Category Archives: Best Practices

If You’re Still Negotiating With the Carrot and the Stick …

… you’re not getting anyone’s attention but good ol’ Bugs. And, generally speaking, giving all the hijinks he causes, it’s best if his attentions are focussed on your competition.

So how should you be negotiating? With facts. Preferably binders of facts (but they can be in e-form on your tablet — no need to kill trees unnecessarily.)

Facts that show:

  • you know what the product should cost to make,
  • you know what margin should be healthy for the supplier,
  • you know what value-add services the supplier can offer more economically than you,
  • you know what performance metrics are reasonable, and
  • you know what the market offers are right now (and whether or not the supplier can beat them).

Suppliers don’t respond to sticks if they believe you really need them and they can get away with what they want, nor do they respond to carrot if other customers seem more enticing. Plus, they will wonder what crawl-out shelter you just climbed out of because no one from a modern organization negotiates like that anymore.

Especially if they are a typical sales organization that is all about the relationship (and talking win-win even if their definition of win-win is win for the organization, win for them at bonus time) or a more modern, Gen-X led, millennial-influenced organization that’s all about the synergy.

In the first case there will be value pitches followed by claims no one can do what they do as well and lots of smooth talk to get you off guard for when they indicate that their price (even if it has a margin that is twice industry average) is really as good as it gets and the latter will try to entice a deal from the synergy.

But regardless of organization type, every organization will respond to fact-based negotiations. With fact-based negotiations, they can’t hide fat margin behind claims of high cost, high-value, or synergy as the only way they can dispute your models, metrics, and market insight is to provide their true costs (or own research from third parties if they expect their costs to rise over the expected contract term).

And the above isn’t that hard to gather. It might take some elbow grease and a category expert, but once you’ve built the proper model and identified the proper data sources, it’s quick to update.

All you need for a fairly accurate should cost model is:

  • the bill of material break down
  • the typical energy required to produce one unit (kWh)
  • the typical labour required (labourer hours by labourer type)
  • the average industry margin

If it’s a contract manufactured product, you have this, if not, you can get an industry expert to help you craft a typical bill of materials. Your current supplier, or an industry expert, should be able to roughly estimate the typical energy overhead (based on typical production process). Similarly, your current supplier (or industry expert) should know average labour requirements against the production line.

All that’s left is understanding the acquisition cost of the materials, energy, and labour. Most raw materials are traded on exchanges, so it’s easy to get an average market cost. Most countries either have electrical utilities as state owned organizations or as highly regulated private organizations with standard prices per kWh. And most countries or labour bureaus compile average labour rates. Industry insight gives you standard margins, and you can see it’s not hard to build a reasonably accurate should cost model with expertise and elbow grease. And since the only way for a supplier to challenge it is to provide their costs, you can get even the model more accurate if their costs are actually higher. (And if they don’t challenge your model, then its relatively accurate or their costs are actually lower. In the latter case, they might get a bit more margin than you want to give in negotiations, but chances are you’ve lowered your cost as well with the model.)

This just leaves an identification of what services they can likely offer more economically, which again comes down to good modelling, and performance metrics (along with cost / profit impacts), which you should be gathering across your supply base. Then you can negotiate for better performance metrics (with penalties if they are not met) with an incumbent that isn’t doing as well as they should and wants to keep the business, or baseline metrics with a new supplier that wants the business based on current average performance across the supply base for the metric in question.

So gather your facts, and give yourself a true edge in negotiations.

New Year, New Challenges … Are you Ready?

Probably not. At this point you’re trying to get through the rest of the year without too many supply chain stock-outs or digital disruptions, especially with the X-mas season just a few weeks off, winter storms on the forecast, and key personnel going on (extended) vacations.

But at the same time you need to start thinking about 2018. How you still don’t have enough modern tech. How you still don’t have enough modern best practice knowledge. How you still don’t have enough staff to get everything done.

And, despite the fact that management should just increase your budget based upon the ROI you’ve delivered, as per our post last Friday, you know that’s not going to happen just because it’s the right thing to do. If you are going to get the software, services, and support you need, you are going to have to fight for the budget. Tooth and nail. And push out Sales & Marketing who also have a history of delivering results.

You are going to have to create a presentation that makes it clear that not only will you get a ROI of at least 5X with the increased budget you are requesting, but that ROI should be seen as an ROI of 40X compared to the ROI that Marketing and Sales will net you because your savings go straight to the bottom line, but, on average, only 1 out of every 10 dollars of additional sales they get goes to the bottom line. Whereas every dollar of savings you get goes straight to the bottom line.

They have to get an additional $10 in sales for your dollar in savings. That’s significant. And that’s why Procurement is significant. That’s why you need to start building your ROI model now so you can get what you need to deliver the savings the C-suite wants. That’s how you will be ready for the new challenges in the new year.

American Thanksgiving May be Over …

… but there is still much more your Procurement Department could be thankful for. For example, it could be thankful for:

  • a new, better, technology platform …
  • … particularly one that fills a hole …
  • … such as analytics, optimization, SRM, and so on …
  • a services agreement with a niche consultancy …
  • … to help source key categories and transfer knowledge …
  • a services agreement with a technology expert …
  • … to help select the right platforms …
  • a GPO contract …
  • … and tail spend management help

… because, as you should have gathered by now, most Procurement platforms are behind on tech, knowledge, and support and have too much spend not under management. And it will stay that way until such time as your Procurement team gets the software and services support it needs to get to the next level.

So make sure you give your Procurement department enough financial support in their next budget so they can take their operations to the next level. Because, when they get there, you will get many times your initial investment back.

Can You Stop Your Event Dead In Its Tracks?

The best laid schemes o’ Mice an’ Men … often go awry. And in the Supply Manager’s world, they often do. And, to be frank, more often than you realize. And sometimes market reality will shift in an instant and continuing a current event could cause considerable loss, and not the significant value that was initially expected.

In this case a Sourcing or Procurement event, even if for a critical product or service needed in a short time frame, will need to be stopped in its tracks. But can you do it? Or will you continue with an auction only to see costs (significantly) increase (if there is no ceiling? Or an RFX only to get no responses at the deadline (with not enough time to try again)? Or a catalog buy for a product that shouldn’t be bought (because excess supply at a non-preferred supplier just resulted in a huge price drop the organization could safely take advantage of)?

And then, even more importantly, the right event will need to be kicked off in its place. An RFX or Auction might need to be replaced with a strategic renegotiation with an incumbent? A catalog buy might need to be replaced with a spot-buy auction to a set of acceptable suppliers with equivalent products? A simple RFX might need to be expanded to a more complex optimization-backed multi-round RFX to take advantage of new entrants shaking up the market. And so on.

But for this to happen, four critical abilities need to be in place.

  1. The ability to detect market shifts that would necessitate a significant change in Sourcing or Procurement strategy.
  2. The ability to determine the appropriate Sourcing or Strategy to shift to.
  3. The ability to quickly terminate an existing event (type).
  4. The ability to structure and launch a replacement event quickly.

1. The ability to detect market shifts.

This requires continuous, real-time, market monitoring which, to be honest, cannot be done without significant software support, and is a proper application of AI in sourcing and procurement. (But this is a subject for another post [series].)

2. The ability to determine the appropriate strategy w.r.t. the shift.

This requires both software support — to extract key details of the shift, summarize it in a meaningful way, and suggest the option(s) likely to be best — and senior buyer wisdom to make the right decision.

3. The ability to quickly terminate an event.

This requires the ability to quickly terminate an event, and do so in a way that will not result in offended suppliers and lawsuit. While not likely possible in the public sector, with proper foresight, and notification, as part of the terms and conditions a supplier must accept to participate, this can happen.

4. The ability to launch a replacement event quickly.

This requires the ability to set up new events quickly, reusing as much information as the current event as possible. This will require great software support (but not necessarily AI).

As you can see, not easy, but sometimes it literally is the difference between a multi-million dollar win, and a multi-million dollar loss.

Sourcing is Full of Secrets …

… and each and every one costs the organization. Sourcing is supposed to be the savings engine that powers the enterprise value engine that relies on enough cost control to maintain the cash flow required by the enterprise.

But achieving savings in souring requires success, and success can only happen if the event is appropriate and appropriately conducted. But, even though many organizations think they know the right way to conduct an RFX, Auction, or other sourcing event, the reality is that they don’t really know the right way. They know the basics, but the basics are never enough.

Why not? Because little mistakes are often made from minute one they add up, costing the organization opportunity with each mis-step. So what are the common mis-steps? There are a number, but the following three are big ones that should never be overlooked.

1. The Specs

Too often the specs provided by the stakeholder are taken as the specs and accepted more-or-less as-is with just a few minor tweaks and clarifications. The problem with this is that the specs are what the stakeholder thinks they need, not what they actually need. Take Engineering — the specs are written to match the component from their favourite supplier. Take Marketing — the specs for an engagement are usually a mirror of those supplied by their favourite agency. And so on. But if Engineering is being tasked to design a new controller, the FPGA doesn’t necessarily need to be the one they’ve used in the past. There might be a better option. And if Marketing needs to get costs down, then they need to consider separating out creative services from production services from material spend, and not request all-in-one proposals. And so on.

2. The Invited Suppliers

Typically, the invited suppliers are, more or less, the same suppliers invited to the last event or the small set of known suppliers in the database. Only for a mostly new category is supplier discovery done, and, typically, these are suppliers in the supplier network, which, of course, is limited to those suppliers the organization have done business with or those suppliers the organization wants to do business with. But these are not always the best suppliers for the stakeholder and/or the organization. And the sourcing team doesn’t do enough discovery to find the potentially best suppliers, and deprives the organization of what could be a new source of value.

3. The RFI

Many sourcing events don’t start with an RFI that focusses on the appropriateness of the supplier before inviting the supplier to submit a bid on a product or service. The stability, sustainability, social responsibility, and support capability of the supplier in the locales the organization does business in should be considered even before the ability to offer the product or service is evaluated.

Get this right, and maybe your events will be more successful and identify greater value as time goes on. And that’s the true purpose of Sourcing: Value, not Savings.