This is the first in a series of posts discussing the history of, business case for and strategy behind supplier performance management.
Before we can get to the end goal of creating an SPM strategy, we must understand the factors in our supply chains that have caused SPM to become an enormously important part of our processes. Over the past decade, economic globalization has allowed companies to reach suppliers in previously untapped parts of the world. With the ability to purchase goods and services at lower costs around the world, we now rely more on outsourced suppliers for these goods and services, which has increased our supply chain risk, the complexity of our supply chains and the globalization of our businesses. These shifts in focus have changed a company’s view of its suppliers as a cost to a revenue source to hold down the bottom line.
The combination of these factors across a globalized supply chain means that companies must maintain strong, viable supply chains in order to maintain strong, consistent business performance to protect their bottom lines. Effective, smart supplier performance management allows us to achieve these goals.
So does this mean a company needs a perfect supplier scorecard that makes its metrics look good? NO. Supplier scorecards are one small, though important, piece in the intricate puzzle that makes up supplier performance management. SPM involves aligning the organization, enabling strong business processes, developing meaningful supplier scorecards, and building actionable supplier improvement plans.
But at the end of the day, SPM is mainly about finding ways to improve your suppliers’ performance to reduce costs and risks, while increasing supplier value. Supplier performance improvement could take the form of making more on-time deliveries instead of shipping a few days early, which increases your inventory costs. Or suppliers could decrease lead time for delivery, which lowers your production time. A strong SPM program allows a procurement team to have visibility into performance issues like these so it can correct them with the supplier, while continually building a strong, mutually beneficial business relationship.
For more information on Supplier Performance Management click here to download our white paper.
Many companies negotiate small package programs to cover the documents in small packages, but how much consideration is given to those shipments with weights between 200 and 300 pounds.
Normally a shipper will tender those shipments directly to an LTL carrier along with other shipments. These shipments are known as minimums in the LTL industry and are either tendered loose or stacked on a pallet and shrink-wrapped.
These shipments can create problems in handling simply because they command an allotted spot with other LTL shipments. They are normally stripped from the pallet and placed in holes between shipments and essentially scattered about the trailer until they are handled again.
Most small package courier companies in the US offer other services such as multi-weight and hundredweight programs geared to the shipments over 200 pounds that are handled within the small package system.
It makes total sense for an organization to look at these additional services provided by US small package couriers since most LTL carriers are shying away and pricing accordingly these type of shipments since they demand a higher degree of handling.
A complete review of your order picking practices must be done in order to reveal if it is cost effective enough and not too labor intensive to move LTL minimum shipments over to multi-weight and hundredweight programs that are offered by US small package couriers.
Add commentOctober 20th, 2009Paladin Associates - Pat Horgan
Contract Document Control
In contract development, the party that controls the physical production of the contract document and the wording changes during negotiations generally has a distinct advantage. This is particularly true in long or complex contracts.
Subtle or undetected changes can possibly be introduced into the document by the “controller”, but without the other party’s knowledge. Sometimes seemingly innocuous, but subsequently important terms and conditions on someone else’s paper can escape notice. To the extent that one party’s language is used, subsequent legal interpretation of precedent, meaning, or industry practice may favor that party.
The party that controls the contract document has a leg up in the negotiations.
Controlling Terms and Condition
Similarly, both the Buyer and the Seller have to be careful that they are not inadvertently accepting unknown or non-negotiated terms and conditions that may exist on the other party’s standard paper, contract documents, invoices, or purchase orders. Often terms and conditions on a Seller’s standard invoice are different than those on the Buyer’s standard purchase order, and both may differ from specific contract language. Often, simply paying an invoice means the buyer has “accepted” the Seller’s terms. In a more recent complication, agreements may refer to Terms and Conditions that reside on the Seller’s website. This is sometimes difficult to manage because the website can be readily changed, enabling the Seller to change prices and terms at their discretion.
Often the Buyer firm, or the larger firm, or the firm that has better legal representation wins this negotiating element without the other party even realizing the issues involved.
Some things Buyer’s can do:
Buyer’s can generally insist that contracts be written on their paper, that they control and modify the physical document during negotiations, and that their terms and conditions prevail. Include terms and conditions early in the RFX process to identify and address these issues at the point of greatest leverage. Vendor invoices should always be reviewed, matched against purchase orders and/or contracts, and checked for inappropriate terms or conditions. Suspect invoices can be referred to properly trained Accounts Payable personnel or legal counsel for resolution.
3 commentsOctober 12th, 2009Charles Dominick, SPSM - Next Level Purchasing
In the last post, I described how price adjustment clauses are commonly misunderstood and end up causing pricing problems between buyers and suppliers.
So, what can you do to ensure that price adjustment provisions are adhered to when math isn’t everyone’s strongest skill (especially suppliers)?
Here are some tips:
Write out the price adjustment method in words in your RFP and contract
Include a formula in your RFP and contract
Demonstrate the calculation of a new price at a pre-bid meeting
Have a specific date for the adjustment
Sometimes index values are revised. So be sure to state that the price is adjusted on your specified date and will not be revised, even if the index is revised later.
One more tip…YOU tell the supplier what the price is, not the other way around.
Yes, we often lean on our suppliers to do certain things that we could do. After all, they are getting paid, right?
Well, some things you should do yourself. Calculating new prices is one of them.
Look, you’re going to have to do the calculation anyway to verify that the supplier got it right. And we’ve established that many professionals – even those with high levels of intellectual horsepower – suck at math.
So, don’t leave your pricing to chance. You tell your supplier what your new pricing is.
Well, that wraps it up for this series. I hope that you’ve learned some techniques for ensuring better communication with your suppliers for better supplier performance.
I know that if you apply everything I’ve covered, you will have fewer supplier problems and will minimize your chance of getting your industry’s equivalent of dog food delivered to you.
When a buyer is in a position to apply some leverage in negotiations with software vendors, there are three critical provisions that can be used, but may require a significant push:
Maintenance fees as a percentage of the discounted license fee, not the list license fee.
Language that locks the software vendor into providing a defined set of services throughout the term. Many software vendors offer several types of support, but will redefine the terms over time requiring buyers to purchase a more expensive level of support.
A fixed percentage of the license fees over a period – usually no more than five years.
On the other hand, here are two provisions, related to your software license, that would be great to have, but are very difficult to obtain because vendors don’t have much flexibility:
Paying for and receiving maintenance only when it is most convenient. Ideally one would like to begin paying maintenance only when licenses go into production and value has been gained, instead of immediately upon licensing.
Negotiating the price of maintenance down between 17% and 20%. Wall Street has adopted this percentage as a predictor of gross margins. Even though the ongoing maintenance revenue coming into a public company like Oracle depends greatly on other factors like the original discount and whether licensees simply drop maintenance, Wall Street can calculate this percentage and ask about it. If a public software company began allowing this percentage to erode, Wall Street would hammer it.
In summary, I suggest that buyers negotiate where the vendor has the ability to be flexible. Remembering these two steps will save companies a lot more money:
Get the greatest possible discount at the beginning and make sure that the annual maintenance percentage is tied to it.
Find out what discount the government and similar sized companies receive.
Don’t overbuy.
Purchase fewer licenses than project people may need. This won’t be easy because technical people naturally want to have enough licenses and budget managers don’t want to ask for more funds. Push back, because the penalty for not buying enough licenses is buying more, while the penalty for buying too many is annual maintenance on extra “shelfware”. Most software vendors won’t sell maintenance on just 75 if 100 are licensed.
Add commentSeptember 28th, 2009Charles Dominick, SPSM - Next Level Purchasing
In this penultimate post of this eight-part series, I’m going to help you understand the subtleties of using escalation clauses.
Wait. There’s a problem already.
Do you know what it is?
Well, think about the term “escalation clause.” What does that imply?
That there is only one way for a price to go: up.
And, as we saw in late 2008, prices for many commodities can go down. Way down.
The last thing you’d want is for your supplier to say after you approach them for what you thought was a contractually guaranteed price reduction would be “But the contract has an escalation clause. It’s clear from that terminology that the intent was to only adjust the price upward.”
So some people use the term “escalation/de-escalation clause” or “price adjustment clause” to avoid such situations. Hey, any way that you can prevent a possible dispute is a good thing.
Now, what might a price adjustment clause communicate?
It may communicate that “The price for paper on October 1, 2008 is $40.00/box. The price will be adjusted on October 1, 2009. The price will increase or decrease by the same percentage (rounded to one decimal point, example: 1.1%) that the Producers Price Index for ‘Writing and Printing Papers’ Series ID WPU091301 increased or decreased during the period from July 2008 to July 2009.”
What is the new price?
I always ask my seminar attendees this type of question and give them the applicable Producer’s Price Index table. About 5% of the attendees get it right.
Then, I give them a formula. About 12% of them get it right.
And when it has come time for suppliers to calculate their new price, I’ve seen them get it wrong, too.
This is a problem. When you are accepting bids, it is important for every supplier to base its price on the price adjustment formula and how they expect it to change their price in the future.
Doing so ensures against the possibility that one supplier can come in with a low bid, win your business, arbitrarily adjust its price in a year, and then end up being a worse deal than if you selected another supplier. Using a price adjustment clause while bidding ensures that all suppliers are on a level playing field for your sake and theirs.
In the next post – the last one of this series – I’ll give you some tips for ensuring that your price adjustment clause is understood and adhered to by your suppliers.
Many companies have worked hard to develop a “preferred” LTL carrier network for their domestic and trans-boarder shipments with each supplier adhering to the specifications of shipment tender.
However, many times export and import shipments are left up to the forwarder or transfer agent to make arrangements for the “door to port” or “port to door” also known as “inland freight” therefore adding another layer of charges utilizing specialized carriage.
Specialized carriers in the export and import market utilize a completely different rationale when costing shipments. Many in the export/import market utilize a “pick-up” cost and a “delivery” cost and a “line-haul” cost from point A to point B for the particular shipment.
Allow your “preferred” LTL carrier network to handle these shipments, preserving your contracted rates and discounts and allowing complete control and transparency of your tender to or from the port.
All LTL carriers whether union or non-union are all capable of entering and existing the ports.
In a recent Friday Rant entitled “Reverse Auctions Have Become the Aero-Bars of Sourcing”, SpendMatters’ Jason Busch describes the all too frequent abuse of Reverse Auctions. He quotes David Clevenger, formerly of FreeMarkets, who notes that “the problem with reverse auctions may be the same as with any powerful weapon in the wrong hands”. A knife can be used for murder or for life-saving surgery.
I believe there are at least two factors that contribute to abuse. I recall Stephen Covey’s leadership example which describes the importance of both skill and integrity. A skilled surgeon lacking integrity might perform an unnecessary operation. (Think Michael Jackson’s repeated cosmetic surgeries.) An unskilled surgeon with integrity would botch the job. You need both skill and integrity!
Clevenger describes abuses such as pre and post bid negotiations and the inclusion of unqualified competitors to drive market behavior. I would add to the list Phantom Bids (i.e. no intention of moving business but merely driving the incumbent’s pricing down via a competitive exercise). Note that none of these tactics rely on Reverse Auctions. They can all be wielded with equal abuse using a paper sealed bid. These are issues of integrity that soil Sourcing’s reputation regardless of the medium. In this instance, Reverse Auctions merely automate an unethical practice.
Skill is a different issue. As a former eSourcing trainer, I was often frustrated at companies’ unwillingness to provide adequate training. There are a number of important differences with the eSourcing process and tactics. Our company always recommended both training and mentoring as buyers geared up. I must respectfully disagree with Jason regarding software vendor responsibility. We didn’t tell unskilled buyers to “go tear it up”! Conversely, we often argued strongly in favor of a thorough implementation process. Unfortunately there were far too many shortcuts with the ultimate outcome being, among other things, unintended supplier abuses.
Anyone employing Reverse Auctions must have both skill and integrity or there will be abuse. However, we shouldn’t blame the tool. Neither we nor suppliers should generalize that reverse auctions are bad. It is correct that Reverse Auctions in the hands of buyers who are unskilled or who lack integrity are bad.
However, not all sourcing professionals lack skill and/or integrity. I am not denying abuse. But I’m concerned that suppliers’ claims become another excuse to resist a legitimate tool that, when used properly, helps buyers achieve best value. Let’s not abandon a fair and effective tool because of the abuse of some.
We put a large piece of business out for bid telling suppliers we plan to award a five year contract with indexed pricing. Suppliers bid accordingly and we make the award. The lawyers are unable to reach agreement on the final contract terms but the supplier behaves as if the contract was signed. Three and a half years into the award period we decide to go out for bid telling the incumbent we have no obligation since the contract was never signed. What are we training suppliers to do?
The supplier provides highly competitive pricing based on Net 30 payment terms. After the fact we tell them we need Net 60. They are happy to provide those terms but need to increase the price since Net 60 will require them to obtain a Letter of Credit. We say “no thanks” but pay Net 60 anyway. What are we training suppliers to do?
In the face of uncertainty, suppliers pad their pricing. From the supplier’s perspective, the above behavior was not anticipated, at least the first time. What happens the next time we ask this supplier for rock bottom pricing? Role modeling is the most powerful form of teaching. What are we role modeling to our suppliers? We should pay close attention to that. What goes around, comes around!
Add commentJune 16th, 2009Paladin Associates - Linda Fox
We have come a long way in understanding what diversity means to business and since President Johnson signed an executive order mandating Equal Employment Opportunity and Affirmative Action in the late 1960s. The United States Census Bureau predicts that 40% of the population will be comprised of minorities by the year 2012, and by 2050 foreign born immigrants will account for 67% of the nation’s population growth. These figures portend the continued growth of minority suppliers which presents the opportunity for procurement to discover the untapped value diverse suppliers bring to the bargaining table.
Today, diversity is a business necessity, not just the” right thing to do”. Small and minority-owned businesses make up the fastest growing segment in the United States economy. Corporations are multi-cultural entities which serve an increasingly diverse customer mix. Supplier diversity provides procurement the opportunity to draw from a wider pool of suppliers to select the best possible talent for meeting their company’s requirements for purchased goods and services. As these relationships flourish, the economy is strengthened creating a Win-Win situation for all involved.
Procurement has the opportunity to lead in developing Best Practices for diverse supplier development. RFP’s should consciously include diverse suppliers. Perhaps some diverse suppliers’ capabilities will not allow them to compete for a large requirement. However, in these cases, they might still be included as a 2nd tier supplier. Ask your large contractors to support minority supplier development through subcontracting. Over time, participation as a tier 2 supplier may provide the growth and development opportunities which allow a minority-owned company to reach tier one status.
In today’s economic climate where buyers are striving to reduce their supply base, awarding business to minority suppliers may seem counter productive. However, one must remember that developing diverse suppliers is a long term goal that makes good business and economic sense.
You may consult the following resources when seeking diverse suppliers: Association for Service Disabled Vets (ASDV), Small Business Administration (SBA), National Minority Suppliers Development Council (NMSDC), Women’s Business Enterprise National Council (WBENC) and US Pan Asian American Chamber (USPAAC).
To compete in the global marketplace today you need a strategic plan for developing a supplier base. Diverse companies have been proven to offer substantial value. Get out of your comfort zone!
Purchasing Magazine is hosting a webinar today (2pm EST) that is a good topic for the other side of the sourcing argument in tough times. You can register for the event by following this link.
I have been hearing many rationales on both sides of this fence. Some companies are hurting badly and want to reclaim ground that was lost in the last couple years. Many of these organizations felt their supply base took advantage of them during that period.
Others are taking a more cautious approach, which will be out lined in this webinar. There should be quality reasons for this approach too. I think, like many discussions of strategy, it depends. There are no rules to follow and each challenge must be assessed individually with the risks properly accounted for. Today’s webinar might help build the criteria chart for the proper supplier development and sourcing strategy.
Knowledge@Wharton had an interview with David Lee, of Boston Consulting Group, on the topic of China sourcing, covered on Supply Chain Brain. The interview is very in-depth on the issues with managing the sourcing process where China is involved. One particular area of focus was regarding supplier identification and outreach.
Chinese suppliers do not always have the same capabilities and the quality level can be highly uneven.
But on top of that, we have a very non-transparent supplier market. We don’t have, for example, a lot of the supplier databases that you would like to have in the Western world. When they first come to China, the first major problem a lot of companies face is: Where do you find a good supplier? There are definitely a lot of suppliers out there, but whether you can find a good one will be a big question.
In the West, things are relatively easy in terms of identifying the supplier market, so you can always go to some database and download a list of suppliers that are capable.
In China, there’s no such database. Everybody says they have some database, but our experience has been that most of the databases are about 50% wrong and then another 10% to 20% are outdated. So, you never really can find a very good supplier database.
Often, you need to do a lot of legwork before you can do the sourcing activities. This becomes very dangerous and very difficult for a lot of people who have no experience working in China. We have seen in a number of companies, when they do China sourcing, instead of casting a wide net to find the right supplier, they usually follow whoever your competitors are sourcing from and go find those suppliers.
I think these are very accurate and educated statements. The concept of embedded/integrated supplier networks in an eSourcing tool comes up frequently. Many practitioners think a supplier database will be a pot of gold, revealing all the best suppliers that China has to offer. This is simply not the case, no matter what database is being used. I agree with David Lee that traditional Western countries have good data that is accurate and can be trusted, but LCCS countries have very unreliable data.
Most sourcing projects involving LCCS suppliers should involve a multi-faceted approach to building a quality supply base. First, static data can be used to cast a wide net. After that, suppliers should be cross-linked and qualified through other sources, like an eSourcing supplier list that can be verified of past participation and a history of work and performance with demanding purchasing organizations. Additionally, I would always recommend the investigation of bringing in consultants that have experience with the category and supply base. Sourcing from China is a major decision with long lasting impact (good, bad or both), upfront investment will contain some of the risk that will undoubtedly exist.
In the latest Denali newsletter, the topic of market intelligence is analyzed. In it, they show the background of different types of corporate intelligence – market, business, competitive. However, none of these address intelligence from the sourcing perspective.
Since I cannot link directly to the newsletter, I will copy some of the definitions that Denali proposes for the components of sourcing intelligence.
Supply Base Insights
* Top suppliers – domestic and/or global
* Market share analysis
* Supply market trends – merger and acquisition activities, etc.
* Supply base structure – local, regional, or global
* Analysis of various market forces, e.g. Porter’s Five Forces Analysis
* Understanding of supplier vs. buyer power
Cost Driver Analysis
* Identification of key cost drivers for specific spend categories
* Pricing trends and forecasts for key cost drivers
Category Pricing Trends & Forecasts
* Historical pricing trends for the category as a whole
* Price forecasts for the category, based on cost driver analysis, combined with supply & demand analysis
* Short- and long-term outlooks
Supply Risk Outlook
* Identification of potential supply risks for the spend category
* Outlook – will these risks improve or get worse?
Category Trends
* New products, services, specifications, or technologies
* Potential product substitutions
* Potential regulatory changes
* Key challenges facing the industry and how they are being addressed
Global Competitive Sourcing Aspects
* Low-cost countries from which the category can be sourced
* Logistics and other total cost of ownership considerations
* Country risk and outlook
Insights & Best Practices
* How other companies are sourcing this category
* Specific approaches that are working well
* Innovations relative to the category
* Specific metrics relative to the category that can be used as benchmarks
* Examples of savings opportunities
Most importantly, Denali claims that good sourcing intelligence can bring 3-5% savings and better visibility into risk. I know from an eSourcing perspective, companies are always looking for quick ways to supplier discovery/identification. There are many ways to become best in class and the results are tangible and very clear.
On May 3rd, an International Paper mill exploded, as a result of a boiler that overheated and exploded. Unfortunately, one person died and a number of others were injured.
This also has impact on sourcing decisions that are going to be made, since this mill will be shut down for upwards of 6 months and represents about 10.5 percent of its linerboard capacity and 1.5 percent of its North America capacity. This is a significant supply disruption for one product from a major global supplier. Linerboard is the material which is used to manufacture corrugate cartons and many companies will be impacted by the disruption.
IP themselves stated, “the loss of the Vicksburg mill capacity will tighten our supply/demand balance, however, we will make every effort to meet our customers’ needs on a case by case basis.” Some have estimated that the repairs could cost as much as $100m, and right now it is uncertain if the investigation will yield a positive result from insurance. Again, adding layers of uncertainty to the market.
Mark Wilde of Deutsche Bank Equity Research said, “The impact on outside (‘open market’) sales will be more profound, because IP is a large seller of [containerboard] into the domestic and export markets, Wilde wrote, and IP will have to trim those sales, leaving customers scrambling for supply.
With operating rates high and inventories relatively snug, there’s not much visible slack in the system. The Vicksburg outage immediately raises the probability of an uptick in industry prices over the next few months, and raises the prospects for a mid-to-late summer price initiative.”
This is a large degree of uncertainty in the market and comes on the heels of an attempted price increase in March, which failed to stick, or as Purchasing.com called it – “price hike flops”.
At a minimum, I expect suppliers to resist any downward pressure, and in some cases, they may attempt price increases. I would be interested in what buyers have experienced first hand from the supply base. Is there any perceivable impact and what duration is expected for any volatility?
Do you ever wonder why an email or voicemail message isn’t returned by a Chinese supplier – even when you’ve left one, two or even three messages? You may think, “They must not think our business is important, if they did, they would respond to my questions.” According to a recent Wall Street Journal article, Email Isn’t a Natural Fit for Tech-Savvy Chinese (no longer available online), there may be more to it than you think. Based on technological and cultural issues, many Chinese simply do not use corporate email or voicemail systems.
The article outlines several reasons why the Chinese don’t use email and voicemail.
Corporate email systems are unreliable due to spam and firewall issues. As a result, many business people routinely distribute personal email addresses since those systems are more reliable.
Cultural preference for one-to-one phone calls or face-to-face meetings. The Chinese don’t check voicemail because typically no one leaves voicemail messages.
We all know that sourcing from Low Cost Countries introduces complexity into the process. It is also important to remember that basic communication practices we take for granted are also affected. So be aware that you may need to adjust how you communicate with current and potential suppliers to ensure a positive relationship. This includes specifically outlining, from the very beginning of the relationship, what communication tools to use when conveying information.
Be specific that you prefer email, voicemail or text messaging, and that you need the supplier to communicate consistently using those channels.
Have back-up communication channels so that you can get answers when needed. This includes personal email addresses and cell phone numbers.
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