Category Archives: Market Intelligence

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.

The Big Bad Blockchain is Here … Well Almost … Well, Maybe …

Blockchain, originally developed to support bitcoin (which heralded the digital currency revolution), is being considered, or at least proposed, for a plethora of uses as a result of the continual promise of the Internet of Things (IoT). It’s one of the most hyped, and to be honest, the most over-hyped technologies out there. (As the doctor originally ranted in his initial post on The Big Bad Blockchain back in March, the blockchain has huge potential, but the reality of the blockchain in today’s supply chain is proprietary proposals that are akin to the most “open” supplier networks, which, as we all know, aren’t that open. In fact, one such network is famous for “having prisoners, not customers”.

But, as the doctor pointed out in We Need BlockChain, But Not for the Reasons You Think, we do need blockchain, and, in particular, a truly open, truly decentralized, truly open blockchain auditable by anyone and everyone (probably operated by a truly global non-profit conglomerate). Because, with that block chain, we could realize the secure transfer of IOUs between multiple supply chain parties. (And that would allow a return to a modern form of barter where supply chain partners could trade debts until they were ready to collect. [After all, one way to hedge currency exchange losses is to trade debts until you can buy or sell in your currency.]

But until we get there (as this is apparently very forward thinking even though trade started with barter), in the meantime there are three very good uses for a proper, open, block chain.

1. Transportation (Cost) Management

All affected parties in a supply can see who has what, when, what charges were applied, when, and how the total landed cost is affected.

2. E-Document Management Between Partners

In addition to the standard fare of purchase orders, acknowledgements, shipping notices, goods receipts, invoices, and payment notices, you also have e-Contracts, e-Agreements, dispute resolution communications, and other documentation critical to regulatory compliance and future lawsuit prevention.

3. Open Innovation Management

Right now we have a lot of crowd-sourcing networks and innovation management platforms where all sorts of parties can post and respond to all sorts of challenges. However, while they have their advantages, they have their disadvantage — in that not everyone wants to give a solution away without some confidence that, if their solution is best, they will get paid and, most importantly, even if it is not, their solution will not be stolen or used without renumeration or, at least, without acknowledgement. But with blockchain, the origin of each submission can be uniquely identified and verified throughout the network, which will help an organization maintain confidence as the ownership of IP can be proven and access can be tracked.

The big bad blockchain is coming, let’s just hope that it the right instantiation of it appears.

At least Twenty Two Hundred and Sixty Five Years Ago Today …

The Pharos of Alexandria was constructed. Estimated to be over 100 meters in height, and one of the Seven Wonders of the Ancient World, it was built on the island of Pharos opposite the isthmus on which Alexander the Great founded the city of Alexandria. The lighthouse was commissioned by the Ptolemy I after the death of Alexander, and due to its location, it not only guided ships by day and night but secured safe access to the city of Alexandria.

We bring this up to show the long history of lighthouses, which to this day are important in the prevention of ships hitting the rocks and wrecking off the coast (like the Stephen Whitney did One Hundred and Seventy Years ago today off the southern coast of Ireland (killing 92 of 110 on board). And while the wreck resulted in the construction of the Fastnet Rock lighthouse, an early example of an oil burning lighthouse (replacing the previous wood or coal lighthouses). And while it didn’t have the brightness of the kerosene burning lighthouse that would replace it, it was a great start.

Because the ability to see in the dark is valued, especially at sea. And this is an extremely relevant metaphor to procurement often lost in a sea of data with no ability to see where the rocks are. This is important because without sight, not only will your organization not realize the Procurement Innovation that is to come we have been discussing all week, but it won’t even realize the opportunities available it today.

Stay tuned.

Procurement Innovation Tomorrow

In our last couple of posts, since They Terk Er Jerbs!, we have been discussing Procurement Innovation today and how automation and tactical data processing is actually a good thing for robots and software to take over, since most of it is mind-numbingly dull and hinders our creativity and productivity — and as that is about the only area we can truly best the machine (although they are making a damned good effort to take over there too), we better focus it on it now when we can.

(Even though it’s not likely we’ll see true AI in our lifetime, as processing power and parallel computing continues to improve, the prediction capability of machines will eventually get so high that some people might be tempted to say eh, good enough and let machines take over jobs and make decisions in areas they will be 95% accurate and sufficiently successful, or at least, good enough, on average. (Moreover, by the time they make one mistake so catastrophic that people die in a situation where no human would ever have made that mistake [as they can’t see what they are not coded to see], it will be too late as we will be living in the world of E.M. Forster, The Machine Will Stop, and that will be it … and then, in a few dozen millennia, Earth will again be the Planet of the Apes).

But the power that comes from the machine’s ability to number crunch is going to go beyond number crunching, m-way matching, and guided buying with visual guilt. For example, one of the common innovations you are going to see tomorrow is invisible buying. And the invisible touch of the machine once it takes over some of the most boring buying tasks will be such that it will crawl under your skin, you’ll fall for it, it will take control, and if it ever gets taken away, it will take you apart. (And your only recourse will be to play Genesis.)

Just what do we mean by invisible buying? Basically stock room and MRO ordering, the bane of your buying existence, will be a thing of the past.

Who is better able to analyze purchase and inventory data and:

  • Auto-detect regularly needed items
  • Auto-compute typical usage schedules
  • Auto-predict best order quantities
  • Auto-re-order on reaching an auto-computed minimum threshold
  • Auto-adjust inventory levels using RFID, Arduino, & IoT
  • Auto-m-way match between all e-docs and auto-pay

Us? Or the software-driven machines?

That’s right, the software driven machines. Besides, what value is there wasting our time doing regular re-orders off of established contracts. None. Our time is better spent identifying the next contract to get in place to avoid cost, achieve savings, and, hopefully, provide more value to the organization. So the machines will take this over. And that’s fine. Because, at the end of the day, there is too much spend falling into the tail costing us big $$$. In most organizations, tail spend, which can be as much as 30% of the spend, is, on average, 15% to 30% over best market cost. 20% of 30% is 6%. That could be hurting your bottom line more than your top spend that is strategically sourced every three years and typically only has 2% to 3% left to shave off through smarter sourcing. Think about that.