Procurement Game Plan: A Review Part III.1

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. In our first post, we set the stage with The Purchasing Professional’s 10 Commandments. In our second post, we covered the first four chapters of the book that discuss organizational role, supply management strategy, talent, and social responsibility — the stage that a modern supply management professional has to act upon. In our third post, we continued our detailed review with a discussion of the chapters on strategic sourcing and supplier qualification. Then, in our last few posts, we discussed the chapters on negotiation. This post begins our discussion of managing supplier relationships, measuring performance, and improving performance, which will conclude our review of The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals.

The chapter on managing supplier relationships covers a lot of material, but the most important point that it covers is the Supplier Relationship Management (SRM) golden rule: when something goes wrong, blame yourself first. If the supplier was properly vetted, the contract appropriately defined, and the relationship properly managed, the only thing that should cause you a problem is an act of god, an act of nature, or an act of war. Unless something happens that would allow a supplier to invoke force majeure, nothing significant should go wrong. If it does, it is (due to a previous) error on your part. As the authors state do not blame the supplier until you’ve thoroughly investigated the problem and are absolutely sure that the problem was the fault of the supplier because many times the the problem is … the fault of your own organization. (And even if it isn’t, why did you select a supplier who would be so lax? That’s your fault!)

Furthermore, if you consider the primary reasons that most relationships falter, you’ll see that they are all your fault!

  • Unclear Expectations
    Often the performance that you expect is different than what the supplier understands is required. Expectations should be clearly defined with respect to metrics, written down, and discussed with every supplier. There should be no doubt in your mind that the supplier understands what is good behaviour and what is bad behaviour. Failure to insure that this level of understanding is reached is your fault.
  • Opportunistic Behaviour
    There is a certain amount of trust involved in a buy-sell relationship and if the buyer attempts to take advantage of every issue by demanding a discount or other concession (before the problem is thoroughly investigated and the source clearly identified), the supplier will lose their interest in committing itself to help the buyer succeed. Attempting to take advantage of every issue, especially when the cause is likely a lack of expectation setting or supplier management, is your fault.
  • Poor Selection Methodology
    If you ended up with a poor supplier, then the selection process was flawed. Guess what, that’s your fault too!

Now, sometimes it will be the supplier’s fault. Every now and again the shop floor will not have the dedication or interest in pleasing you that your counterpart has, or an executive, stuck between a rock and a hard place when he realizes that the organization overcommitted a certain product or for a certain time window, will decide that you are going to get the short straw, but if you’ve done everything right, this will be the exception and not the norm. And both cases are easily corrected a supplier that wants your business. A heart-to-heart will be had in the first instance (and the people responsible will shape up or be shipped out) and refunds or other concessions will be offered in the second. And the supplier will work with you to make sure it doesn’t happen again.

And if you’ve down your job right, and you find yourself in a situation where a supplier decides not to perform up to expectations and not do anything about it, you already have a multi-stage back up, risk mitigation, and/or disaster recovery plan to fall back on. Starting with emergency meetings and site visits with your counterpart and/or senior management, through third party assistance (such as arbitration or mediation), through termination and a switch to your backup supplier, the recovery strategy and process will be well-documented and ready to spring into action.

The chapter does a great job of covering your options for rationalizing the supply base if things do fall apart, identifying cost reduction opportunities within your current supply chain if they don’t, and the cornerstones of good SRM, which is critical if you want a true supplier alliance, but the only other section we’re going to cover is on minimizing leakage. Once a contract is effected it has to be monitored, carefully, or leakage (which will occur no matter what you do) will increase from a slow drip to a gushing waterfall.

Minimizing leakage in an average organization is, fortunately, pretty straight forward. As the authors note, you:

  • Monitor expenditures regularly
    The biggest barrier to leakage (which can take many forms but typically takes the forms of off-contract maverick buying, over-invoicing, or over-payment) is a watchful eye. Like the watched pot that never wants to boil, a buyer is more likely to stick to a contract when being watched, a supplier is more likely to double check its invoices if being watched, and an accounts payable clerk is more likely to check for duplicate invoices or payments. The simple act of watching (followed by a regular report to senior management on who’s not doing their job) can often cut leakage from 40% to 10%. (And for some great ideas on how to find leakage, why not download the 100%-free no-registration-required eBook on Spend Visibility: An Implementation Guide?)
  • Celebrate and Publicize Success
    Securing an interview with a trade publication or leading blog and having your stakeholders participate not only gives credit and builds ownership of the process, but it instills accountability. Who’s going to jeopardize a savings commitment when the CEO has seen it in a news report?
  • Involve Stakeholders
    In RFP evaluation, supplier survey scoring, and even contract monitoring. If stakeholders feel like they own the process, they are going to do their best to see that it is followed and the savings commitments reached. After all, if they are involved, they are going to share the credit for the success (and that’s ten times better than being blamed for failure, right?).

Our review will continue and discuss the final topics of the game plan — measuring performance, supporting technologies, and your strategy for procurement success.

I’ve Lost My Marbles!

Last time I saw them, three days ago, I was playing a rousing game of Ringo (not to be confused with Rango, who is one heck of a lizard may I add) with my developer colleagues (who are very easily amused, and even more easily distracted by giant rubber bands — but that’s a story for another day). I know this because I distinctly remember sticking seven marbles in a row and trouncing my competition in the final game. But that’s not important. What’s important is that they’re gone! Gone! GONE!

Like your average genius, I’m a few cards short of a full deck, and they were probably the only things keeping my eccentricities and insanity in check. (All geniuses are insane. We don’t all reach the depths that von Neumann or Tesla reached, but other than my marbles, and the tires on my car, I think all things should be square. Because it’s Hip to Be Square.) I’m already losing it. Since that time, I’ve joined every social network known to me. I’m fully aware that Tweets are NOT conversations, that Twitter will likely make me stoopid, and that, with the Facebook double-whammy (where one can spend his days poking, prodding, and writing grafitti on infinite walls), I’ll have no time to be social. I know I should remain faceless, spaceless, and twitter free but there’s a big disconnect between logic and action. I know it would be more productive to try and resolve P vs. NP, capture a Higgs Boson, or to try to answer why Hulk Hogan is still in show business … but all I can say is Game On!.

I’m now linked-in, plaxo’d (which I guess, these days, is for the old and plastered), Google-plussed (but given that, as a degreed mathematician, I actually know what a googol is, I’m not sure how that is physically possible), slide-shared (even though playgrounds don’t exist outside of schoolyards anymore), pinned (but not pinned down, thanks to wireless and the power of the Macbook pro), living in twitter-space (and hoping I don’t get flattened by the fail whale — although it might be cool to get eaten by it if it’s anything like Möbius Dick), and facebook’d (even though I haven’t been arrested — what’s up with that)? And now I’m zanier than the Sourcing Maniacs after a month in the boardroom! (And fondly remembering the days of the APE Circus.)

All I can say is that I hope I find my marbles soon! I don’t think I’ll last as long as Tootles if I don’t. (But if it takes them that long to be returned to me, I hope they are returned covered in pixel dust. I’m gonna need it to fly through the ever expanding social media space.) In the interim, feel free to link to, contact, circle, share, pin, follow, and friend me as appropriate — and be sure to join the Sourcing Innovation groups on LinkedIn and Facebook.

And join me in a rousing verse of the zany socialites! (Sung to the tune of the maniac’s theme song.)

It’s time for social-maniacs
And we’re zany to the max
So just sit back and relax
You’ll tweet ’til you collapse
We’re social-maniacs!

Come join us on the Facebook
And the Twitter Channel too
Just for fun we poke around … and see who’s keeping tabs
You’ll find us in the Starbucks on our laptops and our pads
Reading mail and timeline trails
And tweeting off the rails

‘Cuz we’re social-maniacs
Who take pride in Twitter-yak
We’ll pack away the bits
While the servers store our twits
We’re social-maniacs!

Now someone raise me a picture of Wil Wheaton collating paper!

Why Gas Prices Are Too Damn High!

OnlineBachelorDegreePrograms.com recently created an interesting infographic that, after breaking down the cost, demonstrated that the underlying reason was global instability and how it affects the price of crude oil which accounts for about 75.5% of the cost of gas in the US. The second biggest cost component was, expectedly, taxes, which account for about 12.25%. A reduction in taxes would help, but even if taxes were chopped in half, you’d still only save $2.44 on a 10-gallon fill-up.

The problem in the US is that Wall Street has changed the formula in the U.S. for pricing gasoline. Until last April, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma which hosts the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude which, today, happens to trade at a premium to U.S. oil by around $20 a barrel. Good for the US oil exporters adding Billions to their bottom lines, but bad for the average U.S. consumer. (Remember, just because a company drills in the U.S. doesn’t mean it has to sell in the U.S. So if you’re a protectionist, maybe you should be fighting for more wildlife preservations. It’s not like you’re going to get cheaper gas anytime soon.) [For more information, see this Fortune article on “If the U.S. is now an oil exporter, why $4 gas?”]

So, unless OPEC decides to try and regulate prices, or the US produces more oil and passes laws mandating that such oil is kept it on its own soil for domestic use and reduces the cost of acquisition for domestic use (possibly by legislating how oil is to be priced in the U.S.), it looks like gas prices are going to be too damn high for a while.

Click the image below to see the full graphic.



Created by: Online Bachelor Degree Programs (.com)

EQ does not matter more than IQ — Nice to see not everyone is getting caught up in the hype!

EQ, short for Emotional Quotient and also known as EI, short for Emotional Intelligence, and the next resurgent craze in talent management, is very important in Supply Management given the regularity with which supply management professionals need to interact with suppliers and peers around the globe, the number of disruptions that occur on a semi-annual basis, and the intra- and inter-organizational conflicts they will be regularly called in to resolve. After all, people with high EI have more empathy, tend to stay calm under pressure, and have a knack for effectively solving conflict.

But, despite what Daniel Goleman may have claimed back in 1995 (when he authored a book titled Emotional Intelligence: Why it can matter more than IQ), it does not matter more than IQ. As Zoe Lewis, a director at Harvard Lewis, notes in this piece in CPO Agenda on how “clever is no longer enough”, EI must complement IQ. EI and IQ have equal value and it’s equally important for leaders to have a high IQ because in that position they need to be able to make certain decision. You can be the most motivated, empathic, and socially adept individual in the world, but if you don’t understand a balance sheet, ROI, or even the basics of a production line, there is no way you are going to effectively lead a manufacturing organization — or even make any important decision in its day to day management.

In Supply Management, IQ is just as important as it is in senior leadership. In order to be successful today, a Supply Management professional has to be a master of transition and technology — that includes Spend Analysis, Decision Optimization, and Predictive Analytic Demand Planning Solutions. That requires some serious IQ to understand not only how to use the tools, but what patterns to look for, what models to build, and what statistical and interpolative techniques are appropriate for the categories and commodities being sourced. You can be the most emotionally intelligent man, or woman, in the world and be perfect company for Jonathan Goldsmith, but if you don’t understand how to navigate a spend cube, breakdown costs into raw components acceptable to an optimization solution that uses a piecewise linear mixed integer programming model, or understand the difference between statistical interpolation and comparative pattern matching, well, let’s just say that there’s hundreds of thousands in technology purchases and licenses down the drain.

Of course, it is EQ that makes the difference between a good buyer and a great buyer as the dynamics of the position will continue to change much more along the way of relationship management. This is primarily because the need to reduce costs today is as dire as it ever was and traditional methods of working with suppliers and stakeholders only achieve 3% to 4% improvement a year — not the 30% to 40% improvement targets now placed on some buyers. Even spend analysis and decision optimization, the only two technologies in supply management proven to deliver year-over-year returns in the double digits (at 11% and 12% respectively), will not come close to these targets. Only collaborative sourcing techniques that utilize these technologies as part of joint efforts with suppliers to identify opportunities for significant cost reductions (which take major EQ as well as IQ to pull off) have a chance of delivering those returns.

And the good thing about EQ is that, unlike IQ, it can be improved over time. While you generally realize your IQ potential early on in your life, with effort, your EQ can keep increasing. Even if you start of with no social skills and are outcast like a Napoleon Dynamite, if your IQ is smart enough, you can still become a James Bond, or at least an Alastair Donald, who is a secret agent of business improvement. Once you develop self awareness, self-regulation, social skills, and eventually empathy can follow if your motivation, and patience, is strong enough. You can take self-assessments, courses, or get a mentor. It may not happen over night, but you can get there.

And you can get there faster if your organization makes the move from a training organization, where lessons are forgotten as soon as the next fad is brought in by senior management, to a learning organization where best-in-class methodologies, that are really only best-in-class for your competitor, are not force-fed from the top but developed bottom-up by motivated, engaged employees who want to make the organization a better place to work and share what they learn. That’s the foundation for true EQ in an organization.

Has the Best been Bought from Best Buy?

StorefrontBacktalk recently ran a couple of pieces on Best Buy that followed up their recent pieces on “Best Buy’s Black Friday Fiasco” and “Best Buy’s Wifi Porn”, which was expanded upon by SI in its recent posts on how if you wanted a best buy experience, you weren’t going to get it at Best Buy (Part I and Part II). In its first piece on “Best Buy’s Last Hope”, the author says that Best Buy has one shot — an expensive, painful, highly disruptive shot — to truly turn itself around. It must embrace customer service in-sore to an extent that would make Nordstrom, Trader Joe’s and Whole Foods blush. That means store associates who are true experts in the electronics they are selling.

Frankly, I don’t think this is going to happen. The mentality would have to change from “who will work for us for minimum wage and pretend they know enough about this product to actually sell it” to “where can we find someone who knows what they are talking about, is passionate about the products they sell, and will actually work for us as a sales rep” and “what is it going to take to get that kind of people”. Right now, the type of service I’m used to is “this isn’t my department, you’ll have to find someone that is working in this department” to queries as simple as “can you tell me if you still have any of this product in stock” (which any associate can do simply by logging into one of their terminals and doing a query) or, my favourite, in response to “I’d like that” (pointing to something in a cage). Get the key, open the damn cage, give it to me and/or walk it to the cashier. An untrained monkey could do it! (And monkeys are smarter than you think. Pete the Monkey taught himself to do dishes.)

Plus, as the author notes, they would probably have to fire most of their staff and replace them with Apple-store caliber employees. And any employee of that caliber is probably going to go work for Apple or, if they prefer Windows, Sony where knowledgeable associates are preferred.

After all, as the author notes, they currently think they can win a price war with Amazon. A company with massively deep pockets, minimal physical overhead (compared to a retail store chain), and a willingness to go eight years without turning a profit just to conquer a market. Winning a price war against Amazon in the electronics space is not going to happen. Amazon can, and will, win on margin every time if that’s what it takes to be the next major electronics retailer and put Best Buy and its competitors out of business. (And it won’t be hard when it’s customer service reps often give better service over the phone than Best Buy associates in store!)

The other piece that got my attention was that “Best Buy Planned Outages Due to Its Move to the Cloud”. If you believe the hype (and the doctor does not), the whole point of moving to the cloud is so that you don’t have outages. But the most ironic aspect to this story is that Best Buy is cutting Amazon a check for its cloud efforts. They might as well just sell to Amazon.com now and become Amazon’s mobile presence. One little glitch and a propagated purge command and — voila! — no more Best Buy online. (Not that it would make a huge difference anyway. What good is a web store that a growing portion of your market can only order one item from at a time anyway? [See Best Buy Experience? Not at Best Buy! Part II.] the doctor is now ordering more electronics from the local office supply depot because their web site actually works! And if you send them an e-mail, customer support actually responds! On the other hand, it seems that Best Buy’s method of dealing with problems is just to ignore them. It’s not a problem if you don’t recognize it, right?)

The nostalgic part of me would like to say that Best Buy still has a Bright Future, but, in the doctor‘s view, the only chance of Best Buy lighting up the sky is if the same thing happens to it as happened to the Buy More in the season three finale of Chuck. The way things are going, it’s going to be closing 50 stores (CNN Money, March 29, 2012) on a regular basis. And I don’t think China’s going to save it. If Best Buy truly takes off in China, there’ll likely be so many indistinguishable clones in three months that it will just be hastening its demise.