Category Archives: Procurement Innovation

Dick Locke On The Yin-Yang of the Business Universe

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Editor’s Note: This is Dick Locke’s first post as a regular contributor on Sourcing Innovation. (His previous guest posts are still archived.) Dick, who has delivered seminars to over 100 companies across the globe, is a seasoned expert on International Sourcing and Procurement who wrote the book.

Steven Guth proposes that “Procurement pros should be in sales“. He
implies, but never quite says, that procurement pros should have sales
skills. That’s right on. I’ve been there, done that and even got a
tee-shirt. Sales skills are essential, especially if you are in a
corporate central group that is outside of any profit centers.

Here’s the situation. I won’t mention the company name, but I hope
people will figure out who it is. They had a Corporate Procurement group
of which I was a part. I received an assignment to start up International
Purchasing Offices (IPOs) in Asia back in the mid 1980s. Funding those
offices quickly became an issue. It had been an issue all along for the
Corporate Procurement Group, with big annual negotiations and
discussions about how much each profit center would pay to fund the
corporate group. Now we wanted to add more people and expense for an
unproven new function. They might as well have painted a big target on
our backs.

The funding solution we came up with was that we had to generate our own funding and using us had to be voluntary. That meant we had to charge our users a fee and that we were in competition with two other groups. One was reps and subsidiaries of (largely) Japanese and European
companies who had set up a sales subsidiary structure in the US. The
second group was our own company’s buyers and purchasing managers in profit centers who felt they could source, purchase from, and manage
overseas suppliers themselves.

We realized we had to not only charge less than what sales subsidiaries
charged but also less than our profit centers felt it would cost to do
it themselves. We came up with essentially a sliding scale of markups on
purchase orders. Small users might pay as much as 5%. Large users might
pay less than half a percent.

I’m glad to say it worked. The operation was handling more than a
half-billion dollars per year in orders when I left. That’s not to say
there weren’t, err, “learning experiences.” One of our big issues is
that we had selected employees for their purchasing and engineering
skills, and not for their marketing skills. It required a tune up for
several of our people, not excluding me. It took about three years to
become fully self funded. If we had avoided some mistakes we could have
shaved about a year off that time.

It had some very pleasant side effects. We essentially were running a
small business within a big corporation. Our people got lean,
entrepreneurial and very customer-oriented. We quickly developed an
antipathy to bureaucracy. We became really efficient. It also took us out
of the annual budget battle and the annual exercise to calculate what we
were saving. (I refer to that as “lies, damn lies, and purchasing
statisitics.”) We merely had to state that we received x number of
purchase orders per day from people who didn’t have to use us and were
paying us for our services. That kept management happy nearly all the time.

Where is this model applicable? In companies where there is a lot of
independence on the part of profit centers, a center-led purchasing
effort, issues with funding the central department and finally where an
internal department can develop and market an advantage over their
competitors. Check it out, it may be right for you.

Dick Locke, Global Procurement Group and Global Supply Training.

Welcome to Sourcing Innovation, Dick.

Procurement Pros and Sales Pros: The Yin-Yang of the Business Universe

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Today’s guest post is from Stephen R. Guth of The Vendor Management Office Blog and it originally ran on that blog on Saturday. It was so extraordinarily well written that I just had to ask him to re-run it on this forum, even though he did call Jerry Seinfeld very talented.

Let me start off with a bold, controversial statement…  Procurement pros should be in sales…  Procurement pros / Sales pros are natural dualities, the yin and yang, the Jedis and the Dark Side, oil and water, day and night (you get my drift)–but that doesn’t mean that one can’t learn from the other.  To that end, sales pros spend a significant amount of time understanding the nature of procurement and how to work around procurement pros.  For example, sales pros are specifically trained on how to do end runs around procurement to schmooze who the sales pros think are the decision-makers.  With that being the case, why not do the same with procurement pros?  Meaning, why don’t procurement pros dabble in the black art of sales?

We all know that relationships matter, and that’s the bread and butter of sales pros.  A seasoned sales pro will establish a relationship with a customer and manipulate that relationship to the nth degree to maximize their sales revenue and commissions.  In the words of the very talented Jerry Seinfeld, “Not that there’s anything wrong with that.”  Leveraging relationships is a crucial part of business…  Our job as procurement pros is to help level the playing field between customer and sales pro.

So, ask yourself, what are you doing as a procurement pro to leverage relationships with your internal customers?

Your likely response to that question is exactly my point, and why procurement pros should be in “sales.”

Just like sales pros, my staff have quotas in their performance plans, but instead of revenue quotas, my staff have savings quotas.  They are measured and compensated on those quotas.  If my staff don’t hit those quotas, they get zinged on their merit increase.  They exceed those quotas, and they get more $$$.

In addition to commissions, many companies use special incentives to motivate and compensate their sales pros (called “SPIFs” or “Sales Performance Incentive Funds”).  SPIFs can be cash or other incentives like travel or gifts.  Well, I do the same thing.  I have “Special Procurement Incentive Funds.”  If one of my staff do extraordinarily well on a big deal, they get an on-the-spot cash award, free time off, or a work from home day.  Over the years, I’ve given thousands of SPIF dollars away and lots of time off.

Sales pros have the job of determining your customer’s “needs,” so sales pros will meet with your customers to get them to divulge this information.  Yep, my staff do the same thing.  Every year, at the beginning of the year, my staff are required to meet with budget center managers who have made large capital and expense requests.  The purpose of the meeting is to understand what the customers have in their pipelines for the year.  In these discussions, my staff reiterate how we can help the customer through the procurement process, make it easy for them, and, most importantly, how we can save them budget dollars so that they have some extra cushion in their budgets to help pay for other pet projects that may not have otherwise been funded.

Sales plans are a critical work product for sales pros.  Sales plans keep track of all deals in progress and potential deals.  The sales plans help sales pros keep their eyes on the ball and keep them on top of the deals.  You guessed it, my staff have the same thing.  They maintain “RFx Spend Plans,” which document all of the projects where they might need to be engaged to conduct a procurement.  We discuss these spend plans at least once a month to ensure that we’re engaged and work is proceeding.  As we discover new deals, they’re added to the spend plan.

Relationships, relationships, relationships are the mantra of sales pros.  Procurement pros should have the same mantra.  Sales pros routinely have lunch, etc. with customers to develop and sustain the relationship.  Procurement pros should have the same resources to develop those relationships.  At this point in this article, you won’t be surprised to find out that my staff do the same thing.  In my staff’s performance plans, they have a requirement to meet with at least one major customer per quarter over lunch (my budget pays for it) to help manage the relationship and build trust / credibility.  My staff are strongly encouraged to personally know their customers, and if they become true friends, then that’s healthy.

Sales pros of larger companies usually have an annual customer appreciation event (cloaked as a user conference so as to not appear as too much of a boondoggle) where the biggest customers get an all-expenses-paid trip.  Well, I certainly can’t afford to do that, but my staff do something similar.  Every year, we have a customer appreciation event where our customers receive personalized, hand-written notes thanking them for their business over the past year and inviting them to our event.  At the door to the event, the guests are personally greated by my staff and given a raffle ticket with a small party favor (which includes a pen with our department’s logo.)  At the event, we have finger food and non-alcoholic beverages (we go to Costco)–and my staff mingle with their customers.  I do a short presentation of our accomplishments over the year and then we present those customers who worked with us on larger deals (where we saved big $$$) plexiglass awards.  Finally, at the end, we raffle off prizes to our customers (some really good stuff that we get from our vendors, like laptops and digital cameras).  Our customers LOVE this event and the event drives them to want to do business with our department (because it’s an invitation-only event–if you’re not a customer with an invite, you’re not getting in).

Sales pros wouldn’t be very well equipped if they didn’t go through extensive training.  Some companies put their staff through months of training before the staff are permitted to hit the streets.  That’s one area where I think I’ve fallen down when it comes to my staff.  Just like sales pros understand what procurement pros do, the opposite should be true.  For next year’s budget, I’m planning to find a good basic sales training course for my staff and have them go through the training.  The more my staff can get into the heads of sales pros, the better.

Thanks, Stephen.

Ensuring Executive Support in Your Quest for Purchasing Fire

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Last year, over on the e-Sourcing Wiki, I brought you The Quest for Purchasing Fire, a twelve step guide to selling sourcing and procurement initiatives internally in your organization. Last month, the SSON published the “top ten tips for ensuring buy-in from the top”, which complements the wiki-paper nicely. Because you have to:

  • Have a Compelling Business Case
    Anything less than a complete, finely detailed, business case with backed-up ROI calculations and you’re just asking for rejection from an executive with too many time requests and a need to kill some as quickly as possible.
  • Create a Sense of Urgency
    If you can’t demonstrate why the organization can’t wait to take advantage of your cost saving initiative, it will likely get put on the back burner
  • Understand Your Organization’s Internal Processes
    Go through the channels and make sure not to offend anyone who could cause trouble if not included.
  • Be Open and Honest About Endeavors
    Be honest about past mistakes and any shortcomings you may have and how you plan to correct them with this initiative.
  • Keep Company Staff in the Project
    Not only do many organizations still distrust consultants, but getting company staff involved early is key to obtaining buy in.
  • Maintain a Tight Focus
    You’re not trying to save the world … so don’t tackle everything at once.
  • Be Bold Where it Counts
    Even though you’re not trying to save the world, be sure to have a plan that aims high with respect to the problems you are tackling.
  • Give Examples from Beyond the Organization
    Demonstrating how similar projects have helped your competitors will go a long way towards alleviating fears of the unknown.
  • Demonstrate Your Risk Awareness
    Every project involves risk … be sure to address all of the likely, and unlikely risks to let management know that you’re aware of the risks and actively taking steps to mitigate them.
  • Highlight the Compliance Benefits
    As the article says, pull up your SOX.

Purchasing’s Best Practice Tips for Buying in a Recession

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Purchasing recently ran an article on “best practices for buying in a recession” that contained five tips for buying in these troubled times. While most of the tips were pretty basic, sometimes the basics are best, and they are worth repeating.

The tips were:

  • Put the pressure on business stakeholders
    Put the onus for achieving defined savings goals on the business unit executives (with backing from senior management).
  • Give your suppliers a check-up
    Make sure your suppliers are healthy and not on the verge of bankruptcy. Do this by insuring your suppliers are paying their suppliers on time, aren’t burning through too much cash too fast, and have the resources to weather the storm.
  • Help key suppliers
    Start by paying promptly. Delaying payments for ridiculously long timeframes will just cost you more in the long run (since suppliers will likely not be able to get financing as cheaply as you and, at contract renewal time, will have to up their prices to cover the loss).
  • Don’t forget the fundamentals
    Consolidate buying, extend contracts with preferred suppliers, and continually monitor your suppliers’ health.
  • Get Lean
    Control inventory, control commodity costs, and minimize waste.

Best-In-Class Procurement is About Cost Avoidance, Not Savings!

In a recent post over on his Purchasing Certification Blog, Charles asked “why doesn’t Procurement save as much on non-traditional categories” in response to his review of Aberdeen’s latest “CPO Agenda” research report which found that Best-in-Class Procurement achieves 10% savings on managed spend while laggard Procurement achieves savings of 16% on managed spend. His assumption was that Procurement didn’t do as well on non-traditional categories and that dragged the average down.

As far as I’m concerned, the situation is the exact opposite. If the Procurement department is truly a Best-in-Class Procurement department, each time they negotiate a contract they get the best deal possible. Once you’ve negotiated the best deal possible, there’s no more “Savings” to be had until either the indexed market price for the core commodities, components, or labor that makes up the product or service cost decreases or a disruptive innovation comes along that allows the product or service to be produced more cost effectively. Since that doesn’t happen every day, or even every year (as commodity and labor costs tend to increase and production efficiencies quickly reach a ceiling on popular products or services), if Procurement did it’s job right, there are no “Savings” to be found on the majority of categories sourced in the last year.

The fundamental truth — which is hard to see with the recent myopic focus on “Savings” — is that there is no such thing as “Savings” in a perfect Procurement organization. If Procurement did its job perfectly, it negotiated the absolute best deal. This would mean that there are no “Savings” to be had because, if there were, that would mean that Procurement did not do its job perfectly.

A Best-in-Class Procurement organization is all about Cost Avoidance. After all, since most products and services increase in cost over time, a great Procurement department finds a way to contain, and even eliminate, cost increases even when raw material costs go up 10% and labor costs go up 5%. They work with the supplier to find ways to improve supplier efficiencies, or they work with sales to find ways to increase volumes, so that the supplier can commit to the same price and still maintain a reasonable margin even if its costs increase 5% to 10%. And then, if prices happen to drop for a category that comes up for renewal, they renegotiate the renewal to represent the effective cost decrease and never pay a penny above the best price that can be achieved.

Using this definition, and this logic, this tells me that a Best-in-Class company should see diminished “Savings” year after year as they get better and better at getting the best deal each and every time they tackle a category, leaving the only “Savings” opportunities to be those opportunities where product costs (either due to commodity price or labor price decreases or production efficiency increases) have decreased since the last time a contract was cut. And this is much better than finding “Savings” because it means they didn’t waste capital in the first place, which they left free for the business to fund operations and growth!

Remember, even Wal-Mart, despite the popular perception, cannot roll-back prices forever, especially in categories where commodity prices rise day after day! (Heck, sometimes they even roll-up by 50%! Case in point, last time I was there I was going to pick up “our” brand of coffee because they advertised, in their flyer from the previous month, that it was 4.99 everyday, which is a price you can only get in the grocery stores on sale. Well, I’m there, and I go to get some on my way out, and it’s 7.57 … a 51% increase.) At some point, until a disruptive innovation comes along, a Best-in-Class Procurement department is going to get the best deal and there will be no more “Savings”. The better the department, the sooner they hit the floor. The sooner they hit the floor, the sooner they maximize “cost avoidance”, which is what Procurement should be all about.

In other words, I think the numbers are just fine and that Mr. Bartolini did a good job of uncovering numbers that reflect the actual reality of how a good Procurement department really performs!