Monthly Archives: March 2012

Trade Barrier Reductions

Late last year, as reported on World Trade 100 in “Reducing Barriers to Trade”, President Obama signed three new Free Trade Agreements with Colombia, Panama, and South Korea to eliminate tariffs and other barriers to U.S. exports, expand trade between the US and the respective country, and promote economic growth.

Columbia is the third largest economy in South and Central America and Panama is one of the fastest growing economies in the region, but it is the South Korea agreement that is of the most interest, especially considering the amount of electronics being imported by the US each year. And South Korea, which is the 15th largest economy in the world, does the most manufacturing in Information and Communication Technology (ICT) of all the OECD countries (Source: OECD ICT Outlook 2010) — almost 50%. And while 50% of global trade in manufactured ICT products takes place outside the OECD countries, dominated primarily by China, the fact that 50% takes place in OECD countries means that global buyers of ICT will soon have access to tariff-free trade on ICT products from the country producing almost 25% of the goods! (See the tariff schedules on the USTR page that reduces the tariffs on many products to 0.)

Under the FTA, nearly 95 percent of bilateral trade in consumer and industrial products will become duty-free within five years of the FTA’s entry into force, with most remaining tariffs eliminated within 10 years. And the almost unrestricted entry into the huge consumer market offered by South Korea will also benefit producers of ICT products, as demand there is almost as high as in Japan and parts of China. This is promising for globalizing ICT companies.

From the Land of D’OH: Timely Payments Make Effective Business

A recent SupplyManagement.com article on how “Direct Payments Will Save Government £40 Million a Year” caught my eye not because improving efficiency in an organization that spends Hundreds of Millions processing paper will, obviously, save Millions, but because of this paragraph:

The government estimates that ensuring SMEs get paid more promptly will enable them to run their businesses more cost-effectively and pass those savings back to the government. It will also improve the cash flow of small businesses and their ability to plan for future deals.

Supply Chain experts and leaders have been preaching this for years. Slow payments force suppliers to take loans, at terms that are significantly worse than what a large buying organization can get. Sometimes, to make payroll and secure cash-flow when buyers take 60, 90, and even 120 days to pay, small/new/perceived-risk supplier organizations have to borrow at 20%, 30%, and even 40% per annum. This substantially drives up their cost of doing business — a cost that will, inevitably, be passed to the buyer with the short-term mindset. If the buying organization pays on time, or, if it needs to, takes out a loan based on its credit terms, which could be only 6%, 5%, or 4%, to pay on time, the supplier can operate more cost effectively and pass on those savings to the buyer. It is that simple.

But this is a government organization. We should be happy they figured it out before Mayan Doomsday and not The Date Heard Around the World [www.isaac-newton.org]. (At least this way some of us will see the beginnings of a government organization coming to its senses during our lifetime.)

Of course, if the UK government really wants savings, it should mandate that the NHS follow this advice. As the world’s fifth largest employer [digg.com], it spends £110 Billion a year and processes Millions of payments. That’s a huge savings opportunity!

The New Technology Elite

Coming out in hard-copy form next Tuesday, March 27, The New Technology Elite is the next must-read book on your list (and is already available in The Kindle Store for those of you who want an early start). Vinnie Mirchandani’s latest release on how great companies optimize both technology consumption and production, it is a great follow up to The New Polymath, which chronicled profiles in compound-technology innovations (and which was reviewed here on SI in The New Polymath’s Ten Rules for Success), this book looks at “consumer” (tech) companies that have better technology in-house at a larger scale than most (IT) enterprises. With case studies ranging from the media poster child, Apple, through UPS to Valence Health and Taubman Shopping Centers (yes, shopping centers), it is a fascinating read on how the best product and service companies embrace technology at their core, and utilize it to do whatever they do better, and even innovate upon it in ways that even the big IT shops, who are supposed to be innovating this technology, miss. (For example, UPS had enterprise-ready PDAs [Personal Digital Assistants] long before such technology was generally available in the small business and consumer markets. And, in some ways, they out-innovated shops like Palm and Blackberry.)

The supply chain elite know Apple’s story all too well: optimize the supply chain, optimize the cost, and maximize the profit as the high quality items sell for a premium over competitor’s products. And many of us know about HP’s Quest for a “10 Out of 10” supply chain. And the logistics professionals will know about the decades of technology innovation at UPS, but how many of us know Valence Health, chronicled in Chapter 11?

The US health care system is flawed. As Vinnie astutely points out in Chapter 11 (which is an appropriate location for these factoids as Chapter 11 is a short-form reference to the US Bankruptcy code, and that is the path many traditional health care providers seem to be on), the average cost of health care in the US in 2007 was $7,290 — nearly two and a half times the OECD average of $2,984. And yet, U.S life expectancy, child mortality, and other health metrics are significantly worse than those of other developed countries. Plus, the number of medically uninsured in the US grew 16% from 39.8 Million in 2001 to 46.3 Million in 2008, which left almost 15% of the country uncovered despite record levels of spending. Three of the biggest flaws, according to Stockard (a co-founder of Valence Health) are:

  • Fee-for-service reimbursement
    Providers have no incentive to focus on improving the quality of care to bring costs down as they get paid per service, not per outcome.
  • Lack of population management
    There is no one party responsible for the health of the population as a whole with a focus on keeping people healthy.
  • Inability to measure quality of care
    Lack of comprehensive data across health-care providers and disagreement as to how to measure quality has created a void in measuring the quality of care and outcomes by individual providers.
    There is a lack of evidence as to the impact of different treatment patterns.

To combat some of these issues, Valence Health created an analytics-based product portfolio that provides a turnkey HMO solution capable of administering the financial, actuarial, data analysis, claims payments, customer service, and medical management functions of provider-sponsored health plans across the U.S. This allows groups of doctors and hospitals to come together in a clinical integration practice that allows them to collectively negotiate enhanced reimbursements from healthcare plans, something the FTC won’t allow them to do on their own. This provides a foundation for doctors to negotiate reimbursements based on quality of service and outcomes (instead of having to rely on the quantity of services to reach a profitable reimbursement level). This makes much more sense than a strictly-defined per-service fee as a cured patient will not generate future healthcare costs and is more beneficial to the insurer than a provider who keeps treating the patient indefinitely to cover the costs of having a patient. In addition, the meaningful data that can be pulled from the disparate information systems of various healthcare providers allow these providers to not only define a standard quality of care, but measure it against the benchmark. For the first time, many of these doctors and hospitals can move away from a fee-for-service reimbursement mindset, monitor their population, and measure the quality of care — which is a first step to overcoming many of the flaws of the current U.S. healthcare system. Using technology, Valence Health not only mastered the use of technology in its operations, but disrupted the health-care market.

And this is only one of the many examples of the innovative uses of technology that Vinnie chronicles in his latest tome. Many disrupted and made new markets, when the companies weren’t even looking, and all of them improved operations and customer service. If more companies followed the practices described in this book, maybe it wouldn’t be the case that I’m lamenting that, for the most part, Customer Service Has Gone To Hell in the average organization.

Vinnie starts the book off by quoting Led Zeppelin who always said that this is a song of hope before they performed Stairway to Heaven and it really is a book of hope. It shows that, with dedication and perseverance, companies can use technology to innovate products and operations and take themselves, and their customers, to a new level. Let’s hope that more than a handful of company leaders pick up the book and actually read it — cover to cover — as it is filled with insights well beyond the dozens of deep case studies and hundreds of success story references that it contains.

Procurement Game Plan: A Review Part II.3

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. In our first post, we set the stage with The Purchasing Professional’s 10 Commandments. In our second post, we covered the first four chapters of the book that discuss organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon. In our third post, we continued our detailed review with a discussion of the chapters on strategic sourcing and supplier qualification. Our last post began our discussion of the chapters on negotiations, and this post concludes our discussion on negotiations and Part II of our review.

The section on negotiation preparation was a good one. Quoting Benjamin Franklin is extremely relevant in this context. Where negotiations are concerned, By failing to prepare, you are preparing to fail is a definite. Sales people spend every second of every minute of every hour of every day trying to figure out how to maximize the sale price, and thus their bonus cheque. You can bet they are preparing every free minute they have, and that they have been trained extensively on the art of the sale. As a result, you need to do as much preparation as you can on the art of the negotiation. So how does a skilled negotiator prepare?

  1. Try to find the win-win.
    If the only way for the buyer to get better terms is for the seller to sacrifice margin, it’s going to be a tough fight. But if the buyer can offer something to the seller that can look like a win in the rep’s pocket — such as more volume than expected, better production batch sizes, co-marketing — which may not cost the buyer much, the pie can be expanded and both sides can win. While the negotiation will still be tough, it is much easier to get a bigger slice of a bigger pie than to try and take the few scarps the sales person has left on margin.
  2. Know thy counterpart.
    You can bet that not only is a good sales person going to be researching everything he can about your organization if a big deal is on the table, but he’s going to be researching you too. Chances are, he’ll know your public Facebook and LinkedIn profile better than you!
  3. Know thy worst enemy.
    Your worst enemy is not your counterpart, but the assumptions you make. If you assume a supplier cannot go below a certain price because of your cost model, then you will never get below that price. But if the supplier has a better than average production process, maybe the supplier’s cost + 10% is lower than your modeled cost + 10% and a better price is obtainable. But if you don’t think to push for it, you’ll never get it.
  4. Use deep logic.
    Know all the potential responses to your arguments and have counter-responses prepared. Leave your supplier counterpart at a loss for words occasionally.
  5. Control the meeting.
    It’s your buy, and your agenda. Don’t let your counterpart make it your supplier’s agenda. That’s just bad news.
  6. Know what the supplier will ask, and have your responses ready.
    What really matters to the supplier rep? Deal size? Volume? Agreement date? Margin? Know this, as these will influence the initial set of questions, and have your answers ready. Plus, be prepared for the universal questions of budget, decision timeframe, and competition.

I also liked the sections on increasing your negotiation confidence, as you need confidence to control the meeting; and supplier’s psychological warfare, as we already know they do this (from our Review of Stephen Guth’s Contract Negotiation Handbook); body language, as this is often key to what some negotiations are thinking; and today tactics, as using all of your ammunition at once could leave you defenceless near the end of the negotiation. But the best section that you could easily miss is the section on tactics that can backfire. While you might think that crying-poor, saving-the-toughest-issue-for-last, and threatening to get-it-from-someone-else might give you some edge, it could result in the supplier just walking away at the worst possible time.

The second chapter on negotiations focussed on negotiating in specialized situations: adapting your game plan for different conditions as some specialized situations require specific negotiation approaches and tactics. Examples are policies, (proposed) price increases, cost breakdown requests, information exchange requests, and mutual cost reduction proposals. The text includes a discussion of each of these, but we’re going to skip through these, and the section on time-and-materials contracts, to negotiating force majeure clauses. In the case of a disaster that causes a significant disruption to your supplier, such a clause can make or break you. (Stephen Guth has discussed these clauses more than once on the Vendor Management Office blog, with one example being his post on “The Get Out of Jail Free” clause [May 27, 2009].) The short-list of what must be addressed should be in every Procurement Professionals’ master checklist:

  1. Will you get to waive exclusivity while your supplier cannot deliver?
    You need to meet your customers’ expectations one way or the other!
  2. Will you get most favoured customer treatment after a recovery?
    And will that be specified?
  3. Can your supplier provide you with a written contingency plan for each event the supplier wants to be defined as force majeure?
    If the supplier hasn’t thought this true, then maybe you need to think through whether they can serve you.

The sections on contract template was also good, but the next section of particular relevance was the section on negotiating with a supplier in another country. The 20 question checklist is a great starting point to discover much of what will be necessary for a successful international negotiation and relationship, and complements both SI’s series on Cultural Intelligence and Overcoming Cultural Differences in International Trade as well as Next Level Purchasing’s course on the “Basics of Smart International Procurement” which were edited and co-created by Dick Locke.

Finally, don’t miss the section on why asking for suppliers’ advice isn’t as dumb as it sounds. Sometimes suppliers might have cost saving ideas they are happy to share in exchange for continued business. You’ll never know if you don’t ask.

This concludes Part II of our review of The Procurement Game Plan. In Part III, after a short break, we’ll discuss managing supplier relationships, measuring performance, and improving performance.

Procurement Game Plan: A Review Part II.2

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. In our first post, we set the stage with The Purchasing Professional’s 10 Commandments. In our second post, we covered the first four chapters of the book that discuss organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon. In our last post, we continued our detailed review with a discussion of the chapters on strategic sourcing and supplier qualification. This post begins our discussion on the chapters on negotiations, and our next post, which will complete our discussion on negotiations, will conclude Part II of our review.

The first chapter on negotiations is on negotiating with suppliers: jockeying for position. This is important, because if your instinct is to take the advice of Meatloaf and “go on the red … go on the green … go on all the colours that you see in between … run all the tolls … run all the signs … run all the way across the double white line” as you jockey for position, you’re doing it wrong. (Peel Out by Meatloaf) The first step — after the issuance of an RFP, the receipt of the responses, and the initial evaluation using a weighted scorecard — is to select which suppliers to negotiate with. As the authors note, if you decided to negotiate with a supplier, than all suppliers who ranked higher must also be negotiated with as to do otherwise would not be ethical (and we’ve already covered how important ethics are).

Then, the authors describe a process for structuring the ultimate contract and this is a good starting point. The steps suggested are:

  1. Identify the best deal for each service/product and term
    Best price, payment terms, warranty, lead time, etc.
  2. Structure the Ultimate Contract on paper
    Based on the best terms available for each service, product, and term, what would the ultimate contract look like? This is the overarching goal.
  3. Decide what could be sacrificed and what an Acceptable Contract Is
    Realize that no supplier is going to be so efficient that they are best-in-class in every service, product, and term and decide what contract would be acceptable. Once this is reached, negotiations can be concluded once you have determined that the supplier will do no better.
  4. Put Yourself in a Confident, Ethical Mindset
    Now that you know what is feasible, you can ask for more from the best / preferred bidder because you know at least one supplier can do it. You don’t have to disclose the supplier (as doing so would be unethical), but you can disclose the best offer you got.

The only thing I would add is create a BATNA – Best Alternative to Negotiated Agreement – that you could fall back on should the negotiations be unsuccessful. This way, you will not be under pressure to cave in to a less than optimal contract AND you have a disaster recovery plan in case the supplier that is selected can not deliver. For example, it could be spot-buying every three months, giving the business to an existing supplier (who may not be best-in-class in those products or services or slightly more costly but a supplier that has proven that it will do what is necessary to deliver), or shifting the production / service delivery back in house.

The next topic that is tackled is structuring payments. There are some great ideas in this section, particularly the one on spreading out big up-front payments (like license fees) over multiple years to insure the supplier has an incentive to keep performing, but the example provided is, unfortunately, very bad!

The example the authors give is that of a three-year contract from an (enterprise) software provider for a license to an enterprise software product, implementation of such software, and three years of maintenance. The authors recommend spreading the big up-front licensing fee and implementation fee over three years, which is a great idea, but suggest that you do this by reducing the licensing fee and increasing maintenance. ACK!!! As an enterprise software professional, this scares the bejeebies out of me! (My initial reaction was ZOINKS!) When it comes to enterprise software, due to the high up-front investment and asset value, once a solution is selected, the enterprise always ends up hanging on to it for well beyond the initial projections. This means that the enterprise ends up paying maintenance fees for years beyond the initial depreciation of the asset. And the way maintenance fees work is that the provider always tries to jack them up on renewal by a good 10% to 20% a year. So if you double, or triple, maintenance fees, then you can expect to be paying those inflated fees for the lifetime of the software as these fees are never lowered. So, if the software was used for six years, instead of three, in the authors’ example, and the organization miraculously managed to hold the maintenance fee flat, instead of having a total cost of $372,000 over six years, your organization can expect a total cost of $492,000 over six years! Consider the following tables:

Three years:

Negotiated Proposal with Up-Front License Fee
Cost Component Amount Payment Due
License Fee 132,000 Upon Signing
Implementation Fee 120,000 After Implementation
Maintenance Fee $20,000 @ start of year 1
Maintenance Fee $20,000 @ start of year 2
Maintenance Fee $20,000 @ start of year 3
TOTAL $312,000
Negotiated Proposal with Modified Payment Structure
Cost Component Amount Payment Due
License Fee 72,000 Upon Signing
Implementation Fee 60,000 After Implementation
Maintenance Fee $60,000 @ start of year 1
Maintenance Fee $60,000 @ start of year 2
Maintenance Fee $60,000 @ start of year 3
TOTAL $312,000

Six Years:

Negotiated Proposal with Up-Front License Fee
Cost Component Amount Payment Due
License Fee 132,000 Upon Signing
Implementation Fee 120,000 After Implementation
Maintenance Fee $20,000 @ start of year 1
Maintenance Fee $20,000 @ start of year 2
Maintenance Fee $20,000 @ start of year 3
Maintenance Fee $20,000 @ start of year 4
Maintenance Fee $20,000 @ start of year 5
Maintenance Fee $20,000 @ start of year 6
TOTAL $372,000
Negotiated Proposal with Modified Payment Structure
Cost Component Amount Payment Due
License Fee 72,000 Upon Signing
Implementation Fee 60,000 After Implementation
Maintenance Fee $60,000 @ start of year 1
Maintenance Fee $60,000 @ start of year 2
Maintenance Fee $60,000 @ start of year 3
Maintenance Fee $60,000 @ start of year 4
Maintenance Fee $60,000 @ start of year 5
Maintenance Fee $60,000 @ start of year 6
TOTAL $492,000

But if you structured it as a three-phase license fee and implementation fee, the costs wouldn’t change. You would end up with something that looks like this:

 

Negotiated Proposal with Up-Front License Fee
Cost Component Amount Payment Due
License Fee 72,000 Upon Signing
License Fee 30,000 @ start of year 2
License Fee 30,000 @ start of year 3
Implementation Fee 60,000 After Implementation
Implementation Fee 30,000 @ start of year 2
Implementation Fee 30,000 @ start of year 3
Maintenance Fee $20,000 @ start of year 1
Maintenance Fee $20,000 @ start of year 2
Maintenance Fee $20,000 @ start of year 3
Maintenance Fee $20,000 @ start of year 4
Maintenance Fee $20,000 @ start of year 5
Maintenance Fee $20,000 @ start of year 6
TOTAL $372,000
Year Total Payments
One 152,000
Two $80,000
Three $80,000
Four $20,000
Five $20,000
Six $20,000
TOTAL $372,000