Category Archives: Best Practices

Negotiation Basics

If you’re a proactive organization, chances are that you’ve been trying to re-source your way out of this downturn by taking advantage of recent cost reductions in commodity categories across the board. This means that, if you haven’t started already, you’ll soon be entering into final-round face-to-face negotiations with your (new) preferred suppliers. This means that, if you haven’t already, you should be brushing up on your negotiation skills, starting with the basics.

To this end, Industry Week published a useful article last fall on the “Powers of Persuasion” that noted that while all good negotiators have the power to persuade in common, no two negotiations are the same and no single strategy will always be effective. Furthermore, some of the most successful negotiations are the result of knowledge and information and that comes from doing research, asking questions and listening. However, there are some basic skills that will always be useful to you, and that you should have mastered before starting any negotiation, including:

  • The Ability to Define Success
    What is a successful outcome to you, and where do each party’s interests lie? This will allow you to find a common denominator that will lead to an agreement.
  • The Ability to Identify Priorities
    What’s a real “need”, and what’s a “want” that can be sacrificed for the greater good? Is 10 days turn-around time essential when 15 days can give you a 10% reduction in cost?
  • An Understanding of Power
    Who has the power? You? The Supplier? And to what extent can the negotiation be influenced?
  • The Ability to Gain Leverage
    You need to insure that you don’t disclose unnecessary information and give the supplier leverage. You also need to do your research and understand your supplier’s situation.
  • The Ability to Deal with Deadlock
    Good negotiators know that a deadlock doesn’t mean a negotiation is dead. They’re prepared to walk away and then come back later with different information and a different perspective, and to even move on to another potential supplier if required.

In addition, good negotiators are aware of the common negotiation mistakes, covered in Next Level Purchasing’s “Negotiation No-No’s” mini-course, and they don’t make them.

Winning Though The Downturn as a Small Business

Last fall, both Chief Executive and Industry Week published some good articles on how to survive the downtown — and win — that are worth a quick review.

In “Winning through the Downturn”, Chief Executive starts off by telling us that as far as your business is concerned you should be seeking to harvest cash and be really hard-nosed about any investment. In tough times, an investment must generate an adequate, and expeditious, return on investment. It also tells us to be super cautious with the banks – they caused a good deal of the [current financial] problem and that we should not assume that we can trust them at this time. Hear! Hear! (I’ve read too many stories about how mortgage resellers during the housing boom convinced people making 40K a year that they could afford 400K homes. Not being a trust-fund baby, I know from personal experience that it is tough to afford a 200K home on 80K a year if you have a family to support! So how could a family making half as much afford a home that costs twice as much?)

Other advice it gives is to consider outsourcing as opposed to increasing head-count, to consider increasing inventory in consumables when they start rising in cost (which currently makes sense for certain metals and plastics categories where the storage and capital cost are less than the expected monthly rise in raw material cost), and to make sure you are being tough enough with your suppliers. (You need to be fair, and always, always, always, pay them on time, but that doesn’t mean that they shouldn’t partner with you and share the pain of the current economic climate.) You should also focus on providing products and services that will make your customers go “wow” — as those are the products and service that they’ll spend their money on.

In “Keeping Small Business Up, While the Trends are Headed Down”, Industry Week tells us that a little bit of innovative thinking and belt tightening can go a long way and offers up eight suggestions. they are:

  • Show Me The Money!
    Now, more than ever, you need to get paid on time. Boldly (but respectfully) emphasize what you did, how much you are owed, and when payment is due.
  • Tech-Savviness
    Use technology efficiently and consider web-based accounting and CRM software, video conferencing, and multi-function office devices that keep costs down and productivity up.
  • Boost Sales
    Focus on selling more to current customers, who will be an easier sale than a new customer.
  • Market Smart
    Use targeted pitches through targeted mediums that are already reaching your audience. (For example, if you wanted to reach the sourcing, procurement, and supply management space, a great way to get visibility would be a Sourcing Innovation sponsorship. After all, it often comes up #2 for “sourcing” on Google.)
  • Stay Visible and Helpful
    Keep in touch with your customers and be their supplier of choice.
  • Inventory In Motion
    Unless it’s actually cheaper to buy in bulk when costs are rapidly rising or rapidly falling, keep inventory to a minimum. For most products, the storage costs and costs of capital are way more expensive than just spot-buying what you need when you need it.
  • Keep Workers Working
    Workers waste time on trips to the supply store, the post office, and Starbucks. Use on-line ordering and next-day delivery (which is typically free for business orders), use Stamps.com or a similar service for postage and courier services that pick-up, and buy that $500 cappuccino machine (but I’d avoid the $5,464.31 Inox) — you’ll make up the cost in increased worker productivity in the first week!
  • Don’t Cut the Perks (Completely)
    If necessary, reign them in and keep them reasonable, but free juice, soda and lunches (which keeps a worker in the office more and working more), the occasional party, and small bonuses for a job well done keep morale up, and productivity up. They should not be cut. (On the other hand, if times are tough, do you really need that private box at the track/ball-palk?)

But if you’re really serious about how to weather the downtown, consider checking out “10 Secret Strategies to Recession-Proof Your Business”, a recent Executive Whitepaper from Coupa.

(More Than Ever) You Need Experts (if You Want Cost Reductions)

In his Friday Rant, Mr. Busch asked if “kicking out consultants was a smart cost cutting strategy”. I promptly answered, Hell, No and pointed out my posts on why Consultants are Cheap, it’s easy to get maximum value from consultants, and that any we don’t need no consultants here logic is flawed. (I also pointed out that there are better ways to cut costs, as I chronicled in my recent posts on ways to avoid the graveyard, more ways to avoid the graveyard, and even more ways to avoid the graveyard, and that if a company is seriously looking to trim labor costs, it should consider firing its overpaid, under-performing executives. [And if you’re wondering, I fully support Obama’s desire to limit executive pay. There’s no way you should get 20 Million for running a company into the ground. If it was up to me, I’d limit base pay to 1 Million and additional compensation to performance based awards as a percentage of total profit or revenue improvement. I’d still allow for unlimited pay with unlimited performance improvement, but you’d have to earn every penny.])

Let’s face it … with your head down in day to day operations, you’re not going to be up on the latest cost savings strategies, market conditions, or technology improvements … whereas an expert will be breathing the latest strategies and technologies for improving performance and cutting costs day in and day out. Furthermore, as pointed out in this recent article from Chief Executive, using external expertise is in harmony with the modern approach to business which is all about [staying] lean & agile, [being] virtual, and outsourcing. Furthermore, as the author astutely points out, economic turmoil creates unusual problems which might need extraordinary solutions … which are only going to come from an expert.

The Art of Procurement Mastery

Now more than ever, procurement leaders have enormous responsibilities on their shoulders. Not only are they expected to drive even larger cuts in costs of goods sold but they are under fierce pressure to make every business process as efficient as it can possibly be. So notes Gregory Spray in a recent Supply Chain Management Review article on “The Art of Procurement Mastery”.

The article also notes that not many companies are using the downturn as an opportunity to radically rethink their activities and strategies. A downturn is a great opportunity to snap up top talent, apply business analytics to develop sharper insight, collaborate closely with suppliers to drive product innovation, and outsource effectively.

The article examines the performance gap between “procurement masters” and their lesser performing industry peers that was highlighted in a recent Accenture survey across more than 600 procurement executives from Asia, Europe, and North America which found that procurement masters achieve 30% higher savings with costs that are 50% lower, procurement masters outsource at a frequency that is two to four times higher than low performers (depending on the function), and procurement masters are leaders in supplier relationship management. I have to say that these results are not unexpected, given that Hackett has been logging similar results for almost three years now.

The study defined a “procurement master” as one with superior performance in the following five metrics:

  • Total-Cost-of-Ownership (TCO) savings
  • Spend Under Management (by Procurement)
  • Ratio between TCO Reduction and Procurement Operating Costs
  • Percentage of NPD/NPIs where Procurement has a Material Role
  • Percentage of Suppliers Managed Under a Formal Process

So what do procurement masters do that their industry peers don’t?

  1. More Thoughtful and Pragmatic Procurement Strategy
    Masters look and think three to five years out when planning purchases for critical business categories and they do a more innovative job of measuring procurement performance.
  2. Better Guidance for Sourcing and Category Management
    Masters employ a center-led organizational design that cuts across organizational entities and employ best-practice sourcing processes that emphasize

    • common processes
    • wide-spread usage of cross-functional procurement teams
    • formally tracked activities
    • tight focus on TCO
    • end-to-end supply chain orientation
  3. Greater Innovation in Procurement Processes
    For example, 83% of masters (compared with 8% of low performers) excel at providing clear and documented buying channels to end users and 87% of masters use LCCS for value creation.
  4. More Assertive Supplier Relationship Management
    Supplier Relationship Management is a leading practice of procurement masters with 84% employing a supply-base segmentation approach (compared to 1% of low performers), 83% employing automated tracking and reporting of supplier performance (compared with 1% of low performers), and 80% employing central logging and proactive management of contracts (compared with 8% of low performers).
  5. Supplier Workforce Management and Organization
    Masters excel in workforce management with 78% (compared to only 3% of low performers):

      • Objectively measuring existing competencies
      • Frequently adjusting organizational skills to align with procurement strategy
      • Emphasizing ongoing training
      • Blanketing competency development strategies across the procurement network

    In addition, 86% of masters use variable pay schemes (that compensate high performers).

  6. More Effective Use of Technology
    As the article astutely points out, technologies and technology-based solutions have advanced considerably in being able to support innovations in procurement and leading procurement executives are looking to new technology solutions to help digitize the entire supply chain.

As this echoes many of the messages my fellow bloggers and I have been conveying for the past few years, I’d say that this is good advice across the board.

Dead Company VII: Even More Ways To Avoid the GraveYard

In Part IV we reviewed Brian Solis’ TechCrunch post on Fear Kills Businesses Dead where he proffered twelve generic suggestions that any company can use to grow in this economy. In Part V we reviewed ten “essential strategies for weathering the economic storm” from Christopher Lockhead’s guest post on Dan Farber’s Outside the Lines CNet blog. In today’s post, we’re going to cover 10 supply chain initiatives that you can use as a buyer to not only help your company survive in this downtown, but actually thrive, courtesy of Terry Harris of Chicago Consulting, as posted in a recent Industry Week article.

  1. Redesign your Distribution Network
    It’s been well establish by both analyst firms and leading vendors alike that decision optimization can save a fortune — 12% on average (according to two back-to-back studies on advanced sourcing strategies from Aberdeen) and up to 30% or 40% on some categories when deployed for the first time. Furthermore, in my experience there are two areas for unprecedented savings opportunities: services contracts and network re-design to optimize logistics spend, inventory holding cost, and import and export tariffs.
  2. Compete on Service
    If you’re providing a product that is essentially a commodity, in this market, you’ll be price-pressured to the brink of bankruptcy if you try to compete on price alone. So compete on service. Make your customer’s life easy and be a joy to work with. If they struggle with inventory, offer VMI. If they struggle with logistics, offer 3PL services. Etc.
  3. Re-bid Your Freight Spend
    Due to rapidly declining demands, ocean freight rates have dropped more than 50% from last year’s summer highs. Rail and Intermodal traffic has also been dropping at a rate of 6% to 10% a month for the past few months, and rates have been declining steadily as well. It’s a perfect opportunity to put your freight out to tender.
  4. Invest in Non-Transportation Resources that Offset Transportation Costs
    Inventory, smarter labor, and better technology can all reduce transportation costs. Reducing inventory, and storage space requirements, can halve overhead costs, which can be as high as 30% to 35% of product value in some companies. Better technology can streamline operations to minimize logistics and storage costs. And smarter people, properly trained in the latest best practices, can find innovative opportunities for reducing spend further through award reallocation, innovative ideas for packaging reduction, etc.
  5. Fill Orders Smartly and Flexibly
    Only ship from a single location, and make as few shipments as possible. If you’re fulfilling orders for multiple customers from overseas locations, ship them in one shipment to a local warehouse at the port and then divide the order into separate trucks.
  6. Optimize Safety Stocks and Order Quantities
    Make stock/no-stock decisions based on profit margins and SLAs, use pull deployment across the board, and optimize order quantities. Don’t stock low-demand low-margin non-critical items, reserve your costly storage space for high-demand, high-margin, and critical items necessary to fulfill SLA requirements. Implement up-to-date supply chain visibility applications that pull when a trigger point is hit.
  7. Accelerate your Forecasts
    Increase the frequency at which your forecasts are updated to better sense, and respond, to demand changes. Monthly forecast updates become weekly, and weekly forecast updates become daily. Review exceptions as soon as they arise.
  8. Re-engineer Packaging
    Packaging costs money. A lot of money. There’s the material cost. There’s the storage cost. And there’s the transportation cost. Find a way to use less packaging for all of your products.
  9. Use Cost-Effective Transportation Modes
    Don’t expedite. Don’t use air. Etc.
  10. Go Green
    You can go green and save money. Less waste, reduced disposal costs. Less fuel, smaller transportation costs. Savings opportunities abound.