out the theory that the solutions being sold don’t support strategic sourcing (when properly utilized) because the basic process has been well understood for a couple of decades now, every big consultancy has their own n-step process, and the foundational solutions have been built and rebuilt so many times that they’re almost commodity. I also think we can’t say that the solutions aren’t being properly utilized because while I’m sure some companies don’t have a clue, at this point it’s well understood what the solutions do and how to use them, especially at any company that’s investing in the right people, process, and technology to improve it’s sourcing.

This leaves one reason why the results aren’t being realized (to the extent they were expected) by the majority of the market — they companies are not at critical mass. In order for strategic sourcing to truly be effective, I would posit that the following two conditions must hold:

  • there is enough spend to warrant a strategic sourcing effort
  • there is enough knowledge to effectively execute one

At most mid-market companies, the knowledge of modern procurement is limited. Procurement is still primarily a back office function, telephone and fax is more prevalent than modern technology, and the level of education isn’t much beyond high-school. You don’t have a room full of MBAs or Engineers trained in supply chain, and most of the buyers, who have no form of certification whatsoever, don’t even belong to any purchasing organizations. And this lack of knowledge to the face that most of the solutions don’t go beyond the help necessary to guide the user through the process, and you can see that most organizations don’t have the knowledge to effectively execute a proper strategic sourcing effort.

Furthermore, even at those few mid-market organizations that have made the effort to recruit and attract the right people, and give them the right training, I would argue that strategic sourcing is a rare event because most categories don’t have enough spend to enable a true strategic sourcing effort. As Dalip Raheja (of The MPower Group) said when he declared that Strategic Sourcing is Dead, it’s not strategic if everyone else is doing it. You can’t just go through the seven steps and have a strategic event. You have to analyze the rationale behind each and every assumption and decision you make for the event to be strategic. (Why are you dual sourcing? Why are you outsourcing design? Etc.) This takes time, money, and, often, specialized consulting and/or tools in addition to your sourcing suite — and, one way or the other, this comes with a hefty price tag. A price tag that’s only worth it if the spend is significant enough to insure (the likelihood of) a high ROI!

As a result, I have to (mostly) agree with a colleague of mine who has said that there’s no such thing as strategic sourcing in the SMB market. While there will be a few categories in the higher end of the MB market where strategic sourcing can be effectively applied, and while you can push the sourcing tools down through the mid-market to the small business market, you can’t push the strategic element. The best you can do is bring true B2B commerce to the average small business. And while this is certainly a good thing, as it drives transactional efficiency and lowers cost, let’s not fool ourselves. True “strategic” sourcing is a rarity.

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Does Your CSM System Provide Multiple Product Views?

A recent white paper by Dassault Systemes on Product Lifecycle Management (PLM) hit the nail on the head when it asked, near the back of the paper, if your Component Supplier Management system supported multiple views? Specifically, the paper on Component Supplier Management (CSM) identified three views that your PLM / CSM system has to support if you want it to be adopted across the organization and utilized across the product lifecycle:

  • system (logical)

    to enable distributed and cross-organization design activities

  • physical (EBOM: engineering bill-of-materal)

    to enable component identification, selection, and standardization

  • financial (BOM: manufacturing bill-of-analysis)

    to enble supplier identification, selection, management and (strategic) sourcing activities

The reality is that PLM is a very involved process that not only touches most of the orgnization, but impacts most of the organizational functions. As a result, it needs to either support most of those functions or capture the data required by those functions and/or integrate with other organizational systems that capture the necessary data and/or accomplish the relevant functions in order to be useful, because PLM is not a function that can be siloed into any one organization. Keep this in mind when selecting your next PLM system.