Category Archives: Procurement Damnation

Influential Sustentation 95: Competitors

I know this appears to be an oxymoron, but competitors do sustain you. Without competitors, there is no validation for your product, your market, and even your existence. But this isn’t a blog about Sales, this is a blog about Procurement. Believe it or not, competitors also help to sustain your Procurement practice. And we’ll get to that, but first we need to discuss the damnation that competitors can be.

Competitors are an outright damnation to the whole organization. Marketing makes an announcement, your competitors try to one up. Sales signs a great customer, your competitors try to weasel into the customer’s good graces through the backdoor. Your R&D makes a great discovery, and here comes the corporate espionage. But from a Procurement point of view, they are also damning.

  • They compete for limited supply and drive prices up.
  • They compete for limited talent and drive prices up.
  • They compete for limited expert (technology) resource time.

Ouch! How can they possibly be a sustentation. Well, this is an example of where when the going gets tough, the tough gets going.

Your Procurement can wallow in self-pity every time the competition scoops up a limited supply at a great price before you, steals the talent you want, or gets the top expert at the systems integrator to work on their project first, or you can recognize that anything they can do you can do better. And here’s where you start.

  • Monitor the market constantly, on-line, and in real-time to not only detect the rare occasions when forward auctions get listed (because a competitor went out of business or overbought and has to dump), but to detect events that could impact supply. If a natural disaster wipes out a significant portion of supply, then the market is just going to get tighter and having advance knowledge of the pending crunch can allow you to stock up on inventory early and cut your competitor off, or at least get pre-crunch prices locked in.
  • Invest in and understand the talent market, what each generation wants, and put together comprehensive work-life balance packages that will be more attractive than a competitor who merely promises a slightly above market salary (and nothing else).
  • Make sure to negotiate up-front sufficient access to any resources you will need, guaranteed milestone dates on the integration project, and penalties for non-performance.

There are other things you can do, but if you start here, you will suffer less supply crunches, attract more talent, and get your projects done on time. And this is a great start.

Authoritative Sustentation 63: Board of Directors

As per our authoritative damnation post on the board of directors, they can be your best friend or your worst enemy, but they’ll probably be your ongoing nightmare because their dictates can drive your daily duties even more than the wacky whims of the CEO.

If all the board does is chant “savings, savings, savings”, then guess what the CFO has to chant. That’s right! “Savings, savings, savings.” But this isn’t the only craziness the board can throw your way. They can get razor-focussed on outsourcing. They can decide that the organization should have no FTE obligations and try to make as many jobs as possible contingent labour. Or they could decide the organization has to acquire or merge with someone soon and task you with supply chain analysis of the most likely candidate organizations.

So what do you do? Dance to their tune every time it changes? Well, you have to — but we’re no longer in the age of the folk, ballroom, or line dance, so you should do your best to make sure those aren’t the dances that come your way. How do you do that?

Stop waiting to follow the leader and start planning to lead the leader. What do we mean? Regardless of any lip service the executive or the board may throw towards the press about a desire to do support minority businesses, increase overall sustainability, or focus on innovation, they profit when the company profits, and profit, which they generally associate with higher revenues (which they demand of sales) and lower costs (which they demand of Procurement), is all they really care about.

So if you want to stop looking for illusive, and possibly non-existent, savings, then start focussing on how you can increase profit and come up with value-generation plans that you can sell to the board.

For example, Procurement can add value by:

  • helping Sales sell into new markets
    maybe the problem is high distribution costs, which Procurement can rectify as it’s already sourcing from the market and knows the lowest cost shippers;
  • helping Finance improve working capital
    as it’s understanding of in-depth cost modelling and (strategic sourcing) decision optimization can help it work with finance to create an optimal payment plan model that optimizes early payment discounts, invoice factoring, and supplier interest charges or late fees
  • helping Engineering improve quality and lower costs during NPD
    as a leading Procurement organization has expertise in Supplier Management

And Procurement can bring a plan to do so to the board before the board gives it a plan that would take it back to the Procurement dark ages.

Societal Sustentation 48: Workers’ Rights

Now, as we discussed in our original damnation post, this shouldn’t be a damnation because worker’s rights are a good thing, and, assuming one is ethical, there’s absolutely nothing wrong with giving workers the respect and rights they deserve. The problem is, as we previously stated, is that, in the corporate world, not everyone is ethical. Not only do we have to deal with the fact that 1% of the population are psychopaths, but the fact that the top four professions that attract psychopaths are the people who run the corporate world, namely:

  • CEOs
  • Lawyers
  • Media / Publicists / PR / Marketers
  • Salespeople

The only other profession absolutely necessary for a company of any size to survive is an accountant to keep the boxes and make sure they are in order when the tax man comes knocking. In a nutshell, your company is evil, and the only real question is how evil on the scale from skim a bit off the top to sell guns to a known guerrilla group that will use them to commit mass genocide.

And if your company is just a little bit evil, then you know for sure that somewhere, lurking in the shadows of your supply chain, is an organization that is likely so evil that it is using child labour, slave labour, and mistreating both in the process. One has to remember that not all countries have good workers’ rights laws, and this is true of developing countries in particular, and anywhere the men with guns and money have more power than the elected officials, it doesn’t always matter what laws are on the books.

All that matters is that, with the introduction of various anti-human trafficking acts around the world, such as the California Transparency in Supply Chains Act and the UK Modern Slavery Act, if your supply chain uses slave labour, your company is on the hook. Thus, as a Procurement professional, you have to be sure your supplier is compliant, and that they make their suppliers compliant.

And forcing your suppliers to sign a paper that they will comply with your fair labour and fair wage policies isn’t enough, especially if they are outsourcing the work or using multiple locations (unbeknownst to you who only sees the primary “show” location which, just like a model home, isn’t the real thing).

First of all, you investigate them through third parties. Contact companies like Ecovadis and Sedex Global that collect and collate third party and NGO data on suppliers to see a history of their sustainability and ethical practices. Make sure there have been recent audits by trustworthy third party organizations that advocate worker’s rights and that those reviews have passed, contacting additional organizations if you need to. Force the supplier to sign a contract stating that they are fully aware of the regulations you must conform to with respect to worker’s rights and that not only will they follow and adhere to all regulations for their workforce, but that they will only work with suppliers who accept the same. Moreover, they accept full legal liability should they fail to do so and are responsible for all costs borne by your organization should workers’ rights violations occur, be it fines from a government organization, legal defense costs, or reimbursement for goods seized. (And make sure the contract is legally binding in their country and that you can enforce it in their court of law.)

Secondly, monitor on an ongoing basis. Maintain a subscription to at least one organization that regularly reviews, and collates ethical data on, the supplier in question and monitor for any indications that not all may be above-board.

Third, include a mandatory provision that the contract may be immediately terminated for breaches of mandatory worker and human rights by them or any supplier in their supply chain. And don’t be afraid to follow through and shift demand to the secondary supplier the minute a breach is confirmed.

It’s probably not enough, but it’s a start.

Organizational Sustentation 58: Logistics

While Logistics should be Procurement’s best friend, as per our original damnation post, Logistics can be one of Procurement’s worst enemies. Remember, Procurement has to negotiate the deal with the best overall value, but Logistics is generally responsible for minimizing transportation cost. They may decide to change routes, which lengthens delivery time or puts the cargo at increased risk of theft, select a new carrier, with a lower quality of service and on-time delivery record, or stop using a carrier that will only deliver the organization the promised discount when it gets a sufficient volume of business.

And if Procurement can’t convince the C-Suite that Logistics should be a sub-department of Procurement, what is Procurement to do?

First of all, it has to make friends with Logistics and make sure that Logistics understands that it’s not there to step on Logistics’ toes but simply make the best decisions for the organization overall.

Secondly, it has to accept that Logistics might be better at identifying better carriers and negotiating lower rates and leave it to logistics to oversee the logistics part of any tender and make sure that each invited supplier submits their absolute best bid.

Thirdly, it has to take the time to explain that shifting transportation from the winning supplier to another supplier at a later time not only risks increasing costs (though missed rebates, stock-outs from delivery delays, etc.) but tarnishes the organization’s reputation, which means, in the long run, suppliers will not be as incented to provide their absolute best bid as they know that even if they are awarded the volume, they might get it taken away from them three months down the road. Then it has to get Logistics to agree that the winner, based upon the scoring formula or award methodology that Logistics was aware of (and agreed to) as a stakeholder, will be the winner for the length of the contract (unless the carrier fails to honour its commitment, which allows the organization to terminate the contract).

Fourthly, at review time, it has to work with Logistics to create the reports that demonstrate that Logistics’ decisions, and efforts, have not only decreased overall organizational costs but increased organizational value (through cost, and loss, avoidance).

Most organizational departments want to do the right thing, and Logistics is no exception, so if you work with them (and teach them best practices to enable them to do even better), instead of trying to work around them, you’ll have more success and the damnation they can cause might be minimized. (Or they might secretly hate your guts because they feel you should report to them and stab you in the back at first opportunity. You are in Procurement Hell, after all.)

Geopolitical Sustentation 33: Taxation

As we stated in our original damnation post, taxation may be the only certainty left (especially if the futurists who think that cybernetics will eventually allow us to preserve our mind and live forever are right). Even if your current government(al system) fails, a new order will rise up and, like every order that has come before, in some way, shape, or form, it will tax you.

And, as clearly pointed out in our original post, taxation makes it nearly impossible to answer the ultimate sourcing question: what is the lowest cost of ownership and the best overall total value. When we source according to total value management, we want to maximize the value to cost ratio — but this can only be done when we understand the cost.

And when so much of the cost is taxes — sales taxes, export taxes, import taxes, special surtaxes, state or municipal taxes on top of federal sales taxes, and so on — and when all of these taxes can change almost overnight, how do you answer the ultimate sourcing question? For example, some countries in South America change their import tariff codes twice a week. Taxes generally change when consortiums or labour groups cry foul when a market is flooded with cheaper goods from a foreign market or “buy at home” lobbyists get upset that the best products are being exported and stir up a fuss.

When a 10% duty today can be a 30% duty tomorrow, how do you build accurate cost models that allow you to create three year plans and cut three year contracts? The answer is, you don’t. So what do you do?

Gather a lot of market intelligence and analyze it. Taxes for most of the products or services you are buying are usually going to fall into one of three categories:

  • stable
  • trending, with significance confidence as to approximate future prices, up or down
  • changing unpredictably

If the tax rate is stable, then the organization can take confidence that it will most likely be stable for the life of the contract and put a tax increase in the low risk category and, more or less, ignore it unless an event occurs or information is obtained that something might change.

If the tax rate is trending up or down, then you can do what-if analysis at different tax rates defined as now, 6 months, 1 year, 2 years, contract length to see at what point the lowest cost or highest value buy tips to another market and if that will happen in the first half of a contract period, work with a potential supplier in a market with a stable or lower tax rate to see if there are other cost reductions that would make the other supplier a lower cost over the expected contract length.

If the tax rate is unpredictable, and could increase significantly to a point where the buy would cost considerably more than the next lowest cost buy or cause considerable financial harm to the organization, the organization should consider if there are sources of supply that would avoid the tax rate entirely. If not, then the organization has to figure out some sort of hedging strategy that would allow it to profit financially from the tax increase to cover the increased costs of supply. And that should be left to the financial pros — but it’s good to know when they should be trying to work their voodoo and when they shouldn’t.