Category Archives: Best Practices

Procurement Produces Platinum when Engaged Early

We all know the statistic that 80% of the cost is defined the first 20% of product design, and that engaging Procurement early can significantly attack and reduce these costs considerably. But leading organizations are learning that engaging Procurement during New Product Design (NPD) is not early enough. Real success comes from engaging procurement during the Market Needs Analysis and New Product Definition phase.

Engaging Procurement after the product specs and initial design has been more or less determined limits Procurement’s capability to add value and extract cost. Once you’ve decided on a 9.7″ tablet with 64 GB of memory and a 5.1 MP camera limits Procurement to going to market for 9.7″ casing, 64 GB of memory. and 5.1 MP cameras and boards that support processors that can stay cool in a 9.7″ tablet. You’ve already limited the universe of potential. Moreover, you haven’t really defined what the real value is from a customer point of view (specs, reliability, brand value, sizzle), why, and how Procurement could add to
it.

Procurement really needs to be involved from the inception of a new product introduction project. It needs to be both a sounding board and the voice of reason to help the organization zero in on the right mix of what will sell and keep the costs in line with market expectations (or at least market acceptance). Value to the organization is maximized when profit is maximized — which is maximized when profit per unit times number of units is maximized. This requires balancing cost with consumer values, not just optimizing cost, which is all that can be done if Procurement is not engaged until the final design / pre-manufacturing stage of the product lifecycle.

So, for real results and greater success, engage Procurement early and engage Procurement often. Sometimes the perceived market requirement isn’t worth the cost, and other times it is.

For more information on the product lifecycle, as well as some of the results Procurement can deliver not only early, but at each phase, you can check out Source One’s latest paper on Strategic Sourcing Throughout the Product Lifecycle. It’s a quick read, and if you want to go deeper, they have hundreds of projects they can draw on if you reach out to them.

Trump & Brexit Woes? Optimization is the Answer!

SI has been preaching the gospel of strategic sourcing decision optimization since day one, noting how it was the only way to not only achieve the year over year cost savings that could be identified by spend analytics but also identify additional value necessary for struggling under-staffed and under-budgeted supply management organizations to realize the value that was being demand of them. Year-over-year was key. During the noughts, thanks to the success of FreeMarkets and Ariba, everyone thought that e-Auctions were king, as the first e-Auction often returned 20%, 30%, or even 40% savings and the second a healthy 5% to 15% in a host of categories, but no one realized these savings were just a result of excess fat in supplier margins, shaved out by more aggressive, hungrier, competition looking for a chance to prove themselves and grow. Once the fat was trimmed, and inflation began to return near the end of the noughts, subsequent auctions not only failed to identify additional savings, but also resulted in cost increases.

SI knew this, as the early adopters were already beginning to experience this when SI started and multiple options for strategic sourcing decision optimization were available (CombineNet [now Jaggaer], Emptoris [now IBM], Iasta [now Determine], VerticalNet [now BravoSolution], Trade Extensions, and Algorhythm), but the auction providers had big marketing budgets (as a result of their big successes, % of savings contracts, and VC funding) and bigger mouths to spread the auction word. And by the time the blush faded from the rose, most organizations weren’t ready for what seemed to be complex solutions, so the focus turned to better RFX, should-cost models, spend analysis, and weighted evaluation models. This worked for simpler categories, and the fact-based negotiations shave the remaining fat while also identifying processes or unnecessary non-value add offerings that could be trimmed, and savings continued, but began to trail off. That’s why the leaders are slowly accepting decision optimization and why Trade Extensions has been growing aggressively year-over-year for the last five years or so.

But let’s face it … when 40% of the market still doesn’t have any Supply Management tool and only 20% of the organizations that due are leaders (which kind of explains the Hackett 8%), the adoption is still low and the usage still minimal. As long as savings can be squeaked out through other means (analytics, cost modelling, aggressive negotiation, GPOS, etc.), the average organization seems to be doing everything it can not to evolve. Cognitive Procurement is the buzzword, but cognitive dissonance is the reality.

But that could all be about to change. Why? Between Trump continually threatening new border taxes, border closings, and visa program overhauls and Brexit looming on the near-horizon, which will totally change the tax and border situation in Europe, supply chain costs are totally unknown for a large majority of global supply chains. Considering how many global organizations are headquartered (at least regionally) in the US or UK and how many more have their Procurement Centers of Excellence there (either in a distribution hub or a financial hub, of which New York and London are two of the biggest in the world), it’s looming chaos. Are your costs going up? If so, are they going up 10%, 20%, 100%? Are sources of supply going to be cut off due to trade bans? Is your best talent going to be locked out of the US or UK? It’s a nightmare waiting to happen. It’s enough to put even stock market traders into full panic mode.

So what do you do? You manage the risk? But how? Most of the traditional supply chain risk management platforms (Reslinc, Risk Methods, Achilles, etc.) are geared at supply chain visibility — attempting to identify potential disruptions [as a result of external or internal events] before they happen so that mitigation plans can be identified and put in place before they do. However, when the disruption is not an event but an unpredictable [and unaffordable] tax hike or border closing, these solutions, even those that reach level 5 on the Spend Matters scale, are pretty useless. That’s why Sourcing Innovation has recently stated that Supply Management Risk Management Needs to be Cranked to 11. (It’s important to go to 11.)

You see, the key to survival is “what if” the current supply chain becomes unsustainable due to a tax hike or border closing in the US or UK. Running a new scenario with all of the inputs except any lanes, countries of origins, and / or products where you expect to see disruptions, trade bans, or extreme import/export duties. And then running another new scenario under a different set of assumptions on lane, country, and/or product restrictions. Running scenarios at the product level and the category level. Running with current supply base, previous bidder supply base, and newly identified scenario supply base until you have a mitigation scenario that is acceptable and ready to go if something happens.

Only a good supply management decision optimization solution with what-if scenario support can do this – nothing else.

So, since we’ve all forgotten Kermit’s Lesson, this is what we’re left with. But considering how it will enhance your overall supply chain operations in these turbulent times, that’s not a bad thing.

 

Vendor Scorecards DO Work – But Only if They are Done Right!

A recent guest post over Spend Matters by Andy Kohm, founder of VendOp, provided 4 reasons why supplier scorecards don’t work, which is a terribly inaccurate and a disservice to the procurement space because

  1. They Do Work if done right and
  2. what he was describing was internal vendor surveys, NOT scorecards.

Even worse, if he had said internal vendor surveys don’t work, SI would have totally agreed and hailed the post because, frankly, internal vendor surveys don’t work. Expecting enough people to fill out enough long surveys to get statistically reliable data when everyone is overworked, underpaid, and tired of doing everyone else’s job (because no one has time to do their own) is just ludicrous. It’s not going to happen, and when it does, the data and answers are not going to be that good or reliable because the surveys will be filled out in a rush. And all the reasons provided by Mr. Kohm will hold true.

But you see, a scorecard, at least a proper scorecard, is not a survey, or a summary of soft, qualitative feedback survey scores, but a summary of hard, quantitative metrics built up from hard data over time. A scorecard summarizes hard performance metrics, KPIs, and unarguable (undisputable) incident counts, not subjective scores on reliability.

We have to remember that just like anchoring can be a problem in negotiations, it can be a problem in subjective ranking. If the last couple of interactions with the supplier were problematic, the recipient is likely to fill out a fairly negative score even if the 20 interactions before that were great and, overall, the supplier is batting 800. Similarly, if the last few interactions were particularly good (because the supplier knows their review is coming up and making extra effort just to score enough to pass), the recipient may rank the supplier very positively even though 8 out of 10 requests are ignored on average. In short, for reliability, surveys suck.

But hard scorecards, built on on time statistics, reject rates, incident counts, billing accuracy, and so on are unbiased, anchored in fact (and not fiction), and work. They allow both parties to zero in on true issues, problems, and disagreements, and work collaboratively to fix them. They are the best supplier relation management tool the average organization has at their disposal and should not ever be discounted. Proper scorecards are the solution, not the problem.

Enhancing MRO Supplier Value through Contract Service Levels

Today’s guest post is from Jennifer Engel, a Senior Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives.

Despite the convenience of boilerplate language and pre-approved templates to expedite execution, contracting is never a one-size-fits-all process within any silo of a business. Contracts for professional services tend to require a focus on performance expectations, and rarely have a need for protection against pricing volatility, lead time requirements, and fuel costs. Diametrically, contracts for the tactical purchase of goods focus not on service levels, but on maintaining pricing, ensuring product availability, and outlining delivery terms.

A trait often unique to the Maintenance, Repair, and Operation (MRO) space within a business is that many suppliers are providing a combination of both goods and services that support overall operations. As a result, contracts within this space are difficult to mold to a single template, and constructing agreements without taking into account the business needs to cover each area can be detrimental to the overall relationship goals. When undergoing contracting with a new or existing supplier, there are a few key principals to keep in mind that will benefit both parties as well as drive best value in pricing and service levels.

#1) Fully assess the risks associated with the goods and services separately

When negotiating terms, it is important to prioritize the areas that could most drastically impact the business should a change occur. If the pricing of a good is tied to a volatile commodity index or may be subject to interruptions due to raw material availability, protecting exposure to these factors should be at the forefront of the agreement. If the service associated is more critical than the actual good, for example a specific sanitation chemical being less critical than the completion of the actual sanitization process, then the level of service needed to ensure the business can continue to operate at or above standards should take priority. This primarily holds true to categories for which product substitutes are widely available, however the end result of the service is critical to business continuity.

#2) Adjust the terms of the agreement to form a mutually beneficial relationship that does not expose either party to significant risk.

Explicit service levels and pricing escalators and de-escalators inherently protect the business from any supplier shortcomings or market changes. As long as commodity increases are tied to a verifiable index, are accommodated by a manufacturer’s letter and advanced notice, and de-escalate at an equal rate should pricing decrease, the supplier is protected from becoming insolvent and the customer is protected from realizing an increase not driven by market conditions. For goods not driven by an identifiable index, pricing increases should be capped at a reasonable rate and subject to review and mutual agreement of the involved parties.

#3) Leverage rigorous service levels as another tool to drive negotiations and ultimately satisfy both parties.

As long as supplier expectations are detailed, measurable, and tied to a condition of termination with cause, there is less business risk to include contract language that may be viewed as more favorable to a supplier than the customer. A common point of disagreement in most MRO contracts is term length. Businesses are hesitant to engage in two or more year agreements with fear of dissatisfaction in a supplier’s performance. From a supplier standpoint, these lengthier terms allow them to invest more heavily in a specific customer without risk of being replaced in the near term. As a result, suppliers are often more likely to give more favorable pricing and terms under these extended agreements. Another point of leverage that incentivizes suppliers to offer more competitive terms is exclusivity clauses or volume commitments. Both can be high risk for a business to include, however are easily protected under strict service levels and quality expectations outlined in the agreement.

When putting together such agreements, stakeholder involvement should go beyond the legal department and relationship owner (department manager and/or procurement). End users, and those more closely aligned with the day to day operations should be consulted to outline critical functions of the supplier and bring to light any historical or future potential issues that will impact the integrity of the relationship or daily operations. Contracting should be viewed as opportunity to maintain and strengthen the relationship from both parties, and not seen as a necessary evil of back and forth on general language until legal departments reach consensus. Dedicating the extra resources necessary to construct a detailed and forward thinking agreement will prove beneficial in the long term, as company standards will be maintained without sacrificing cost competitiveness.

Thanks, Jennifer.

Anchoring Doesn’t Have to be a Problem …

… or even a concern, if you approach negotiations in a fact-based manner, instead of a seat-of-your-pants manner, like most negotiations are approached.

What are we talking about? We’re talking about the tendency for us to fix our thoughts around a particular number, point, or fact rather than thinking logically and independently about a decision. In particular, the fixation that occurs when people consider a particular value for an unknown quantity before estimating the quantity. From that point on, the estimates then stay close to the number considered, even if the estimate is way, way off. The absolutely proven phenomenon discussed in detail in the public defender‘s recent pro piece over on Spend Matters + on how to hone your procurement negotiation skills by learning the right way to think (fist part free, full article requires membership).

Anchoring happens if you begin your negotiation or event with a price that is based on current price, a recent supplier quote, a market index, or some other number that may or may not have any basis in reality. Anchoring is avoided if you start with a price that is based on a should cost model, for a product, or an amalgamated index by a large analyst firm or statistics bureau for services category.

The should cost model should be based on a detailed cost breakdown that takes into account raw material costs (at market indexed rates), average labour costs for a region, average overhead costs, and any advances in production technology. A current cost, a current market cost, or even a project cost from a trusted supplier is not a should cost – and negotiations should ALWAYS be based on should cost. It might seem a waste of time for a product you’ve sourced ten times over the past ten years, or a service that you’ve paid the same rate for from three different manpower suppliers over the past three years, but that’s a very small sample of the market price at large, or the should cost price.

So do a detailed should cost model (or, for a service, detailed market research and break it down against average salaries available through a number of portals, augmented with standard contractor / manpower / outsourcer mark-up) and start your negotiations around that reasonable, logical, point — even if it’s half of what the supplier is quoting. Remember, you can scream that they take their unreasonable cost off the table or you walk because you can say “look, I have a should cost model right here that backs up the reasonableness of my number — so we’re starting within 20% of this and adjusting as necessary, or we’re not starting at all”.