Category Archives: Best Practices

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.

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 (Storefront Backtalk), 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, March 16, — 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 Procurement Game Plan: A Review Part I.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 last post, we set the stage with The Purchasing Professional’s 10 Commandments. In this post we’re going to continue our fairly detailed review of this book, which will span four or five posts. We’ll start by covering 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.

The first chapter on Procurement’s Place in the organization starts out with an overview of management’s expectations of modern Procurement — something every Procurement Pro needs to know when finding a (new) job in today’s highly competitive skill-based marketplace. We’re well beyond the time when all that was expected of Supply Management was cost savings. Now, with costs rising and consumer belts tightening, Supply Management is also being tasked to deliver productivity improvements, brand & differentiation support, customer satisfacation, cash flow improvements, great service, competitive advantage, and sometimes even revenue. It’s a tall order for a single organization — it’s good that the strategies and tools exist to deliver. (And that’s kind of what this blog is all about, but the doctor digresses.)

The chapter then dives into the types of goals that Procurement / Supply Management organizations have, and this is where the value of the book starts to kick in. Organizations, depending on their stage of maturity, either have no (documented) goals, which is very bad, vague goals (with no meaningful measurable targets), which is bad as a professional will not know how important each goal is relative to other goals, SMART (Specific, Measurable, Attainable, Relevant, and Time-Bound) goals, which are good and a minimum requirement for organizational success, or Strategic SMART goals, which are great as they also tie the SMART goals to overall organizational strategy. A world-class supply management organization puts the good of the organization before the good of itself.

The chapter also discusses strategic vs. tactical procurement, Procurement as a Profit Centre, Procurement as a Service Centre, and Procurement’s Role in Specification Writing — but the other key section of the chapter is The Procurement Manifesto. Because it can be difficult to gain buy-in from functional departments when trying to get them to accept Procurement’s involvement, it is important to have a list of reasons why it will benefit them to work with Procurement. Your Supply Management organization should have such a list and should describe then in The Procurement Manifesto that can be given to the other organizational units. For details on what to include, see the book.

The next chapter discusses Supply Management Strategy — The Procurement Playbook if you will. The existence of an appropriately written guiding document will help keep the organization on the same page and help it to achieve its goals. Such a document must contain the following five sections in order to meet the department’s needs:

  1. The Procurement Organization’s Business Plan
  2. The Procurement Organization Structure
  3. Cost Control Strategies
  4. Risk Management Strategies
  5. The Supply Management Sourcing & Procurement Methodologies

Each piece of the puzzle must be clearly defined and outlined, and each organizational member must be on the same page. For details on how to write the Procurement business plan, on what types of cost control strategies to focus on, and what types of risk management strategies might be included, see the book.

One of the key parts of this chapter is the section on standard supplier selection criteria. The authors note that you should use a hierarchy of constraints and criteria every time you select a supplier. That hierarchy must include all of the relevant selection criteria, ordered and weighted so that each supplier can be compared fairly. This is sometimes the only way to determine which supplier will be the best fit for an organization. Generally speaking, this hierarchy should contain cost, value, quality, service, social responsibility, convenience, risk, and agility at a minimum, with other factors added depending on the goods or service being sourced. The weightings and rankings will be project specific.

The next chapter on Procurement Talent Management is one of the key chapters of the books and contains one of the key messages, talent is key to success. Without it, no amount of technology or transition management will help. It does a great job of discussing the five facets of the talent management cycle — Assess, Retain, Develop, Recruit, and Unify — and how each is necessary for organizational success. It also points out that they are not sequential and, depending on organizational needs, they may all need to be addressed simultaneously. Not only is talent management more important than many organizations prioritize it in their key issues list, but it is more difficult than many organizations would lead you to believe. This is a chapter to be reviewed in depth as almost every point matters, but a key point it addresses that is often missed is that education is a retention tool. Real professionals want to learn and improve, and will value an employer that not only allows them to do that, but that sponsors their education and efforts to improve themselves. The value of educating a resource is many times the up-front investment. Many, many times. The only point I’d disagree with in the entire chapter is the statement that by working with the business schools of the universities in your area, you can hire (at no cost/credit only or at minimal cost) intelligent and hard-working interns to take away the burden of tactical work from your strategic sourcing team members. While it is true that you can hire these intelligent, eager, hard-working resources at little-cost to do just this, they will need regular supervision from your senior Procurement Professionals, and this is a hidden cost you will need to account for.

The next chapter, and the final chapter that we’ll cover in this post, is on social responsibility in procurement: the new rules for a more responsible game. Whether this is important to your organization now or not, it will soon be as more and more consumers demand environmental or social responsibility, so you better get a handle on how it is going to impact your organization now, or you’ll be scrambling later when the media has you under the gone. Not a situation any Supply Management organization wants to be in when they can eliminate the risk with some careful research, planning, and a social responsibility program – which may not have to be all that extensive or demanding.

One of the key points covered by the chapter, which is often missed by other books, is ethics. Not only does social responsibility start with ethical behaviour, but a perceived lack of ethics, real or not, can land you and your organization in hot-water. As an example, the authors describe some recent government scandals, including one that got their mayor in some very hot water. In 2007, Mayor Luke Ravenstahl accepted two days of golf in the Mario Lemieux Celebrity Invitational from UPMC and the Pittsburgh Penguins, valued at $9K. His defence is that while the city’s ethics code limited city officials to accept admission to cultural or athletic events valued at $250 or less per year, charitable outings were exempted. This may have been a charitable event, but it’s value created a perceived conflict of interest that landed him in very hot water with the media. Then, a few months later, he decided he wanted to accept free tickets to go to a Stanley Cup Final game against the Detroit Red Wings. This time, he asked for an official legal opinion first, but it didn’t matter because the ticket value was very high and another councillor said he made half of the Mayor’s salary and pays for his hockey tickets out of his own pocket and the mayor should do the same. The lesson is that even if you don’t violate the ethics or gift acceptance policy of your organization, if there is any chance your actions could be perceived by a (large) group of people as unethical, you probably shouldn’t do it. And if you have to think about whether or not something is ethical, and, even worse, think you have to ask permission, just don’t do it.

The sections on the supplier code of conduct, green procurement, and supplier diversity, which for the most part cover all of the basics, are also quite good and worth a careful read.

That’s it for Part I. In Part II, we’ll discuss the next four chapters on Strategic Sourcing, Supplier Qualification, and Negotiations. Stay tuned.

The Procurement Game Plan: A Review Part I.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. We’re going to do a fairly detailed review of this book over four to five posts, but to start, we’re simply going to cover the purchasing professional’s 10 commandments because they do a great job of covering the basic mindset a Procurement or Supply Management professional has to have if she is to expect a successful career.

The Purchasing Professional’s 10 Commandments

  1. Thou shalt always make decisions in the best interest of thy employer.
    Good purchasing agents avoid any real, and even perceived, conflicts of interest.
  2. Thous shalt always involve thy internal customers throughout the purchasing process.
    Good purchasing professionals never act alone.
  3. Thou shalt never make price the only criterion in a purchasing decision.
    Good purchasing agents take quality, delivery, and other relevant criteria into consideration also.
  4. Thou shalt measure thy performance and communicate thy performance to management.
    Good purchasing professionals know and show their value.
  5. Thou shalt treat suppliers fairly.
    Good purchasing professionals don’t attempt to take advantage of suppliers’ mistakes nor trick them into accepting unfavourable terms.
  6. Thou shalt embrace change and new technologies.
    Thou shalt not resist them.
  7. Thou shalt negotiate with the understanding that there may someday need to be a close relationship with the supplier across the table.
    Thou shalt not burn thy bridges, especially before crossing them.
  8. Thou shalt realize it is a global economy.
    Thou shalt never make assumptions that thou knoweth every supplier available.
  9. Thou shalt acknowledge that thy manager’s job is to develop and implement a strategy for development.
    Therefore, thy shalt challenge thyself to solve problems independently rather than involve thy manager in tactical crises that can be reasonably resolved at your level.
  10. Thou shalt commit to continuous improvement of thy skills.
    Thou shalt never let a year go by without learning new practices used by other purchasing professionals.
  11. Thou shalt always exceed expectations, consistently delivering more than anticipated.
    Good purchasing professionals will also fulfill obligations sooner than expected.

In our next post, we’ll review first part of the book on organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon.

Supply Chain Disaster Management

Earlier this year, EBN Online ran a good article on “Managing the Variables in a Supply Chain Disaster” that outlined the basic steps a global company can use to get started on planning for a disaster.

It’s obvious, with all of the recent natural disasters, political disasters, and economic disasters, that a supply chain natural disaster is coming your way. It’s just a question of what, when, and how it is going to impact your supply chain. That’s why you need to plan. So where do you start?

According to the author, start by getting all of the departments together — IT, operations, sales, warehousing, administration, and management — to help map out the entire upstream and downstream supply network and determine where the different risk points are and what risks are most likely to materialize. And, as Jim Lawton points out in this Industry Week article on “Country Risk — What You’re Overlooking”, you have to not only focus on your suppliers and the countries they are located in (whch contribute to the political, economic, and commercial risks that are faced by your organization), but your suppliers’ suppliers and the countries they are located in.

Then run a variety of “what if” scenarios to see how the company could recover if supply is interrupted, a warehouse goes up in smoke, a supplier becomes unavailable, freight rates or tarrifs rise substantially, preferred raw materials or components get banned for regulatory reasons, or something else possible, but not predictable, happens. If there is no way to recover, something has to be done now before it’s too late for your supply chain, and maybe your entire organization. For example, if all of the company’s supply for a certain component is from South Korea, and supply from South Korea gets cut off, there would be no recovery. The company either has to find a secondary source of supply from another country, or a way to use a slightly different component to accomplish the same task.

If a moderate increase in freight rates or tarrifs would prevent the company from being able to source a raw material at a price that would allow the company to turn a profit on the finished product, then the company has to identify alternate, cheaper, transportation methods, a way to further save on raw material costs, or a way to increase the value, and thus the selling price, on the finished product. If a raw material gets banned from usage in the product the organization plans on importing into Europe, then the organization has to have a way to produce the component using a different raw material, which could require a different design or manufacturing method, which could add cost as well.

The short of the story is that disaster planning is more than just identifying the upstream supply network and more than just identifying what could go wrong, but also identifying how a recovery could be initiated if necessary.