Category Archives: Guest Author

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.

Are You An Idiot? Stupid? Dumb? Oh, and Happy New Year to You Too …

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group, and is reprinted with permission (as it originally appeared on The Mpower Group Blog. (Dalip provides us guests posts as well.)

Obviously that’s a rhetorical question and not one that I’m asking but it was in an article that stated:  ”Any idiot should be able to work out that publicly-quoted advertising holding companies (whose margins are public knowledge) have to make their money somewhere…..” (Stephen Foster) and I’m pretty sure that the idiots he was referring to are the procurement departments of various advertising agency’s  clients.  What the author is referring to is the practice of extremely low priced contracts from the agencies but who then get compensated from the media owners (where ads are bought) in the form of rebates.  Think of it as the rebate that car dealers get from auto companies thus muddying up the price you actually pay for your car.

Almost all the major advertising holding companies and reportedly a few others are under investigation by the Department of Justice for taking rebates (kickbacks?).  Stephen points out that this is a result of overzealous procurement departments squeezing the last penny out of contracts thus forcing the agencies to make up margins through rebates.  Another article goes on to say, ”Procurement has triumphed in commoditizing marketing, and its tentacles are deepest in media. Blind e-auctions and a general policy of letting agencies know the cheapest bid will win have stripped out nearly all the visible profit from media.”  Not only has this led to the rebate conundrum but also in agencies directing business to sister companies within the family and also led to the recent scandal of getting third parties to submit high bids so that in-house production units would end up winning the business (also under investigation and resulted in jail time in 2002).

For those that have followed this blog and our work over the years, this should sound a bit familiar – all the way from “Strategic Sourcing is Dead” to the more recent “Back to the Future – Strategic Sourcing is Dead – or It Should Be… ”.  We have long argued that the over-the-top focus on lowest price by procurement was actually destroying value and this would be a perfect illustration of that.  While procurement drives results that deliver to their own metrics, the marketing department suffers as they are not getting the service levels they need and are still paying higher prices – except on a different set of invoices.  Here are some additional comments from different authors: “If brands continue to turn everything into price, if they continue to screw cost so tightly ….then they would be stupid not to realize there will be mission (scope) creep.”  “If brands can’t see how reducing everything to cost at first saps the big agencies….. then they are dumber than anyone could have ever thought.”  Seems like everyone wants to call us idiots, stupid and dumb!!!

Google recently announced a formal “rebate” program where they are paying the agencies for placing ads with them accompanied by this gem, “If you hit certain thresholds and depending on the market, a check is paid back to the agency, which the agency should theoretically pass back to the client,” said a Google source with detailed knowledge of the program. “The agency will then divvy it up by client. P&G gets X and Visa gets Y.”  So procurement feels great that they negotiated a great contract with their agency but are willing to pay more for the actual ads and let marketing then fight to get some share of the rebate from the agency!!  Only in Strategic Sourcing does that make sense .  It’s almost similar to buying lots of things in a store because they are on sale and you can document huge savings – even though you don’t need half the stuff you bought?

The good news is that more and more of the conversation at various conferences is starting to get away from cost and much more into value(TCO=Value Destruction??). Unfortunately, the relentless focus on price/cost is not losing a lot of steam with procurement in most companies.  In the above example, it has changed the way the entire industry operates and is in fact lessening the options and competition for procurement by forcing a lot of independent agencies out of business – all brought upon by strategic sourcing practices.  Perhaps those calling us idiots, dumb and stupid may have a valid point?  I leave that up to you to decide.

Thanks, Dalip!

IT and Functional Departments – Finding the Middle Ground


Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their Procurement expenditures.

One of the challenges Procurement can face when working within the typical IT category is working on IT-related services that are used to support functional areas. Think of the marketing group or supply chain function; there are a number of different systems or software products that support those departments, but how clear is ownership of the solution between IT and the business group or function that the solution supports?

The answer to that question can vary across companies, across industries, and even across those within IT and the department utilizing the solution. Given this ambiguity, it is critical for Procurement to ensure representation from both and IT and the functional group for sourcing efforts that involve products and services that are not “purely IT”.

Does Procurement really need to be involved?

For many organizations, IT groups tend to work in a vacuum or keep their sourcing efforts separate from Procurement. While there are nuances that Procurement professionals need to be aware of and navigate within IT, there is clear value that Procurement brings to the table, especially when other functional departments are involved. Those in Procurement should be comfortable working with different areas with differing needs and finding a cohesive path forward. Procurement also brings market information (suppliers, price points, service levels) that IT may not be as focused on, but that could be critical to the overall solution. IT groups can at times limit themselves to certain suppliers for system or software solutions, but there may be alternate suppliers that easily integrate, or provide enough value to justify the effort required for working with disparate suppliers or systems. Procurement can bring that perspective forward and champion the needs of the business to balance the costs associated with IT change.

How do I know if something is “purely” IT or not?

When we look at organizations today, there tends to be a number of software and hardware suppliers that are categorized in spend data as “IT,” but fulfill a more functional or business need. When looking at spend and suppliers considered as IT, be sure to think through your organization’s end users and how the program or solution is being used by different groups. Marketing, HR, supply chain/logistics, and finance are all key functional areas that likely use some form of software to support their processes and should have a principal role in selection, whereas supplier selection for hosting or PCs and related consumables may be made more centrally within the IT area.

How do I get IT and functional departments to work together and come to a consensus?

When working with multiple stakeholder groups, no matter the departments involved, it is important to establish roles and responsibilities from the onset of the initiative. A key to working with these two groups is to consider what is most important to each group. Likely the functionality, ease of use, and flexibility of the solution will be top of mind for the functional department, whereas IT may be more focused on integration and hosting requirements, continuity with the company’s overall technology strategy, and licensing/purchasing models. Beyond IT and the functional area, discuss what other stakeholders may be affected or if other IT systems (and those who administer them) would be impacted downstream in the process. Focus the two (or more) groups on the goals for sourcing and what criteria is going to drive supplier selection – this will help to ensure that any critical issues or “deal-breakers” are identified and don’t come up later in the process. Each group will likely have their own set of requirements and criteria that need to be aligned and prioritized to ensure they are not in direct contrast with each other. Ask each group to look at their requirements and define the priority of each (e.g. rank as nice-to, prefer-to, or must-have) to ensure the core solution encompasses all must-have requirements.

Who ultimately makes the decision?

This is likely going to depend very heavily on your organization’s priority of functional and IT requirements. Ideally, Procurement can help bring these two groups together and drive to a decision point that all, including Procurement, can agree on. When the solution is business critical or the department relies heavily on the given product/service on a day to day basis, the business function is likely to be the lead in terms of making a decision, but IT will in any case need to validate that the solution will work from an infrastructure and support position.
While most may think of Procurement as a cost-reduction engine, we are uniquely positioned to enable relationships among different groups within the organization. Especially when working with software and hardware systems to meet business needs, it is critical to bring in IT stakeholders at the onset of the process to enable a more efficient and effective sourcing process that balances the needs of IT with the needs (and wants) of different functional areas.

Thanks, Torey!

Still Using Product Photography to Drive Sales? Part II


Today’s guest post is from Brian Seipel, a marking project expert at Source One Management Services focused on helping corporations achieve both Marketing and Procurement objectives in their strategic sourcing projects.

While this guest post is a bit off of the beaten path for SI, it’s a very interesting one and relevant for those Procurement professionals that want to run with the marketing bulls.


Five Ways Rendering will Beat Out Photography

In Part I, we noted that rendering needed to be “as good” as a photograph for organizations to ditch photography, and for this to happen, rendering needs to offer more. What is the “more” that is needed?

Here are several examples of what “more” means in this sense:

  • Perfect conditions – every time. Let’s face it: there are plenty of elements of a photo shoot that can (and will) go wrong. This is especially true of outdoor shoots or tricky products. Think of Breyer’s next “ice-cream-cone-on-a-hot-summer beach” ad. With rendering, you control all aspects of the environment, leaving nothing to chance – bad weather can’t shut down your rendering, and there’s no hot sun to melt your product.
  • Don’t like it? Change it. Another reality of product photography is its element of permanence. Once a shoot wraps, it is over. Small-scale changes may be possible in post-production, but also may incur additional charges. Larger changes will require a costly reshoot. Rendering provides the flexibility to make changes right up until the point you have your perfect image.
  • Rendering goes where photography can’t. Imagine filming a fly-through of the many intricate elements of a watch, with the viewer flying over the watch face and delving deep into the watch’s moving inner gears. Imagine this watch transitioning from a solid object to an exploded view, showing how a thousand individual components come together to form the whole – all while still ticking away and moving in time. These are powerful ways to showcase a product, but creating them with traditional photography or videography would be a struggle at best. With digital rendering, achieving these views is no more difficult than capturing a standard image.
  • Entrée into augmented reality. Just how far augmented reality will go in helping an organization reach customers is still an unknown. However, definite marketing plan synergies exist by developing a rendering that could not only replace a photograph but also feature in an augmented reality app.
  • Rendering keeps getting more cost-effective. To be clear, rendering may still be expensive depending on what work you need done. However, the fast pace of advances in this area have dramatically cut costs to the point where many organizations see a direct financial benefit to making the move. Photography costs are much less flexible – the costs related to studio space, product and equipment storage, and prop warehousing will always be present. Even though photography equipment keeps getting better, staying on the cutting edge of hardware still requires a large outlay of cash for studios, which is passed onto customers in every shoot.

Is Rendering Viable Now?

Given the speed at which technology is moving and just how lifelike the results are becoming, a transition to rendering from photography will, for many organizations, be a matter of “when” and not “if.”

So, at what point is this switch viable? For many organizations, this is a judgment call. For many, rendering can achieve results faster than photography and at a better price point. For others, rendering supplements photography to achieve results that traditional production can’t.

Thanks, Brian.

Still Using Product Photography to Drive Sales? Part I


Today’s guest post is from Brian Seipel, a marking project expert at Source One Management Services focused on helping corporations achieve both Marketing and Procurement objectives in their strategic sourcing projects.

While this guest post is a bit off of the beaten path for SI, it’s a very interesting one and relevant for those Procurement professionals that want to run with the marketing bulls.


Still using product photography to drive sales? Why there may be a better way!

Pictures are certainly worth a thousand words when it comes to products sales, and well-shot product photography is a key aspect of many sales and marketing budgets. Many organizations recognize that those “thousand words” are the least of their worries, however – those pictures are worth a large chunk of their budgets as well. In fact, the higher-end or more physically detailed the product is, the more organizations can expect to pay for a proper photograph.

Any organization operating in the luxury space has likely asked the question, “Do we really need to put so much money towards product photography?” Unfortunately, the answer has always been a resounding “yes” from Marketing – until, perhaps, now. As with all areas of business, technological advances are offering a clever disruption to the product photography space.

Digital Rendering: The Product Photography Killer?

Many organizations are either turning to, or considering a test run of, digitally rendered images to replace product photography. In a nutshell for those unfamiliar, a rendered image is one generated entirely from a computer. Without going too deep into how rendering works, here is a brief overview:

  • The Wireframe: To start, we need to build a model of a product. The wireframe defines the shape of an object by taking a 2D or 3D drawing and developing it into a digital model.
  • The Skin: At this point, the model alone has no form. Typically, this empty “space” is represented visually as a simple set of intersecting lines (hence the name “wireframe”). The skin, or texture, applies visual characteristics to the model. Consider a product made with both white gold and brown leather – two materials that are very visually different. The gold would be light, smooth, and highly reflective. The leather would be rough, rich in dark color, and non-reflective. All of the attributes of these materials must be perfectly reconstructed in a digital environment.
  • The lighting: When a product photo is taken, excruciating attention is paid to creating a compelling lighting setup. Lighting is used to evoke specific emotional reactions or showcase key elements of a product. This is just as true for rendering – lighting sources have to be both created (how bright, focused, and warm or cool the light source will be) and directed at the model (determining what direction light should come from, and how many sources are needed to effectively light a product).

Think about any Pixar movie you’ve ever seen – these are beautiful examples not just of rendering, but also a fair representation of just how far advances in rendering have come. As amazing as they seemed to us when they first hit theaters, early digitally rendered movies look crude by today’s standards. The pace of development is moving extremely fast, thanks to refined techniques, better digital tools, and more powerful computer platforms to run them on. In fact, it is becoming extremely difficult, if not impossible, to discern a photograph of a product from its comparable rendering.

But it isn’t enough for a rendering to be “as good” as a photograph. For organizations to ditch photography, rendering needs to offer more. And it will. How? Come back for Part II.