Category Archives: Best Practices

Procurement Game Plan: A Review Part III.1

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. Then, in our last few posts, we discussed the chapters on negotiation. This post begins our discussion of managing supplier relationships, measuring performance, and improving performance, which will conclude our review of The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals.

The chapter on managing supplier relationships covers a lot of material, but the most important point that it covers is the Supplier Relationship Management (SRM) golden rule: when something goes wrong, blame yourself first. If the supplier was properly vetted, the contract appropriately defined, and the relationship properly managed, the only thing that should cause you a problem is an act of god, an act of nature, or an act of war. Unless something happens that would allow a supplier to invoke force majeure, nothing significant should go wrong. If it does, it is (due to a previous) error on your part. As the authors state do not blame the supplier until you’ve thoroughly investigated the problem and are absolutely sure that the problem was the fault of the supplier because many times the the problem is … the fault of your own organization. (And even if it isn’t, why did you select a supplier who would be so lax? That’s your fault!)

Furthermore, if you consider the primary reasons that most relationships falter, you’ll see that they are all your fault!

  • Unclear Expectations
    Often the performance that you expect is different than what the supplier understands is required. Expectations should be clearly defined with respect to metrics, written down, and discussed with every supplier. There should be no doubt in your mind that the supplier understands what is good behaviour and what is bad behaviour. Failure to insure that this level of understanding is reached is your fault.
  • Opportunistic Behaviour
    There is a certain amount of trust involved in a buy-sell relationship and if the buyer attempts to take advantage of every issue by demanding a discount or other concession (before the problem is thoroughly investigated and the source clearly identified), the supplier will lose their interest in committing itself to help the buyer succeed. Attempting to take advantage of every issue, especially when the cause is likely a lack of expectation setting or supplier management, is your fault.
  • Poor Selection Methodology
    If you ended up with a poor supplier, then the selection process was flawed. Guess what, that’s your fault too!

Now, sometimes it will be the supplier’s fault. Every now and again the shop floor will not have the dedication or interest in pleasing you that your counterpart has, or an executive, stuck between a rock and a hard place when he realizes that the organization overcommitted a certain product or for a certain time window, will decide that you are going to get the short straw, but if you’ve done everything right, this will be the exception and not the norm. And both cases are easily corrected a supplier that wants your business. A heart-to-heart will be had in the first instance (and the people responsible will shape up or be shipped out) and refunds or other concessions will be offered in the second. And the supplier will work with you to make sure it doesn’t happen again.

And if you’ve down your job right, and you find yourself in a situation where a supplier decides not to perform up to expectations and not do anything about it, you already have a multi-stage back up, risk mitigation, and/or disaster recovery plan to fall back on. Starting with emergency meetings and site visits with your counterpart and/or senior management, through third party assistance (such as arbitration or mediation), through termination and a switch to your backup supplier, the recovery strategy and process will be well-documented and ready to spring into action.

The chapter does a great job of covering your options for rationalizing the supply base if things do fall apart, identifying cost reduction opportunities within your current supply chain if they don’t, and the cornerstones of good SRM, which is critical if you want a true supplier alliance, but the only other section we’re going to cover is on minimizing leakage. Once a contract is effected it has to be monitored, carefully, or leakage (which will occur no matter what you do) will increase from a slow drip to a gushing waterfall.

Minimizing leakage in an average organization is, fortunately, pretty straight forward. As the authors note, you:

  • Monitor expenditures regularly
    The biggest barrier to leakage (which can take many forms but typically takes the forms of off-contract maverick buying, over-invoicing, or over-payment) is a watchful eye. Like the watched pot that never wants to boil, a buyer is more likely to stick to a contract when being watched, a supplier is more likely to double check its invoices if being watched, and an accounts payable clerk is more likely to check for duplicate invoices or payments. The simple act of watching (followed by a regular report to senior management on who’s not doing their job) can often cut leakage from 40% to 10%. (And for some great ideas on how to find leakage, why not download the 100%-free no-registration-required eBook on Spend Visibility: An Implementation Guide?)
  • Celebrate and Publicize Success
    Securing an interview with a trade publication or leading blog and having your stakeholders participate not only gives credit and builds ownership of the process, but it instills accountability. Who’s going to jeopardize a savings commitment when the CEO has seen it in a news report?
  • Involve Stakeholders
    In RFP evaluation, supplier survey scoring, and even contract monitoring. If stakeholders feel like they own the process, they are going to do their best to see that it is followed and the savings commitments reached. After all, if they are involved, they are going to share the credit for the success (and that’s ten times better than being blamed for failure, right?).

Our review will continue and discuss the final topics of the game plan — measuring performance, supporting technologies, and your strategy for procurement success.

Will Your e-Auction Be A Success? Or Will You End Up in Court?

 

As an April Fool’s joke, SupplyManagement.com ran a piece about how a ‘court battle looms over e-auction “error”‘ which discussed a fictional case in the UK High Court as a result of legal proceedings initiated by a Chinese business in an attempt to hold a supplier to a price submitted in an e-auction. According to the article, one independent consultant William Sommers (represented by the UK law firm Jester & Prank), said he was participating in an e-auction for project management services while working at home where he left his iPad alone for a few moments to answer the door. He claims that during that time his daughter grabbed the iPad (because she loves a bit of Angry Birds) and must have pressed something to place a bid on his behalf as he returned to the iPad to find a bid he couldn’t change. As a result, to honour the bid he would have had to offer his services for “almost nothing” for a three-month project and argues that the supplier, Hohhot Axle Industries, is being unreasonable in trying to hold him to an offer that was a “genuine mistake”.

While this article was a prank, the issue it discusses is all too real. As pointed out in this recent piece on ‘a genuine bargain or a genuine mistake’, (poorly designed) e-auction software makes it very easy for buyers to submit incorrect bids and, even worse, correct bids that the supplier might decide, after the heat of the auction is over, that it does not want to honour. What do you do when its time to sign the contract, after you’ve informed all of the other suppliers that they lost and won’t be getting your business, and the supplier tries to back out? Especially if you need the goods or services quickly?

Chances are you panic and pay more because not only were the other bids higher, but when you desperately have to scramble to find product quickly, suppliers will know they have the upper hand and won’t be as competitive as when they (believed) they had to compete for your business. You’re taking a loss. But can you recover it in court?

As the above article indicates, if one party makes an error that the other party should know is a genuine error, the offer, even if it is an implied contract, can be rendered void by the courts. In fact, if the court believes that the details or circumstances of the offer from one party are such that the other party should know that a genuine error has been made, or the council for the party can argue that the other party should have known that a genuine error has been made, that is enough to void an offer.

So what can you do to prevent this from happening? Take lots of precautions.

  1. Describe the auction process in detail.
    Describe end-to-end how the event is going to play out from the initial invitation, through the pre-event data collection and supplier qualification, to the actual auction and the final contract award. There should be no unknowns in the supplier’s mind.
  2. Define the rules and force a bidder to accept the rules.
    Describe the rules for participation, the process for bidding, and the terms and conditions associated with the contract award up-front and force the supplier to accept all of the rules, processes, and terms and conditions before they can participate in the event.
  3. Create a secure account for each individual authorized to use the system and force them to accept full responsibility for the account.
    Force each representative to assert that this is their account, they take full responsibility for it, no one else will be allowed to use it, and they take full responsibility for all offers made through the account.
  4. Use software with controls and make sure you use the controls.
    Not only should you force confirmations on bids to prevent “genuine mistakes”, but you should also put limits on how much lower a bid can be with respect to the current lowest bid (to minimize errors as a bid should not drop from 10,000 to 100, which would indicate either a decimal point error or a misunderstanding as to lot size) as well as an absolute floor that defines the minimum acceptable bid (as you should not accept a bid that you know is lower than the theoretical lowest cost based on your cost model and the maximum efficiency that is achievable).

While this may not be enough to guarantee that 100% of bids will have to be honoured, as you cannot always predict the results of a court case if an argument were to go to court, it certainly puts the odds in your favour and minimizes the chances of a supplier making a bid that the supplier would be uncomfortable in honouring (especially since you’d have a stronger case if it went to court).

 

Good Data Will Not Guarantee Good Decisions … But Informed Skeptics Increase the Odds

In our last post, we noted how great it was to see this recent article in the Harvard Business Review on how Good Data Won’t Guarantee Good Decisions because investments in analytics can be useless, even harmful, unless employees can incorporate that data into complex decision making and only 38% of employees and 50% of senior managers, on average, are equipped to make good decisions given good data. As pointed out by the authors, there are too many “unquestioning empiricists” and “visceral decision makers” and not enough “informed skeptics” who can effectively balance judgment and analysis with strong analytic skills and a willingness to listen to others’ opinions, but dissent if necessary.

As a result, organizations need to do whatever they can to increase the number of informed skeptics within their four walls. So what can they do? According to the authors, they can:

  • Train workers to increase data literacy
    and more efficiently incorporate information into decision making so they can make better decisions and
  • Give the workers the right tools
    to turn the data into information.

With respect to training, the authors recommend workshops and coaching. Workshops can teach them that they must understand the factors and calculations behind the numbers and learn to think critically about the accuracy, sample sizes, biases, and quality of their data. Even people who took statistics in college could probably use a refresher to help them apply what they learned then to their current jobs … especially since most people, analysts included, don’t understand statistics. (Remember that there are lies, damn lies, and statistics.) Coaching by people-oriented data experts can provide informal, ongoing training to employees that can gradually improve their skills. Given that surveys indicate that only 25% of all knowledge workers receive effective training in information analysis and use, this is a good start.

With respect to tools, there is a vital need to interpret data displays in a manner that allows them to deduce the information the data contains. Just because most executives choose to go with good-enough data now vs. perfect data later doesn’t mean it’s the right thing, not because perfect data is always a useful goal (as sometimes good enough is good enough), but because, without the right tools and understanding, it’s not always clear if good enough is good enough.

But is this enough?

No.

Three factors are always required for success: technology (tools), talent (training), and transition (change management of the process). Overlooking how the training is to be applied, the technology is to be used, how the results are going to be interpreted, and how the change from dumb data to intelligent information is going to be implemented so that it sticks, the training takes hold, the technology gets used, and the results get repeated is very important. Otherwise, a few moderate wins will be made, but as pressure mounts to get things done, the talent will revert to the old ways and the tools and training will be for nought.

Invoking Innovation In Your Organization Internally

Supply Management magazine recently ran a great piece on innovation from the head of SRM at Best Buy Europe (where they might have it together better than Best Buy USA where you are not likely to get a Best Buy Experience) on “Creative Industry” where he described the difficulty of jump-starting an innovation initiative in an organization which has not been innovative in a (very) long time.

In the article, he detailed and exemplified an eight step process which is a good starting point for anyone trying to get in an innovative mindset.

  1. Lose the Fear
    Of being judged. Of disappointing others with your idea. Of just plain doing something different. Jamie says to be childlike in your approach and embrace the initiative with excitement. And if that don’t work, and it’s not against your religion, start with martini hour. Inhibitions are bad for innovation.
  2. No Idea is a Bad Idea
    It might not be the right idea for the organization, but it doesn’t mean it’s necessarily bad. In different circumstances, it could be a great idea. All ideas should be captured, and explored, at the right time, in a search for a better idea.
  3. Understand the problem.
    What is the issue? What is the objective? It’s the measurement stick for any idea you come up with.
  4. Diversity is King
    Have both experts and novices in the room. Make sure the novices are not afraid to ask “why can’t we do this”. Sometimes opposition is just knee-jerk. When there is no rebuttal to the question, you’re on the right track.
  5. Get Visual
    Draw. Illustrate. Sculpt clay if you have to. Make a prototype out of cardboard and play-doh. Whatever gets people thinking differently enough to actually innovate.
  6. Safe Environment
    Everyone is equal. No idea is bad. Freedom to speak up and speak out during the brainstorming process. Keep it out of management offices where positions of authority are implicitly conveyed.
  7. Subdue the subconscious
    It has default knee-jerk reactions to everything and default knee-jerk visualizations for every concept and pre-assigned meanings to every word. This gets us through the day, but is not always good where innovation is concerned. (Of course, if you start with martini hour, this may not be much of a problem. 😉 )
  8. Be Committed.
    Almost to the point where a conservative middle manager (who doesn’t understand the importance of relentless innovation) wants to have you committed. It takes a lot of effort to get an innovation project rolling, and even more to keep it rolling until the first positive, revenue-producing, output is produced.

This is a really great starter list and Jamie’s article on “Creative Industry” is really good. Take 5 minutes and read it end-to-end. It’s worth your time.

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.