Monthly Archives: March 2012

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.) 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

Customer Service Is Going to Hell — What Should Supply Management Learn?

At Home Depot, employees can’t even be bothered to check their systems to find out if they carry an item one aisle away on the shelf. (See SI’s recent series on Home Depot’s snafus that could be the beginning of their end in five parts: One, Two, Three, Four, and Five.) At Best Buy, if you want a manager, you have to get him or her yourself (Part One) and if you want your problem to be solved in a timely manner, forget it as it will take at least three customer service agents a minimum of a half hour to do so (Part II). Unless you want wi-fi porn on the big screen, you’re out of luck (as there is no best buy experience). And United, not content with breaking guitars, has decided to go all out and mange their switchover of their ticketing, web, upgraded, and related systems so poorly that United Airlines Should Be Ashamed (SpendMatters — read it!).

In a nutshell, customer service is going to hell across the board, and it’s doing so almost every single time a company places too much emphasis on technology to “automate” and “streamline” customer interactions. Organizations seem to have forgotten that unless you truly are one of The New Technology Elite, technology can never replace talent, systems can never deliver the service a real person can, and any attempt to implement such big data systems in one fell swoop will almost always result in an implosion that rivals the Big Crunch that some physicists predict will occur at the end of the universe (which immediately precedes the Big Bang, as we all know from the late Douglas Adams who told us all about what you see when you go to Milliways, The Restaurant at the End of the Universe).

We should take a lesson from this, as those who do not study the lessons of (very recent) history will be doomed to repeat them. So what should we learn? First, as Jason Busch points out in The Comments to his post on how United Airlines Should Be Ashamed, we should note that:

  • Flex Capacity Matters
    When the technology inevitably fails, real people will be required to handle the situation.
  • Hard-Wired Integration Outside the Cloud Will Always Be a Nightmare
    And this nightmare will become a reality when trying to add new nodes or change out the guts.
  • Communications Matter!
    Upstream with suppliers and downstream with suppliers. Over-communicate and invest the time to keep everyone in the loop! Finger-pointing helps no one.

In addition, we should note that:

  • Big Bang Upgrades Only Result in Big Crunch Failures
    We should have learned our lessons from the FoxMeyer and Nike ERP disasters which caused the bankruptcy of the first and hundreds of millions in losses for the second. If we didn’t, these recent fiascos should show us just what Big Bang upgrades do!
  • Thorough Testing is a Must
    When you have to port hundreds of thousands or millions of data elements from one system to another, test thoroughly. Anything that can go wrong will, and anything you don’t test for will go wrong.
  • A Rollback Option Must Be Available
    There’s a reason relational databases have rollback capabilities. In case of failure, you can always go back to a previous state. In the United instance, the old system should have been left online, and transactions duplicated across the new and old system for at least a few days, until it was clear the new system worked sufficiently well to run on its own. At the first sign of massive failure, the entire new system should have been taken offline and all transactions directed to the old system.
  • The Disaster Recovery Plan Should Be Ready to Go
    And should be communicated up and down the chain well before any transition occurs. Be prepared for failure. You’ll minimize disruption and recover much faster if you do.

What else can we learn?

The Global Agenda — It’s Coming!

One of the key takeaways from Hackett’s 2012 Procurement Agenda is Globalization and Global Operating Models. Why? The Hackett Group 2011 Key Issue Study found that not only is globalization critical for enabling revenue growth but the level of planned transformation over the next two to three years is such that the respondents’ ambitious plans will nearly triple today’s level of globalization within two to three years. Wow!

Within three years, the percentages of organizations with the following key activities at the maximum global level achievable is expected to enter the double digits almost across the board. Specifically, Hackett expects to see the following improvements:

Activity Current Saturation Projected Saturation
Development/Management of Product/Service Lines 4% 11%
Go-to-Market Strategy 6% 13%
Supply Chain 6% 13%
Organizational Culture 4% 8%
Internal Operations 3% 11%
Average 4.60% 11.20%

So what does this mean to your (Supply Management) organization? First of all, it is going to be a tough fight if the organization’s goal is to be world class in Hackett’s rankings, as only 8% of organization’s make the cut and over 11% of organizations will be leading in the globalization of their core activities.

Second, the organization, and each professional in the organization, is going to have to brush up on its CQ (Cultural Quotient). Not an easy task, as chronicled in SI’s series on Overcoming Cultural Distances in International Trade and Cultural Intelligence, but a necessary one.

Third, as Hackett points out, supply chain flexibility is going to have to increase. Disruptions and disasters are pretty much guaranteed at least every 12 and 24 months, if not every 6 and 12 months, the changing regulatory landscape will throw a wrench into the organization’s best-laid plans, and demand surges will play havoc with traditional shipping lanes and practices.

Fourth, selling into a given country is going to be as important as buying from the given country as the need to be perceived as a truly global organization, and not just an American or British back-office, will be real for those organizations that want to attract the best talent.

Fifth, attracting and retaining top talent will be more critical than ever as the complexity of tomorrow’s global sourcing will be much more involved than the complexity of today’s.