Michael Soon Lee posted an article over on uPublish.info on Ten Negotiating Mistakes that Cost You Thousands that deserves to be highlighted. Although it made heavy use of martial arts metaphors, all of the points are simple, important, and easy to understand on their own and we can easily work them into a sourcing framework.
1. Being Afraid To Bargain
Do you want to pay full price? Or do you want a deal? It’s up to you, but if you don’t bargain, you will pay full price.
2. Forgetting that Everything is Negotiable
Who says it takes seven days advance notice to ship an order? Why can’t it be five? Who says everything not on contract has to be at catalogue prices? If you’re buying $10K worth of an item – that’s worth a discount.
3. Believing It’s Not Worth Haggling Over Small Items
Let’s say you are buying for a large enterprise that buys 1M worth of Laser Toner annually and $250K worth of paper. Don’t just settle for a 10% discount on the Toner – a 5% discount on the paper is equal to $12,500. That could be your bonus!
4. Thinking About Ourselves First
Michael quotes the ancient Chinese saying “To defeat an opponent you must first think like an opponent.” Master bargainers are always thinking about what’s in it for the other party. There has to be a clear benefit to the other party for the other party to negotiate seriously. Before they give you a 20% discount, they’re going to want a significant order or commitment. A master bargainer figures out what the minimum commitment would need to be for an offer to make sense to the other party, and is prepared to ultimately make that offer.
5. Making The First Offer
As a buyer, once you make an offer, you can only go up. Try to get the seller to make the first offer because, as per the rules of the game, if it’s a buyer’s market, the price can only go down from their.
6. Being Too Nice
If you must make a first offer, make it low. And don’t be afraid of no. Remember, the negotiation isn’t over.
7. Being Too Eager
Take your time and don’t add undue pressure to the situation. The last thing you want to hear after a first offer is “okay”. That means you offered too much. Remember, in some cultures, negotiation’s do not start until after a mutual level of trust has been built between the parties – which might take two or three weeks of casual conversation and joint activities.
8. Not Doing Your Homework
Be sure to know what the current demand is, what the average profit margin in the industry is, what competitors are quoting, and what leverage you have. Otherwise, you’re not going to get the best deal.
9. Not Playing To Win
It’s true that you’re not going to win if you don’t think about the other party and are not willing to make the offer worthwhile for them, but that doesn’t mean you play to tie. Your goal is always to get the best deal you can while giving up as little as possible. After all, if the other party agrees to an offer, then they must think it’s fair and benefits them.
10. Missing Opportunities
Remember that everything’s negotiable and don’t make a single purchase off-contract without asking yourself “is this the best deal I can get?”.
A great sourcing department is led by a great sourcing leader – but what does a sourcing leader do that sets her apart from everyone else? Simply put, to earn her place at the top, she astricts. More specifically, great sourcing leaders analyze, strategize, believe in team recognition, innovate, focus on compliance, use technology, and always have an eye out for sustainability. More specifically:
Analysis
A sourcing leader understands the importance of analysis and carefully analyzes the situation before making important decisions, putting something up for bid, or signing a contract. She has a data-centric approach, based on spend analysis, that she uses to cut through the nonsense and find the real opportunities.
Strategy
A great sourcing leader recognizes that the truly successful don’t get ahead by flying by the seat of one’s pants. She also recognizes that no one gets ahead by just focussing on day-to-day tactical operations. A great sourcing leader has a strategy. One that is built on a solid foundation, based on detailed and thoughtful analysis.
Team Recognition
A great sourcing leader is a team builder that believes in regularly recognizing and rewarding her team for her accomplishments. This recognition comes in the form of public praise when they succeed, bonuses when they exceed savings targets, and a salary that’s at least at the high end of market average.
Innovation
A great sourcing leader is focussed on constant innovation and improvement that enables her, and her organization, to not only adapt to the market, but to lead it where they want it to go. A great sourcing leader is constantly on the lookout for new innovations in technology, business process, and relationship management that she can use to improve the operations of not only her unit, but the enterprise and supply chain as a whole.
Compliance
A great sourcing leader recognizes that compliance is not just the multi-faceted buzzword of the day, but the key to realizable savings, low risk operations, and positive press.
Technology
A great sourcing leader is always on the lookout for new technologies that can help her team get a better handle on the supply chain as a whole as well as for new best-of-breed technologies that can improve performance in key activities with the potential to generate significant value or advance the overall organizational strategy.
Sustainability
A great sourcing leader knows that sustainability is more than just a buzzword, it’s the key to successful business year after year. That’s why she makes sure that each strategy employed is sustainable, that each supplier used is responsible, and that environmental and social responsibility is always considered.
For more information on The Seven Scruples of a Sourcing Sensei, I strongly encourage you to check out the new Sourcing Leadership wiki-paper over on the e-Sourcing Wiki. Besides diving deeper into each of the actions that a sourcing leader does differently, it also discusses The Seven Savors of a Sourcing Sensei, or the seven key fundamental skill sets that set sourcing leaders apart from others.
Industry week previously ran a good article by Chris Ferrell of Tompkins Associates on Best Practices in Freight Bidding that had a number of good suggesstions. The article offered up the following 12 best practices:
Obtain commitment from executive management.
This is always a good idea, no matter what project you are undertaking.
Benchmark current freight costs. Also, separate out fuel surcharges from basic freight spend.
This is critical. After all, how can you do better if you don’t even know how well you’re doing now?
Include new transportation providers in the bid process and allow carriers to bid on different markets.
This should be obvious, but I’m afraid it isn’t. If you always have the same carriers bidding on the same lanes, they’re going to figure this out eventually and keep their rates in sync to maximize their profit, which is akin to minimizing your savings.
Standardize bid formats to ensure apples-to-apples comparisons.
This should be a no-brainer.
Have a minimum of one year’s worth of clean historical data.
Not sure I understand this one. You should have good projections of what your freight requirements are going to be, by market and lane, for the next year and these should be based off of solid demand projections that use at least a year’s worth of good, clean, data and preferably two or three years!
Look for opportunities to decrease cost by changing transportation modes.
Never assume your current transportation network and strategy is optimal. For instance, just because ocean looks cheaper, doesn’t mean it is. Consider laptops. Their value depreciates weekly. If you can make them light enough, and pack them tight enough, air freight will be more profitable.
Use a multi-round bid process.
You should definitely use a multi-round RFX, to qualify potential award recipients, but not necessarily a multi-round bid. Depending on the market conditions, the number of potential carriers, your needs, and how clearly you can specify those needs up front, a well-defined auction that takes into account all costs and factors, appropriately weighted, might be your best bet.
Encourage carriers to take a more holistic look at your freight.
Good carriers will know their networks and how to optimize them much better than you will know yours. It’s their job. They might be able to come up with alternative bundles, modes, or schedules that could save you a significant amount of money.
Leverage volume through a relatively small group of core carriers.
This is a basic tenet of sourcing, period. Just make sure that you split demand through a small group, and not a single carrier – because this would introduce a significant risk into your supply chain.
Bid freight on a regular, predetermined basis.
Like any other bid, it shouldn’t be done ad-hoc. It should be by major sourcing project or at regular intervals.
Put as much effort into implementation plans as you do the bid.
Remember that negotiated savings are just that – negotiated savings. To realize them, you need to be ready to do what it takes.
Track carrier performance against commitments and utilize feedback loops.
You should not only track performance, but verify invoices using m-way matching and analyze historical performance using spend analysis to find overpayments and secure the credits or refunds before the contract expires.
Optimization can not only be used to reduce cost, but it can also be used to reduce risk. In this post I’m going to overview how you can effectively support seven common risk mitigation strategies in a proper strategic sourcing decision optimization solution (including the solution offered by Iasta, if you’re wondering).
Capacity Assurance
You can create exclusion constraints that restrict supply to suppliers with a minimum amount of capacity to insure that the suppliers can handle the award they receive. Furthermore, you can create qualitative constraints that restrict award to suppliers with spare capacity to insure you can cope with unexpected demand surges. Although forecasting significantly more demand than you actually have is bad, especially if you stockpile inventory and don’t dynamically order and pull as needed, forecasting significantly less demand and not being able to meet that demand is much worse – because then your brand takes a big hit in the public market, which is much harder to recover from.
Compliance
These days, there are a dizzying array of regulations that may need to be complied with such as REACH, RoHS, Part 11, ITAR, and SOX (etc., etc., etc.), and failure to comply with any one of these regulations can result in huge fines, delayed or stopped shipments, or confiscation and destruction of inventory. Thus, it’s key that you insure that each product you source meets the regulations that you have to meet. Optimization supports this by allowing you to exclude suppliers that don’t meet any of the requirements, and limit supply to suppliers that only meet the standards of some of the countries you ship product to.
Distribution Alternatives
A strategic sourcing decision optimization solution that supports freight lanes can support multiple carriers, allowing you to select the lowest carrier, and lowest cost shipping lane per carrier, between a supplier warehouse and a buyer distribution center. (If the product doesn’t support multiple shipping lanes per carrier for each warehouse-distribution_center pair, you can always create a second instance of the carrier and associate that with alternate routes. You can then account for total volume discounts offered by the carrier by defining the discounts on all instances of the carrier.)
Dual Sourcing
From a risk mitigation perspective, sole sourcing is a bad idea. A really, really bad idea. With decision optimization, you can use allocation constraints to force an award to at least two carriers, and even specify an approximate award breakdown, such as a 20-30-50% split between the three lowest cost carriers.
Incentives / Performance Based Contracts
Let’s face it, some suppliers will perform much better if they get a bonus for good performance. By using negative discounts, you can determine how much a given award would cost you if the supplier performed exemplary under an incentive structure, and by using penalties, you can determine how much an award would cost if the supplier performed poorly (providing you also factored in an adjustment for the higher cost of processing more returns).
Lead Time Reduction
You can use a qualitative constraint to capture the average amount of delivery time for each carrier on each lane and limit awards to a given distribution center, set of distribution centers, or all distribution centers to product from supplier warehouses that can reach the destination(s) in a maximum (average) timeframe. Thus, if you’re selling a product for which demand can fluctuate significantly, you can make sure you can always restock within a given timeframe as soon as the sales data starts to spike unexpectedly.
Price Hedging
Strategic sourcing decision optimization can help you figure out what contract length might be optimal for a given commodity. For example, if your predictions are that oil is going to keep rising for the next year, with a peak price that’s $20 per barrel above what you’re paying now, and your main supplier thinks that it’s going to top out at a peak price that’s only $10 per barrel more than what you’re paying now, and is willing to give you all the oil you need at only $5 more per barrel than the current market price, you can run scenarios for a 6 month demand window and a 1 year demand window at different price points. Then, you can see that if cost keeps increasing at a rate that is only two thirds of your prediction, it’s probably better to hedge for a full year.
And, of course, proper strategic sourcing decision optimization also gives you:
Total Value Management
Since it allows you to capture all your costs – unit, freight, utilization, and impact costs (by way of adjustments) – as well as any discounts available to you from a supplier for the purchase of certain products in sufficient quantities. This means that you’ll always get the lowest total cost of ownership with respect to your business constraints.
In our last post, I reminded you about Strategic Service Management and the complexities thereof, as well as about Strategic Service Parts Management and Strategic Workforce Management in my efforts to give you an answer to when do I source that?. Now that you know when you should be considering strategic services management and when it enters into your sourcing projects, let’s move on to the question that first comes to mind, how do I source that?.
The first thing you do is separate out the different types of services that are available into those you can do effectively in house and those you cannot. Then, for those services you can manage in-house, you figure out the average cost of offering those services, as well as the average resolution time. The reason for this is that even though you can do the work in house, if it’s not your core competency or core offering, if your provider can do it cheaper and better, you should outsource it.
Then you insure that your supplier not only breaks out it’s value added services from its core product offerings, but breaks down it’s services into as many discrete offerings and quotes each service offering separately. It’s true that you will get a better deal if you buy service packages, but you first need to figure out what the right service packages are for you and, more importantly, whether or not the supplier is capable of offering at least the services you absolutely need at the levels you need them.
For example, let’s say that you are a Technology Consulting and Services Firm that supports big clients with their technology needs, be it desktop needs or data center needs, including outsourced data center management. Let’s also say that some of your customers have mission critical services that need to be available 24/7 and that your technicians are certified on HAL and IQ but not on Moon, and that you only have enough HAL technicians on staff to confidently service the percentage of your customer base with platinum SLAs (Service Level Agreements) in house. This says that if you set up a customer’s new data center on HAL technology, you probably won’t need many services, but that you will take them if they are more economical than maintaining those services in house (which might require overtime or adding staff), that if you go with IQ, you will probably need some of their services and support, and that if you go with Moon, you will probably need a lot of their services. The following table breaks down what services you might need from each vendor:
Service
Moon
IQ
HAL
24/7 support line
X
1 day on site service call
X
X
guaranteed 4 hour part replacement
X
X
X
Now that you know what services you can do in house, you need a cost. Let’s define the costs as average cost per year, based on your internal metrics. Now our table might look like:
Service
Moon
IQ
HAL
(A) 24/7 support line
X
$50K
$40K
(B) 1 day on site service call
X
X
$160K
(C) guaranteed 4 hour part replacement
X
X
X
Now that you know what you will need, and might need, from each supplier, you can ask for quotes on what you will need by individual service and service package, by each vendor, and do an informed total cost of ownership analysis on each bid and select the right product and service package for your business.
In this simplified example, you’d ask Moon to quote on each service individually and as a package; you’d ask IQ to quote on each service individually, a package for the two services you need, and a package for all three services; and you might ask HAL to quote on each service individually, a package for the service call and 4 hour part replacement, and a package for everything. After this, you would have something along the lines of the following:
Service
Moon
IQ
HAL
(A) 24/7 support line
$40K
$60K
$50K
(B) 1 day on site service call
$175K
$125K
$150K
(C) guaranteed 4 hour part replacement
$35K
$25K
$30K
(B) and (C)
$140K
$160K
All 3 services
$225K
$180K
$210K
You’d then compare these total costs to hybrid costs where you kept some services in house, which would give you:
Service
Moon
IQ
IQ w/ Int. Support
HAL
HAL w/ Int. Support
HAL w/ Int. Support & Services
(A) 24/7 support line
$40K
$60K
$50K
$50K
$40K
$40K
(B) 1 day on site service call
$175K
$125K
$125K
$150K
$150K
$160K
(C) guaranteed 4 hour part replacement
$35K
$25K
$25K
$30K
$30K
$30K
(B) and (C)
$140K
—
$160K
—
—
All 3 services
$225K
$180K
$200K
$210K
$220K
$230K
And finally combine these costs with the hardware costs, which might be 240K for Moon, 270K for IQ, and 250K for HAL to get a total acquisition cost:
Service
Moon
IQ
IQ w/ Int. Support
HAL
HAL w/ Int. Support
HAL w/ Int. Support & Services
(A) 24/7 support line
$40K
$60K
$50K
$50K
$40K
$40K
(B) 1 day on site service call
$175K
$125K
$125K
$150K
$150K
$160K
(C) guaranteed 4 hour part replacement
$35K
$25K
$25K
$30K
$30K
$30K
(B) and (C)
$140K
—
$160K
—
—
All 3 services
$225K
$180K
$200K
$210K
$220K
$230K
Hardware Costs
$240K
$270K
$270K
$250K
$250K
$250K
Total Hardware & Service Cost
$465K
$450K
$470K
$460K
$470K
$480K
And conclude that, if all things were equal, the best deal would be to single source all hardware and services from IQ. However, we are talking hardware, where the total cost of operation usually exceeds the cost of acquisition when you add up all the energy requirements to run a server for a year AND keep it cool, so you’d also have to add an adjustment cost for expected energy consumption to find the very best deal, but you get the point.
I should also note that, as you saw from even this simple example, this is calculation heavy, error-prone if done by hand, and not spreadsheet friendly. That’s why you’d use strategic sourcing decision optimization software, such as Iasta’s Smart Optimization software, to do this analysis, as you could define, for each supplier, which services you’d need fro that supplier if the supplier was selected (because you can’t do them in house), and which services could be done in house. You can also define the cost of each service individually and then define discounts for different packages offered by the vendor. And building in cost adjustments for the differences in energy consumption is a snap.
This two part post originally appeared last summer, but I thought would be good to review, as we just saw a Fortune 50 client auction, with 74% reduction in strategic IT services, last week – David Bush.
To answer the when question, you start by looking at the products you are sourcing and asking the following questions:
How strategic or mission critical are they?
Are they for us or an end-customer?
Are they simple or complex?
What expertise do we have with respect to their maintenance and repair?
What is our capacity?
How cost-effective is it for us to service these products?
If you were to answer:
Not strategic or mission critical.
Internal use only.
They’re standard products available from half a dozen vendors.
It’s more cost efficient just to replace them when they wear out.
We have enough support staff to handle replacement when necessary.
We need the office manager for other tasks anyway, so there’s no real cost.
… as you might if we were talking about off-the-shelf laptops, then you would not need strategic services. But if you were to answer:
If it fails, a customer’s production line goes down.
They are for our end customer.
It is very complex electronics.
We have two technicians who understand the products, and that’s it.
Low (capacity). Our technicians spend most of their time doing initial installations and quality assurance testing.
Not very (cost effective). Our technicians are at the home office and most of our customers are in different cities.
… as you would if it was a custom-made control board for your custom-made machinery that ran part of a customer’s production line, then you would definitely need strategic services. But if you were to answer:
They are strategic assets, and they would temporarily prevent the delivery of certain services if they go down, but they are not mission critical.
They are for our internal use.
They are moderately complex.
At least half-a-dozen of our technicians can repair them.
Our technicians have system maintenance as their primary jobs and with typical failure rates, we have the capacity to service these products ourselves.
Our costs for service are industry average.
…, as you would if we were talking about servers, SANs, and rack components in your data center, you probably wouldn’t need the vendor’s technicians, but you would need quick replacement of parts when they failed, as some of your internal, and external, services, as well as service levels, would be affected. In this case, you would need some strategic services, but not all of the strategic services the vendor was offering you.
Only once you figure out what you need with respect to strategic services management, you know the answer to when do I source this, which is when I figure out what I need, and only what I need, and only then can you begin to address the how do I source this question, which is the subject of part II.
A study by McKinsey & Company and the Supply Management Institute found that high performing firms have high performing purchasing departments, that what matters most is the people in the purchasing department, and that purchasing departments staffed with talented, motivated, and interactional personnel achieve, on average, savings that is two-and-a-half times higher than their peers who haven’t yet figured out that when it comes to supply chain, People Matter Most.
Therefore, should you be so lucky as to acquire exceptional talent, it is key in today’s economy that you hold on to it. The following are ten tips that might help you do just that.
Organizational Culture
An organization needs the right environment to attract and retain the highest calibre procurement talent. Although this is hard to define, a good start is the right mix of openness, diversity, ethics, sustainability, fun, and support for work-life balance.
Give Them Space
Empower employees to make their own decisions and give them the room to do so. Encourage them to try new ideas and don’t break out the whip if they fail, as one can often learn more from failure than from success. Also provide employees with the freedom that allows them to get the job done in the ways that work best for them.
Mine for Opportunities
Involve the organization’s best people in strategic planning when the search is on for the next great opportunity and allow them to head new projects or spend categories on their own.
Challenge Them
Ensure that BIG and NEW purchasing challenges are presented to them on a regular basis. Great talent is drawn to the opportunity to work on big things and to apply new thinking.
Training
Good training starts on day one, from the minute a new recruit walks in the door. Before the recruit was hired, the manager should have laid out the skills relevant to the role, identified potential gaps, and developed an appropriate (on-the-job) training program to get the new employee up to speed as soon as possible.
Mentoring
Mentoring facilitates knowledge transfer, helps the organization take advantage of lessons learned, and makes both the mentor and the mentored feel valuable.
Career Path
Good procurement personnel are ambitious. They want to know that they can advance over time. Make sure there is a career path for every employee that starts at junior buyer and goes all the way to CPO.
The Right Equipment
Every professional needs tools. This goes doubly so for procurement professionals who often have the hardest job of all managing the organization’s global supply chain. Make sure they have the right sourcing, procurement, logistics, inventory management, and contract management tools (to name a few) that they need to do their job effectively and productively and don’t be cheap when it comes to technology.
Rewards
A good salary is often the top indicator of employee retention, and often the top reason an organization loses its top talent. Know what your top people are worth on the open market and do your best to compensate them justly.
Proactive Stay Interviews
Even if the organization has the right culture, makes efforts to empower its employees, mines for opportunities, challenges the team regularly, offers continuous training opportunities, institutes mentorship programs, establishes a career path for each employee, gives them the right equipment, and rewards its employees handsomely, don’t assume this is enough. Everyone is different and every team is different. Instead of guessing, find out what your staff really want by asking them.
For more information on Talent Management, check out the Talent Management: Build and Retain World Class Sourcing Talent wiki-paper over on the e-Sourcing Wiki which covers the five R’s of talent management – resolving, recognizing, recruiting, retaining and retiring, skills development, and succession planning.
e-Procurement is the counterpart to e-Sourcing, starting where e-Sourcing ends and ending where e-Sourcing begins. It is the “e” implementation of the procurement cycle which is concerned with the requisitioning, receiving, and reconciliation of the received goods as opposed to the analysis, auction, and award that takes place in the sourcing cycle. It is essentially the automation of the non-strategic and transactional activities that consume the majority of a buyer’s time, but one that comes with increased enterprise level visibility of all purchases.
The basic procurement cycle consists of up to nine steps, depending on the complexity of the buy and organizational policies. At a bare minimum, it consists of an order (requisition or purchase order), an invoice (which might be one with the receipt), and payment. For high-dollar purchases, the process will generally also include authorization and reconciliation of the invoice. In addition, if taxes were paid that the organization is capable of reclaiming, then the forms or entries to reclaim such taxes at the proper time will also be filled out or made. Finally, in a leading procurement organization, every step will be completed, although many will be completed automatically for low-dollar or non-strategic purchases by the eProcurement system using defined rules in the workflow engine.
Requisition
A buyer recognizes a need and places a request for goods or services.
Authorization
Each requisition made by a buyer gets routed to an appropriate approval agent. The approver verifies that the goods or services are needed, that they are either off of an appropriate contract or acceptable as a stand-alone non-contract order, and that the purchase amount is acceptable.
Purchase Order
Once a requisition is approved, a purchase order is created and automatically delivered to the supplier(s).
Receipt of Goods
Once goods are received, the buyer issues or confirms a receipt of such goods to the supplier.
Invoice
After a supplier prepares goods for shipment, an invoice is created that denotes the individual goods ordered by SKU and the amounts being charged.
Reconciliation
After the goods are received, the invoice needs to be reconciled to the purchase order and goods receipt before payment is made. Are the charges for the right goods or services? Are the amounts the contracted amounts? Were the quantities correct? Are any other charges, including taxes, valid and correct?
Payment
Once the goods have been received and the invoice reconciled with the order and contract, payment is scheduled and made using an appropriate payment method, which could be p-card, electronic funds transfer, or good old fashioned cheque.
Reclamation of Taxes
In some situations, the supplier of a good or service will be obligated to charge a tax, but the buyer may be eligible to retain some or all of that tax because of its corporate status. Examples include European Value Added Tax, Canadian Goods and Services Tax, and out-of-state sales taxes.
Analysis
After a number of procurement cycles have been completed, it is important to take measurements of the efficiency and accuracy of the procurement process.
For more insights into e-Procurement, check out the e-Procurement Primer: 9 Steps to Procurement Success over on the e-Sourcing Wiki which not only dives into the 9 steps to success, but also discusses the core capabilities required in every e-Procurement solution, other important features of good e-Procurement solutions, the benefits an e-Procurement solution brings, best practices for implementation, challenges that may need to be overcome, associated costs, and tips on user adoption as well as a glossary of many e-Procurement terms and a rather extensive bibliography.
The Supply Chain Management Review recently ran an article on Maximizing e-Sourcing through a Center of Excellence where they noted that software alone is not sufficient — organizations must have the knowledge and policies in place to support these tools. The article then says that, because of this, leaders today are establishing Centers of Excellence (CoE) to fully capture the value and savings from e-Sourcing technologies.
As per the article, a Center of Excellence is a small center-led group of sourcing experts who focus on standardizing processes, leveraging technology, capturing best practices, sharing knowledge, and streamlining activities. The model allows the flexibility to tailor purchases at the local level while leveraging corporate spend for strategic categories and commodities. (For a more complete definition of Center Led Procurement, as well as the benefits that normally accompany it, see my three part series: Part I: Introduction , Part II: Center of Excellence, and Part III: Best Practices).
The article also proclaims the benefits that often accompany a CoE and points to an Aberdeen study that found that the savings performance of an organization that has established a CoE is typically 39% better than its competitors. Furthermore, the organization is 32% more likely to have employed advanced sourcing strategies, 54% more proficient in their usage of e-Sourcing technology, and 25% ahead of their competition when it comes to maverick spend.
Considering that other studies from other organizations have reported similar results, there’s no arguing that a well designed and properly executed center of excellence gets results. However, I have to wonder how much is due to the center of excellence and how much is due to the mindset of excellence. It’s not the center that achieves results – but the people. It’s not the technology that the center employs – but the people who use it. It’s not the processes that the center recommends – but the people who
employ them. The mindset to apply best practices, processes, and technologies and be best in class resides in people.
Furthermore, if you have a team that has the mindset, do you really need a physical center? Many organizations like to “centralize” their “center-led” procurement organization in a single location – but considering the global talent crunch, is this really a good idea? First of all, your best talent is probably distributed globally – and many of them probably aren’t going to want to relocate (half-way around the world). Secondly, with the increasingly global nature of business, you need talent distributed globally to help your global teams understand the best practices, processes, and technology and properly apply them. If you think that once a year training sessions in a central location is enough these days, you’re trapped in the past. Thirdly, you can’t always aggregate demand across disparate divisions when each division could be making slightly different goods for different markets with different regulatory requirements. Sometimes demand just has to remain distributed.
Thus, I have to ask whether a Center of Excellence is the answer or if what you really need is a Team of Excellence. Furthermore, do you really need this team centralized in the same office, or can they be distributed out across your global purchasing organizations? It seems to me that if they have a Mindset of Excellence, this is all you need. Furthermore, since you’ll have one or more experts in each of your divisions, it seems to me that not only will you have increased adoption of the mandated processes, technologies, and best practices, but that you’ll get even better performance across the board. Now, it’s true that you’ll need networked persons to pull this off, but hey, it’s the noughts. Get used to it.
This post first appeared on ESF on April 8th, 2008
Successful innovation designs for sourcing. Waiting until the prototype phase, after engineers have made material and component choices, increases the chances that all designed-in-costs will be locked in. Considering that the Defense Advanced Research Projects Agency (DARPA) estimates these costs to be, on average, 80% of product costs, this is significant. Furthermore, failure to involve procurement early could risk increased direct material costs, unacceptable risk in supply, unexpected component obsolescence, missed regulatory compliance, the inability to expand into new geographies, the lack of ability to take advantage of sourcing leverage, increased quality inspection costs, raised manufacturing costs, and missed launch dates.
New Product Development is more challenging now than ever before since the majority of products require expertise across disciplines and organizational boundaries. Most products are so complex that it often requires cross-disciplinary teams across the supply base to design, prototype, and bring a product to market. Furthermore, innovation, which is as much as broadening the product development view as it is about managing the product lifecycle, requires input from almost every business unit.
Managing this innovation is no easy feat, but great results are much more likely if one follows the best practices of best-in-class companies that dedicate leadership, centralize control, standardize processes to capture and leverage results, employ technology to facilitate the process, and measure constantly.
Innovation on Demand
Innovation on Demand is an advanced version of TRIZ, Teoriya Resheniya Izobretatelskikh Zadatch, a topic I first discussed here on e-Sourcing Forum in Purchasing Innovation II: TRIZ. TRIZ is a methodology, tool set, knowledge base, and model-based technology for generating innovative ideas and solutions for problem solving and the advanced version employed in innovation on demand, sometimes known as invention on demand, is important because, as pointed out in this CPO Agenda article, it can be used by CPOs who want to help their firms escape the clutches of patent-protected, monopolistic suppliers.
Furthermore, as CPO Agenda points out, invention on demand can do more for a company than just improve terms from a patent-protected supplier or bypass it altogether. “It can replace expensive components with cheaper ones. It can generate product improvements in combination with target costing. It can be applied to any technical problem, whether for reasons of technical improvements, the value-price ratio, or both.” The process as a whole can considerably boost a company’s performance. As an example, CPO Agenda points out the Korean conglomerate Samsung where TRIZ has become part of Samsung’s culture. In 2000, Samsung’s market capitalization was less then a quarter of Sony’s. Today, it is almost double.
Home Country Sourcing
A lot of companies have hopped on the low-cost country sourcing bandwagon, so many so that many low cost countries are not low-cost anymore. This has inspired some of the more progressive organizations to focus not on low cost country sourcing, but on right cost country sourcing. Right Cost Country Sourcing is a process of not only selecting the right country, but selecting the right country quickly and, more importantly, being able to reverse that decision and select a new country should circumstances change.
However, the most progressive organizations will be those that find ways to source at home and do so competitively on a global basis. After all, when an organization looks at the global risks the World Economic Forum is tracking, it sees retrenchment from globalization, failed and failing states, interstate and civil wars, the US account deficit, and a potential Chinese economic hard landing topping the economic, geopolitical, and societal risk watch lists. This clearly indicates that any organization that can source competitively in its own country definitely has an edge over the competition, considering any one of these risks could bring production to a halt in any organization unable to effectively mitigate such risk.
Visibility First, Consolidation Second
Some organizations hear the oft-quoted fact that, typically, 80% of spend is with 20% of suppliers and go on a consolidation spree, eliminating as many suppliers as possible as fast as possible to get to a number where all supplier relationships can be tracked and managed and associated risks identified and mitigated. This sounds great in theory, until the organization realizes it just cut the only supplier capable of producing the custom GPS chip for the new model of mobile phone it planned on introducing next year, or, even worse, it cut the only supplier capable of producing the guidance chip for the top-of-the-line SUV it is currently manufacturing.
The reality is that most organizations that do not do proper supplier relationship management and proper spend management probably have three to five times (if not more!) suppliers than they need, but the reality also is that until such organizations have visibility into who their suppliers are, what they are supplying, where it is being used, and how they are performing, they are not in any position to do proper supply base consolidation, which, in some cases, might actually dictate the addition of new suppliers where key parts are being singled sourced. Thus, it is important that they acquire visibility into their supplier network before consolidating.
Forget Savings … Avoid Cost in the First Place
Most organizations have a myopic focus on cost savings, but considering there ain’t no saving in a perfect world, this is a level of foolishness that even the SpendFool wouldn’t tolerate! In fact, the SpendFool, in full foolishness, would go Donald Trump on the organization! “You’re fired!”
A leading procurement organization doesn’t look for ways to reduce spend, since this is the result of overspending, which a good procurement organization that does a should-cost analysis on all purchases and makes proper total value awards would not do, but for ways to avoid spend in the first place. Leading procurement organizations will employ substitution strategies, lead innovation-on-demand initiatives, improve inventory management, revolutionize processes, and find ways to get around “fees” and “maintenance charges” that essentially represent low-value to the organization and pure profit to the vendor.
For 16 more great ides on how to take your sourcing to the next level, and more detail on the ideas presented above, see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki.
This post originally appeared on ESF on November 27, 2007.
A generally accepted (and obvious) “best practice” is to procure services via a robust competitive methodology. In general, this is achieved by issuing a comprehensive request for proposal (RFP) to each of the potential vendors for that service. The practice has now become so common that many organizations have developed a standardized template (or templates) and are able to rapidly churn out RFPs to meet the demands of its business unit customers. This semi-automated approach accelerates the overall procurement timeframe and enables the organization to rapidly achieve superior results for the procurement of commodity products and services. Unfortunately, as with any automated process, this approach has also led to a reduction in critical thinking that is applied to each RFP.
Hear, Hear! This is precisely the point I was trying to make in the doctor on Technology RFPs: Don’t Put The Cart Before The Horse!, although I was restricting my attention to technology RFPs at the time. “Filling in the blanks” on a template isn’t sufficient for large and/or complex projects. The RFP needs to be carefully composed if you are to achieve maximum value from it. That’s why it was nice to see the article Beyond the Template over on SourcingMag.com which outlined some best practices for:
effectively creating a competitive environment
clearly defining the services being procured
enabling the objective evaluation of vendor responses
achieving optimal terms, conditions, and pricing in the competitive environment
The article may be services centric, but it still has great advice.
Creating a Competitive Environment
Accentuate the positive
Why should the supplier want to engage in a relationship with you?
Clearly specify what you hope to achieve
What are your goals? What do you require from the supplier?
Enable the vendors to differentiate themselves
Be sure to allow some open-ended responses. Check-the-box, multiple-choice radio-buttons, and fill-in-the-blank does not leave much room for vendor differentiation.
Ensure the vendors understand your environment
How do you work? How will the relationship be managed? What do you expect from a supplier?
Emphasize the importance of the transition period
If you are transitioning away from a current supplier or a current process, be sure to explain how the transition process is going to work and what you expect from the supplier.
Defining the Services
Know what you want
An RFP should not be used to gather information to help the enterprise decide what it would like to procure — it should be used to gather information about what the organization is going to procure and how it is going to go about the process.
Define the boundaries
If you are procuring a product, who is managing the transportation? If you are procuring a service, what capabilities will the supplier be providing, what capabilities will you be retaining, and how do you define the break-points?
Define the measurement criteria
How will the supplier’s performance be measured?
Put yourself in the vendor’s shoes
Read the RFP from the viewpoint of a supplier. If there is anything that requires clarification, then clarify it. If you’re unsure if it is clear or complete enough, have an uninvolved third party (such as a colleague in another department) review it.
Objectively Evaluating Vendor Responses
Establish discrete requirements
What do you need at a minimum to consider a supplier? If you are unsure, do a multi-round process where you ask for general proposals on how a supplier will solve a problem, followed by a request for specific proposals once you have selected an approach.
Weight the requirements according to their relative importance In order to score the proposals to select a winner, it is important to give more weighting to key factors.
Define the proposal pricing format
This will allow you to compare proposals apples-to-apples.
Achieving the Best Buy
Make it clear that RFP responses are contractually binding Of course, this only applies to the final RFP/RFQ in a multi-round process.
Use contract-ready requirements in the RFP This will prevent snags in the negotiation.
Don’t put off until later what you can do now
Do your best to make sure that the requirements in the RFP address all key considerations. After all, how likely are you to receive favorable terms regarding any items you forgot to address once you enter into a deal and lose the competitive environment?
This post originally appeared on ESF on March 12th, 2008.
This post originally appeared on ESF on Sept 11, 2007
Spend analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of gaining visibility into cost reduction, performance improvement, and contract compliance opportunities. It is part of an overall spend management and visibility process that includes the analysis, award, and monitoring of corporate spend. Additionally, it is the first and last step of the strategic sourcing process that drives total value. But it’s more than determining (i) who is buying (ii) what (iii) from whom (iv) when (v) and where (vi) and at what price. It’s about finding opportunities for savings across your organization, as obvious and non-obvious as they may be.
For example, here are five applications of spend analysis:
Commodity Analysis
Build a separate, commodity specific dataset to determine how much of a commodity an organization is buying, if it’s being charged consistently, if the charges correspond to any contracts in place, and if there are any opportunities for spend consolidation.
Rebate and Refund Collection
Did you know that you’re probably paying too much for your office supplies and high-tech equipment? Some of the more innovative consultancies have found that many office supply and high-tech companies overcharge across the board, even when contracts are in place. For example, many large organizations sign “best price” agreements with a high-tech supplier for all computer purchases over the next year, but in reality, if they don’t watch prices, most often end up paying the same amount throughout the length of the contract term for the exact same configuration even though prices tend to decline a few percentage points every month for a given hardware configuration. Also, if office supply agreements are for fixed quantities, such as a 10-pack laser printer toner cartridges, it’s often the case that an organization will end up paying (significantly) more per unit if they order less or more. And then there’s the rebate – which you only get if you order a certain volume and, in many cases, prove it and ask for it. I’m not saying these overcharges are the product of willful malicious intent on the supplier, but that such inconsistencies can slip through both parties if proper systems are not in place to properly process invoices and analyze spend.
Maverick Spend Identification
$10M in negotiated savings is simply that – $10M in negotiated savings. For the savings to hit the bottom line, the contract, and all its terms, have to be adhered to. If your buyers still buy off contract, you could lose out on all of the savings, and more. Spend Analysis can not only detect how much spend is off contract, but if proper data is kept, it can identify which supplier is getting the bulk of the maverick spend, what department is causing it, and, in some cases even the individual behind the problem.
Fraud Reduction
Most employees are decent, hard working people. In fact, most are more honest than the employers they work for. (And if you don’t believe me, read the Freakonomics book or blog which chronicled Paul F. and his honor system bagel operation where he found, with 20 years of data to back it up, that executives are often less likely to pay on an honor system.) But if your company is large enough, chances are you have one or two bad apples trying to defraud you. And even though they might not be trying to ring up $241,000 at a strip club or charging you 998,787 to ship two 19-cent washers, chances are, if they are of the right persuasion, they are bilking you out of thousands of dollars a year. Without a good spend analysis tool, how will you ever find out that your salesperson is submitting the same 378.65 receipt for customer entertainment 6 times, or that your new executive is not only paying for customer entertainment on his new corporate credit card but his own golfing excursions as well, or that the 378.65 charge from a generic entertainment company is not for a meal for 4 client representatives but for your new executive’s lap dances at his favorite strip club? Don’t laugh and don’t say that never happens – it does – and sometimes all too often at big companies that have transactions that is an order of magnitude more than their accounts payable department can process and review manually.
Opportunity Assessment
Not only can it tell you who is buying what from whom, when, where, and at what price, it can tell you whether or not there are large variances in the spend for the same commodity, whether spending conforms to appropriate market indices (assuming you have access to such data), and whether there are opportunities for supplier consolidation or rationalization. The limits of a good spend analysis tool are only those imposed by your own imagination.
There’s Gold in Them There Hills … Of Data wiki-paper over on the e-Sourcing Wiki. In addition to a thorough overview on the spend analysis process, technology requirements, and technology approaches, it also describes, in detail, what spend analysis really is, why it is necessary, what the various approaches to it are, the challenges associated with a project, and some of the more common applications to which a sourcing professional can apply it.
A basic two-way scorecard is a scorecard that allows a supplier to provide feedback on how well a buyer is providing it with information, paying on time, and managing other key elements of bilateral performance. It is designed to ensure that there is a two-way flow of information, and feedback, regarding the service that the supplier is expected to perform on behalf of the buyer. A more advanced two-way scorecard measures supplier and buyer results across a balanced set of categories with combined metrics that merge component metrics tailored for each party. It is designed to insure that there is both information flow and cooperation (and collaboration) in the relationship, as the merged metrics will only be good if both the supplier and buyer component metrics are good — and the component metrics will only be good if there is collaboration. For example, the “customer service level” metric will be computed based on the average supplier delivery time and the average accuracy of the monthly buyer forecast. After all, if the buyer tells the supplier to prepare for a slow month when, in fact, orders are about to double, should all the blame rest on the supplier who was not given a chance to prepare?
Needless to say, two-way scorecards are not only more work than traditional scorecards, but they also require more up-front effort to make them work (but they payoff is worth it). Fortunately, there is a recent piece over on the Supply Chain Digest site that describes the keys to implementing dual buyer-supplier scorecards successfully for those new to the concept. According to the article, best results stem from best practices, and the best practices they list are the following:
Rely on Senior Leadership
Senior leadership must emphasize internal accountability as well as supplier accountability and insist upon the new scorecarding methodology.
Choose the Best Managers
Insure the implementation is led by top-performers on each side.
Focus on Critical Items
Focus on those items and metrics that have the biggest impact on customers.
Use only with Strategic Suppliers
The approach requires long term commitment — on both sides.
Broaden the Involvement
Create cross-functional teams and insure all key areas are measured by the metrics.
Be Practical
Aim for “best-fit”, not “perfection”, in the metrics. The metrics should be easy to define and to track.
Engage the Supplier
Metrics need to be selected jointly, and agreed upon jointly.
Communicate the Value
Be sure to understand, and communicate, how the initiative is going to benefit both parties.
Recognize Performance
Rewards and recognition go a long way. Be sure to congratulate top performers appropriately.
Allow for Evolution
No one gets it (completely) right the first-time. Revisit the scorecard regularly and re-define the metrics as appropriate as part of a continuous improvement initiative.
Green Purchasing, also known as Environmentally Preferable Purchasing (EPP) is important, and not just because we’d need the resources of five (5) earths to sustain us if everyone in the world consumed like the developed world did (and the US, Australia, and Canada in particular). It’s important because purchasers, be they government, corporate, or institutional, yield a great influence over the future of the planet with every buying decision they make – and because every purchase has a hidden cost on the environment.
Public sector and private sector institutional buying combined accounts for the vast majority of spending in most developed countries. It’s true that we as consumers in developed countries buy a lot, but when you consider that we’re (almost) always buying from a private sector company that is in turn spending 60% t0 80% of its revenues buying raw materials, products, and services from other businesses, and that, in some countries, public sector buying alone accounts for as much as 25% of GDP, it’s easy to see that, combined, purchasers ultimately control 70%++ of GDP in much of the developed world. Thus, if we were to refuse to buy products that were not green, we would effectively force our suppliers to provide us with green products, as the alternatives would be for those suppliers to go out of business.
So what is green purchasing? Simply put it’s one of the three cornerstones of sustainable purchasing, where the other two cornerstones are sound social policy and economic soundness. However, whereas economic soundness insures that the overall decision is sound from a life-cycle cost and corporate sustainability perspective, and whereas social policy addresses your need to be a responsible corporate citizen when it comes to human rights and welfare, green purchasing addresses the environmental impact of your buying decision.
One might think that buying green is the easiest criterion of the spend triumvirate to meet now that we have “organic” and “local” food and “eco-friendly” labeling and “energy-star” standards, but it is, in fact, the most challenging criterion! A food product does not necessarily have a low carbon footprint just because it is “organic” or “local”; just because a product is “eco-friendly” when used, does not mean that it’s production process was “eco-friendly”; and just because a product is “energy-star” compliant does not mean that it will have the best overall energy utilization.
Buying local produce makes sense during the fall harvest season, because you’re eliminating the carbon footprint that accompanies transportation, but it does not make sense in the spring when all the product is coming from greenhouses. Why? The energy footprint associated with a greenhouse often has a much higher carbon footprint than transporting products by land from the opposite hemisphere. Eco-friendly detergent is much better than hazardous bleach, but if it’s been produced in a factory that (still) uses a process that generates toxic chemicals as byproducts, it’s not very eco-friendly at all. And your average energy-star desktop workstation still consumes 80+ watts of power, which really adds up if your employees never turn them off. If all your employees are doing is word-processing and internet purchasing, they could be using a thin-client that only consumes 4W of power when in use, and a fraction of a watt in standby mode, hosted on a multi-core modern server that supports automatic power-down of processors, drives, and power supplies when utilization drops below a certain threshold.
Because green purchasing is so important, and because it can be difficult to know the right thing to do in each situation, we created the Green Purchasing wiki-paper on the e-Sourcing Wiki to help you start on the green grass path.
A recent Economist article reminded us that energy efficiency, according to the McKinsey Global Institute, could get us halfway to the goal of keeping the concentration of greenhouse gases below 550 ppm. Considering that energy efficiency lowers fuel bills in addition to energy needs, the quest for “negawatts” is a valid one.
Moreover, even though a lot of investment would need to be made to increase energy efficiency to the levels that are possible, on the order of 170B annually until 2020, this is only 1.6% of today’s global annual investment in fixed capital. A bargain when you consider that the measures, which only require existing, proven, technology, would earn an average return of 17%, and a minimum of 10%. Considering the performance of most traditional investments, including the stock market, as of late – that’s very attractive!
A recent Wired article noted that embracing nuclear power as a clean power source is not necessarily the right solution. The argument assumes that clean alternatives will not improve in efficiency or affordability during the 10 years it would take to implement an effective nuclear program. Given the current cost of oil and recent improvements in solar, hydro, and wind power, these sustainable alternatives, which don’t produce hazardous radioactive waste as a byproduct, when combined with energy efficiency investments, could deliver a clean-energy future much cheaper and much sooner — without security or health risks.
A new study from the Argonne National Laboratory has confirmed that greenhouse gas benefit from most corn ethanol is modest at best, and that if coal is used as the process fuel, it can actually increase greenhouse gas emissions by 3%! This correlates well to a recent study from UC Berkeley’s Energy and Resources Group (ERG) that found that there is no climate benefit from corn ethanol. The only ethanol with a promising potential is cellulosic ethanol, which can reduce total greenhouse gasses by a whopping 86% compared to gasoline. If it can be efficiently and effectively generated from switchgrass, and if switchgrass can be grown across much of North America, it may have a future. Otherwise, ethanol will be a dead end.
So what’s the verdict? We have the means to solve the energy crisis, or at least curtail our energy needs to the point where the crisis will be deferred to the future where we will likely have more innovations to draw from, but we have to be smart about it. Renewable energy sources and increased energy efficiency will help significantly in the short term, and cellulosic ethanol presents a viable alternative to gasoline if production processes can be improved and raw materials grown in abundance (without affecting the food supply). However, if we could reduce our dependence on oil to transportation only (which accounts for less than 10% of our total energy consumption and produces less greenhouse gasses than our farm animals on a global basis), we’d have quite a bit of time to perfect the process.
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