January 04, 2005
"The Terminator" uses Strategic Sourcing for cost savings
Arnold Schwarzenegger is not exactly the first name one would associate with Strategic Sourcing... But in California, the first wave of their strategic sourcing initiative is producing savings of almost 20%... "total cost of ownership (TCO)being "Terminated....?"
Strategic Sourcing Saves Millions for California Taxpayers
The California Strategic Sourcing Initiative scored its first big win Wednesday, landing the state a renegotiated contract for office supplies.
The renegotiated contract is projected to save roughly $9 million between now and July 2006, when it expires. The state successfully leveraged its buying power to achieve an 18-19 percent reduction in the prices it pays today for the same goods....
If a link does not open, right click on the link and select "open in a new window"
What do you think? You can air your views in the space provided below.
Posted by Bernie at 04:05 PM | Comments (0)
October 18, 2004
PART 2: How to negotiate with a SOLE Supplier
By Bernie van Niekerk
Its that time of the year.... Your SOLE supplier is about to present you "their valued customer" with their increase. They know, and you know that there is not much that you can do about it....
Now for whatever reason (part 1 of this article dealt with making sure you aren't put in a sole supply situation in the first place!) you or your organisation is faced with no alternative supplier or product. Not the greatest position to be in when trying to negotiate a better deal!
Especially when the item is a strategic or bottleneck item that could seriously impact the performance of the company. (Not to mention the impact on the performance bonus of the procurement individual involved!)
Three questions might arise from this situation...
1. "How do I accept what they say, and still keep my pride intact?". Basically a matter of surrendering gracefully...or
2. "There has to be a way to beat these guys at their own game..."
3. "If no answer is found for question 2, How do we return to question 1, "gracefully"?
This article deals with question 2.
In other words: If the Power of an alternative, is not available, what other sources of negotiating power are available to get a better deal?
The power to satisfy a need.
It has been said that "Success in a negotiation depends 5% on negotiation (tactics) and 95% on information."
This is especially true in large and very large procurement deals. Each and every organisation has particular and varying needs depending on the situation. Unearthing the information about the needs (or interests) of the SOLE supplier will provide valuable levers that could influence the negotiation.
For example: Most suppliers would like to reduce their costs. Understanding what their costs are might unearth opportunities for you to satisfy a major need of theirs.
I've been involved with a large foods company who were complaining that they've just been presented with 14% increase from their SOLE supplier and that there is not much they can do about it. After analysing their SOLE supplier's costs we realised that a major component of the supplier's cost base was in fact a raw material item for which the Buyer was one of the largest buyers in the country. By offering the SOLE supplier a deal whereby they are able to share in the buyer's deal, four major benefits accrued to the Buyer.
1. By lowering supplier raw material costs, the SOLE supplier's price to the Buyer would be lower on the items purchased from the supplier. (Direct cost reduction benefit.)
2. By lowering supplier raw material costs, the SOLE supplier now has a lower cost across its customer base and this benefit could be shared with the Buyer. (Indirect cost reduction benefit) It is quite possible under this scenario that the buyer would have an overall price decrease rather than a 14% increase.
3. The Buyer has just increased its volume and therefore its negotiating power with its own raw materials supplier.
4. The SOLE supplier has become dependent on the Buyer in a way like never before! This might just help in future negotiations...
There are various other needs or interests that the SOLE supplier might have which will not be evident at the start. In some instances the SOLE supplier will actively try to discourage you from finding out what these are. They might be in negotiations with a third party that could directly be influenced by the nature of their business with your firm.
They might be looking for an investor. In this case, they could be desperate for a long term contract. Even though, in the past, they might have appeared immovable on certain positions, things might have changed and they could be far more willing now. They might be aware of certain legislation that is about to happen that could change the industry. Or new technologies on the horizon. This could influence their competitiveness in the market.
Now assuming they are shrewd negotiators they would divert your attention as far as possible from these issues...
Sometimes, believe it or not, the representatives of the SOLE supplier do not understand their own business well enough!
There is an excellent, recent example of a smaller local mining company who appointed a specialist to analyse their major and SOLE transportation supplier (A specific mode of transport was used. Our readers in South Africa could probably guess which SOLE supplier I'm talking about).
As usual the supplier had the view that "Although we feel your pain, we must unfortunately pass the following massive increase to you".
The mining company, who made up a relatively small portion of the supplier's turnover, countered and threatened that they would then choose another mode of transport. The SOLE supplier did not back down end effectively bid the buyer farewell. I surmise, fully expecting the Buyer to come groveling back to the table.
In response, the mining company presented senior people at the SOLE supplier with an exact analysis of what would happen to the SOLE supplier if they moved their business. These weren't idle threats but based on exact information. Information about the SOLE suppliers business that clearly indicated the effect that the Buyer's business had on the SOLE supplier's business.
Well this information along with the Power of Persuasion had a very positive effect for the Buyer. And apparently I'm putting it mildly!
Sometimes there is more to the deal than meets the eye. Although our turnover with the supplier might be small, the PRODUCT that we are buying from them might be of strategic importance!
So from procurement specialist to private investigator... to expert negotiator!
This information can lead to The Power to Obstruct. By understanding the suppliers' future plans or future trends in the industry there might be some actions we could embark on that could seriously obstruct where they would like to be heading. This information could be used to extract major concessions.
A final word on The Power of an Alternative. Its seems quite logical but the negotiation session, is not the place to find out that we don't actually have an alternative supplier or product! If a negotiation is eminent and we do not have an alternative, this might be a good time to stall the negotiation. Only enter the negotiation at such time that an alternative, or the appearance of a credible alternative (know in plain english as a credible BLUFF!) he been developed.
Posted by Bernie at 07:59 PM | Comments (1)
September 01, 2004
How to negotiate with a SOLE Supplier (Part 1)
By Bernie van Niekerk
You know the feeling ...Their price increases are double that of everybody else's... As far as their service is concerned well you've got 2 choices.
1. Take it or 2.Leave it!
Their ''service" personnel are insolent to say the least. But there is one thing that you both know. namely, this supplier is in charge... and they know that you know!
Without the power of an alternative can you really negotiate...?
In fact it is considered to be a good negotiation tactic to postpone a negotiation until such time that an alternative has been developed. An alternative product perhaps or an alternative supplier...
Sometimes the negotiation is postponed until the ''Appearance of an Alternative" has been developed. In other words - a credible "Bluff"!
But is it possible to negotiate with a sole supplier? (And by sole supplier I don't mean a purveyor of a certain type of fish!). I mean the kind that generally has us over a barrel.
These suppliers can greatly influence our capability to get Strategic Sourcing benefits. They can also impact the competitiveness of the organisation in a major way - if it makes up a large part of our spend.
In dealing with such suppliers the first, key action to take has to be...
a. Not getting into the situation in the first place!
"Now, this obviously must be stating the obvious, " I hear you say. However, how many times do you know of end-users signing/ forcing the company into such agreements.
Here are 3 common mistakes to avoid.
1. Not thinking carefully about the contract throughout its lifecycle, properly identifying risks and then summarily signing the supplier's contract...
A truly amazing example I heard of this week related to an Office Automation supplier who had the following clause in his contract , agreed to by the buying company. "If at any time additional components are purchased to supplement the office equipment, the entire contract is extended by an additional 5 years! In this case even though there might be alternative suppliers, the contract created a sole supplier.
One can just imagine the cute "dolly bird" offering the suppliers' contract to sign - "Its just our standard terms and conditions Sir...".
If proper contract management principles were adhered to, a professional procurement person would have thought about the lifecycle of the item (and the total cost of ownership (TCO)) , identified potential risks along the way and ensured that these are addressed. Then we could have offered the supplier "Our Contract!".
2. Getting caught by "Techno Lust"
Another way of getting set up into a sole supplier situations is through specification. As we all know, engineers suffer from "Techno Lust". (Being an engineer myself, I can testify to this truth). So the engineer (or the IT people), determine that they absolutely cannot do without the functionality in their spec.
Never mind that their specification is highly complex and suffers from high variability. This results in one only being able to buy the product form one very particular supplier. (This is also called creating a high supply base challenge by design!).
If strategic sourcing principles are followed and a cross functional team is put together to challenge the specification this type of situation can be avoided.
3. Having the "Balance of Power" shift...
This is especially prevalent in outsourcing agreements. The tendency is to outsource areas of the spend where "we are not experts" in. The supplier absolutely loves this because it means that they could write all kinds of "expert clauses" in the agreement, many of whom will come to play when the "Balance of Power shifts".
What this refers to is that once the deal has been made and our ex-internal function is being run by the supplier it becomes extremely difficult and costly to bring it back in house never mind managing the supplier.
The guideline here is to get to know the area very well before we outsource - especially throughout the lifecycle of the contract..
Think carefully about what alternatives are available should things go wrong. Remember, once the service has been outsourced and your people are now working at their company... Or your IT is now being run by them... What recourse will you have..?"
Furthermore, by calculating total cost of ownership throughout the lifecycle, we can identify the drivers of the various costs going forward and in this way ensure that we contract for the wide and disparate number of issues that can arise during the agreement. We can also contract around what happens when these drivers change.
Finally its probably a good thing to outsource on a piecemeal basis. By starting with a small part of the contract, we can learn what the supplier really means in their proposal and contract for the next phase in the correct manner. It also helps to have the rest of the deal "out there" to motivate supplier behaviour.
Ok so "not getting into a sole supplier agreement in the first place" is probably quite an obvious statement, but prevention is better than cure..
But what to do if we are already in such a sole supplier situation:
a. because some end-user - who has since left the company - has put us in this situation or
b. we really need this product and can't get it anywhere else
In the next issue
HOW to negotiate with a SOLE supplier...(Part 2),
we'll be dealing with ways to:
1. Shift the balance of power in your favour even with a sole supplier
2. Finding hidden ways to get the sole supplier on your side.
3. Creating competitive advantage through a sole supplier.
To your success!
Posted by Bernie at 08:17 PM | Comments (0)
May 16, 2004
Why should SALES, IT or OPERATIONS enjoy a greater mandate than Procurement?
By Bernie van Niekerk
It seems that everyone in the organisation has a reason why Procurement should not get TOO involved in their particular area of the spend! Ask the IT function, and they'll be of the opinion that IT's too technical and only propeller heads can really understand it...
Never mind the fact that they make some awful commercial mistakes in the acquiring process. Speak to marketing and they would like to know what does Procurement know about advertising and sponsorships. Its often the same story with transportation (that's Logistics' domain!), insurance and so on...
With what's left of the spend, there is often little opportunity for procurement to really make its mark... and the company loses out in the process.
Fortunately, this is not the case with all companies / organizations. Some interesting research from CAPS (Centre for Advanced Purchasing Studies) showed that in many large global companies procurement now play a very senior role within the organisation.
- in the Aerospace industry 47% of the time procurement reports directly to the CEO
- in the engineering / construction industry 41.67% of the time procurement reports
directly to the CEO
- in the diversified foods industry 33.33% of the time procurement reports directly to the CEO
- in Mining 27,27% of the time procurement reports directly to the CEO
- in Municipalities 17.2% reports directly to the City Manager and a further 6.9% to the Mayor
- in the Petrochemicals industry 30.77% of the time procurement reports directly to the CEO
- in the Telecoms industry 11.11% report directly to the CEO
- in the Utilities industry 6.25% report directly to the CEO
- in the Banking industry 83.33% of the time procurement reported at a corporate and not a department level.
But the research does go further to show that even in the case of these companies, procurement is not always getting its hands on all the available spend.
However, in the most progressive environments procurement is deeply involved in just about all bought in goods and services.
In talking to some of the companies that I have trained recently, procurement is even
getting involved in the acquisition of COMPANIES! (An interesting question: Should
buying a company be classified as Goods or Services?)
Whatever the answer, some progressive companies are using the procurement function to identify strategic sourcing opportunities in the company to be acquired. This enables the buyer to acquire a company, knowing that their is significant cost reduction opportunities which would ultimately significantly increase the value of the acquired company. Talk
about World-Class Procurement!
The big question for some procurement functions then become: 'How do we reposition the function so that it can play this strategic role?'
One of the most important steps towards creating a world-class organisation is to create
a compelling and comprehensive vision for what the function should be doing inside the organisation. (I have written a more comprehensive article on this topic which can be accessed here.) The key point to make about this vision is that it takes the form of conditional bargaining.
For those of you who have attended negotiations training, you'll remember that the little
word IF plays a very important role in the bargaining process. It ensures that one never
gives away something for nothing!
In the same way, the procurement vision has to contain a comprehensive IF statement.
And this is where the concept of MANDATE will be achieved.
Any organisation would love massive cost reductions and other supply chain benefits from the procurement function. While we all know that procurement can achieve these benefits,
it cannot do so without the appropriate resources or the appropriate mandate...
And this is the point where a NEW DEAL needs to be struck between procurement and
the organisation.
The NEW DEAL will read something like this:
Procurement will be able to deliver to the organisation the following benefits:
1. e.g. Increase operating profits by at least 50% through reducing the overall spend by at least 5%. (the effect on operating profit will vary by company, but reducing the overall
spend by at least 5% is well within reach)
2. e.g. Improve inbound supply chain performance (delivery, quality, service, innovation etc) by 5% per annum year on year...
and various other inspiring goals...
IF... (This is where the conditional bargaining comes in)...IF, the organisation agrees to do the following (examples):
1. Provide the function with the appropriate organisational resources .. E.g Staff, management level ,incentives etc.
2. Puts money aside for appropriate technology. (Codification, Contract Management, e-Procurement, Purchasing cards etc.)
3. Agrees that procurement is responsible for driving value out of the entire spend
through strategic sourcing
.... and whatever other infrastructure, policies, mandates etc. are required. (for an
interesting case study follow this link)
The fundamental difference between acting in this way and the traditional procurement approach is that the organisation invests back into procurement according to the benefits produced. Often procurement professionals report significant savings but do not see a
single cent spent back on creating a world-class function.
The NEW DEAL is like a contract with the organisation. In fact, its a 2 way Service-Level- Agreement (SLA). The contract is between procurement and the board as well as procurement and the various key functions in the business (such as Sales, Operations, IT and the like)
Most procurement people understand this concept since we do this with suppliers the
whole day! Now just apply in the opposite direction.
In closing, (and referring to the title of this article), its quite obvious that procurement deserves to have the greater mandate for achieving world class procurement. The company also deserves world-class procurement. The only question remains whether or not Procurement truly believes it deserves the mandate...
To your success!
Posted by Bernie at 08:28 PM | Comments (2)
January 14, 2004
How one procurement manager's vision shook the auto-industry
By Bernie van Niekerk
March 1993. The New York Times reported that the Vice President for Worldwide Purchasing at the world’s largest Automotive Company was leaving. As a result General Motors (GM) lost 3.5% of its market value in one day!
Jose Ignacio Lopez de Arriortua, was credited with saving GM more than $4bn during the 1992-1993 period. He controversially decided to move along with 7 of his staff (and, allegedly, lots of confidential information) to Volkswagen (VW) as its Chief of Production Automation and Purchasing. This ultimately resulted in a courtcase that dragged on till January 1997. The final settlement called for VW to pay GM $100 million in damages, purchase over $1 billion in parts from GM over the next seven years, exchange letters off apology, and bar López from working for VW in any capacity until the year 2000.
Interestingly enough, Lopez’ vision – and the subject of his negotiations with GE and later VW – was later realised. In the end, Lopez saw his ”Plant X” dream realized in the form of VW’s new truck and bus plant in Resende, Brazil, in the state of Rio de Janeiro.
On the one hand, Mr Lopez was an excellent example of the massive difference that procurement can make to the organisation. He came to GM at just the right time. It was rumored that at one point in 1991 GM came within 16 hours of not meeting payroll! (See abovementioned link) The billions that he returned to the bottom line have certainly assisted GM in turning achieving 8 years of consecutive earnings growth.
On the other hand he is also credited with potentially causing irreparable harm to the long-term supplier relationships key to GM's future competitiveness. And his alleged unethical behaviour in passing trade secrets from GM to VW is certainly not the type of “mis - leading practice” to emulate.
But the fact is that the man had a compelling vision for what he wanted to achieve. He was adept at communicating this vision to all involved including: senior management, union representatives and suppliers.
The proverb states that “Without vision, the people perish”. And if procurement leaders do not have a compelling, appropriate and comprehensive vision, the procurement function will remain as corporate “backwater.”
Control your destiny or someone else will” said the well known ex-CEO of General Electric, Jack Welch. In procurement this is especially true. There is no end to the number of people in the organisation who would rather you stay away from their key areas of spend such as IT, Logistics, Marketing etc. “What value can purchasing really add?” they would ask.
Fortunately the concept of how to build a vision for a world-class procurement function has been successfully developed and implemented by other procurement leaders. We can benefit from their learnings – both mistakes and successes - in how to turn the function around.
Firstly the vision has to be Compelling.
I’m not only referring to the fact that the vision has to motivate the procurement function into action but that the rest of the organisation must find it incredibly motivating. The procurement function often does not have sufficient resources. As a result people are unwilling to make great claims about what they can achieve, and so the goals communicated to the organisation are often greatly tempered by caution. However, if the vision is presented in a conditional fashion (see point four below) one can promise the organisation the world and not lose your shirt.
Secondly, the vision has to be Appropriate
The vision also has to be articulated in the language of the other key stakeholders in the business. Instead of just mentioning the fact that procurement will be adding Rx million to the bottom line, how we are going to create sustainable competitive advantage for the organisation. What will the impact be on earnings per share, company value, supply chain performance, environmental compliance, BEE development and so forth.
Thirdly, the vision has to be Comprehensive
The goals and objectives within the vision is really just the tip of the iceberg. The real work lies in figuring out what needs to be put in place in order to achieve the vision. Do we need to implement Strategic Sourcing, World-Class Supplier Management, Effective Contract Management, Advanced Planning and Control and efficient day to day procurement processes? What about the required technology, organisation and performance measurement to make sure the whole thing work? How much would it cost? When would the benefits start appearing etc.
Fourthly, the vision has to be Conditional
When is the last time that the savings that you put on the table were REINVESTED into the procurement function? The magic words here are IF and THEN. Example: “IF we are able to appoint the right people, technology and implement strategic sourcing, THEN we will be able to save the company R50m pa in three years time.” Its basically a service level agreement between the procurement function and the organisation. IF you invest this much, THEN we will deliver the following. This is diametrically opposed to the status quo where the procurement function puts savings on the table and HOPES that the organisation will invest some of it back into the function!
And Finally, the vision has to be Pragmatic
We might sell the organisation on a grand dream and this is appropriate (see first point). But we need to ensure that the planning of how this will be achieved is pragmatically orchestrated. Try and schedule the drawing down of resources (be it cash, people, technology etc) to coincide with benefit being produced by the function. In this way the function “pays” for its resources as and when it is required. Ensure that the gap between the resources you require and the time that it will take to benefit is as short as possible.
In short “Plan to be a Hero!”
Joel Barkers described the philosophy behind developing a vision quite aptly: "Vision without action is daydreaming, but action without vision is just random activity."
Posted by Bernie at 08:31 PM | Comments (0)