When you just look at a purchase from a pricing perspective, it would be reasonable to think that purchasing products directly from the manufacturer be an effective way to reduce unnecessary overhead and markup costs. While I generally find this to be true in practice, if it were that black and white the large number of distributors thriving in today’s markets would cease to exist. Manufacturers and distributors each have strengths and weaknesses, but in a strategic purchasing landscape you do not always need to choose between the two. In fact, developing a balanced relationship with manufacturers AND distributors often proves to yield the most value, particularly with high volume purchases.
You’ve invested a lot of time and money. You may even have staked your reputation on backing a supplier. So when is it time to replace them?
At a recent executive meeting, the subject of incumbent suppliers arose. The conversation reflected on both the personal and business investment that can occur when a supplier is selected, from a business stakeholder and a procurement perspective.
This guest post is part of The Procurement Revolution. To share your thoughts or join the conversation, use #ProcureRev on Twitter or use the comment functionality below.
I'm Ovidiu Slimac and I am from Timișoara in the western part of Romania, a beautiful town which was just declared the European Cultural Capital for 2021.
I have worked in procurement for 15 years now. And yes, I'm human. I'm a human being. And if we believe what the researchers and scientists say, all of my purchasing activities and buying decisions are made with an emotional input – even the ones I made for my company. The question is: does being human disqualify me as a good procurement professional?
Procurement is undergoing a transformation, moving away from process and price and towards undertaking initiatives that demonstrate value for the business. Therefore, when the opportunity arises for procurement to demonstrate its value, you would expect them to seize it in both hands… or maybe not!
We want to share with you a real life situation undertaken this month. We have removed the names of those involved to limit embarrassment; both company names are fictitious, but the scenario is real.
As we covered in Nearshoring: Why Now?, outsourcing production operations to Mexico (or nearshoring) offers a number of tangible and intangible benefits over traditional “low-cost” country sourcing. Take China as a prime example: with labor rates in China, on average, exceeding those in Mexico since approximately 2013 and holding an advantage in productivity per worker, Mexico is increasingly becoming a hub for U.S.-based companies looking to transplant their supply chain operations. In moving operations closer to home, many companies are either fully or partially outsourcing manufacturing to suppliers in Mexico and in some cases, even placing full production facilities in that country. Sourcing suppliers in Mexico, however, is not without its obstacles: challenges that can quickly halt nearshoring operations for unprepared companies.
The principle of a North/South divide has been around for as long as mankind has organized itself into societies. It is a term often used within politics to define the ‘North of the country from the South’. It doesn’t matter if you are referening to the USA, UK, or India, the statement is still applicable. It works on the principle things may be considered different between two groups, thereby creating a barrier to collaboration.
The key to the model is achieving the right perspective. For example, we may embrace a North/South divide within our countries yet still passionate about being part of the same country. Overcoming the divide requires a common agenda, one that everyone can get behind regardless of which side of the divide they are from.
Special thanks to longtime BMP friend Charles Dominick, SPSM3 of the Next Level Purchasing Association for this guest post.
Welcome back to this series on improving procurement capability. In the previous post of this series, I covered how to find candidates for your procurement jobs. But finding procurement talent is easier than whittling the talent pool down to that one, perfect candidate. Let’s talk about how you do that.
Behavioral interviewing has become a classic interviewing technique. According to Virginia Tech University, behavioral interviewing is “a technique used by employers to learn about your past behavior in particular situations…Past behavior is a better predictor of future behavior than is speculation” about how a candidate would act in a hypothetical future situation.
Special thanks to longtime BMP friend Charles Dominick, SPSM3 of theNext Level Purchasing Association for this guest post.
As a procurement professional, you need to be good at finding suppliers who work out as good or better than you predict. As a procurement leader, you need to be good at finding employees who work out as good or better than you predict. In this post, I’ll share some traditional and not so-traditional ways to find high-potential procurement talent.
Some of you may be aware of smart contracts. They are a new approach to contracting which uses technology to execute and enforce the negotiated terms. In this article we explore what the future of contracting may look like with smart contracts.
What is a Smart Contract?
In essence it is the creation of a contract using computer code rather than the written word. The computer software is then used to enforce and manage the contract, enabling both parties to utilise the contract as a living breathing document.
“’Smart contract’ can refer to any contract which is capable of
executing and/or enforcing itself.”
When you think of outsourcing manufacturing operations, what country do you typically think of? China? Vietnam? Philippines? Yes, Asia is typically the go-to region for companies looking to cut costs by outsourcing production processes - and for good reason. Asia possesses both the labor and raw material resources to make the region an effective substitute to higher cost labor in the U.S. and the limited availability of certain raw materials in North America.
While outsourcing to low-cost countries such as China has its benefits (i.e. labor/overhead costs, raw material costs, scalability, freeing up the business’ time to focus on other critical functions, etc.) it comes with challenges as well. Lead times, language barriers, time zone differences, IP integrity, and a general lack of physical presence make outsourcing certain functions a constant struggle for US-based manufacturers and can outweigh the initial savings gained over the long-term. Companies oftentimes look at the price-tag of outsourcing functions such as IT support or manufacturing assembly work, figuring the decision is obvious. However, to minimize risk and to optimize/streamline domestic manufacturing operations it is important to weigh the pros and cons of outsourcing, especially in deciding which low-cost region to outsource to, which processes to outsource, and which partner(s) to use.
The term supplier is banded around with such ease, yet has it devalued the relationship and removed the individual, resulting in generic and stale business relationships?
The associated business activity of a supplier is simple enough: the supplier delivers goods/services to the buyer in order to fulfil a contractual requirement. However, the challenge is that the term can also be used in many other ways. For example:
It can be used as an excuse to blame poorly structured contracts. “The supplier didn’t agree”
It can be used to justify the buyer not doing something they don’t want to do “the supplier didn’t support it”
In essence the word “supplier” is used as a generic label to cover all and any activity between the buyer and their supply chain.
Society has a habit of labelling many areas of the world we live in, ranging from how one’s spouse might be identified “The wife/husband” through to labelling social, economic, political, regional, and religious groups.
When a label is used it can de-humanise the individual. Sometimes this is a deliberate approach to make it easier to talk about a wider group, however when used incorrectly it can also have a detrimental effect on how the individual identifies their value and how others evaluate their contribution.
Human relationships are behind all commercial contracts, and so de-humanising the relationship may feel like a convenient model for addressing multiple aspects but one needs to question if it will really drive the best out of the relationship.
When we look at the relationship between the buying organisation and their supply chain, we see a trend. Suppliers who are valued are rarely labelled as “the supplier” but are identified by either the company name or account team members. When this supplier is discussed internally, the ability to name the company/account team demonstrates to the business the value placed upon the relationship. This has a knock on effect within both organisations, a greater focus placed on the human relationships creates a stronger desire to accommodate and collaborate.
With more and more automation being introduced into the procurement processes, it has the capability to remove the human relationship aspect of doing business. Now more than ever one needs to focus on how labels are applied within business.
Collaboration remains an undeveloped area of business opportunity, with few organisations able to say they collaborate with their entire supply base. Collaboration can take many forms but they all require a human desire to want to engage. The level of support buying organisations can generate from their supply chain may be directly influenced by how the supply chain has been labelled.
The next time you discuss “the supplier” you may want to reflect if it is being used to truly reflect the larger community or to cover up other underlying issues. It is human nature to blame a faceless entity when convenient such as “The Business believes XXXX,” however to get the most out of others you need to respect who they are and what they bring to the relationship.
As a procurement professional, I am frequently tasked with conducting a spend analysis on behalf of current and potential clients, but for those outside of the industry, this may be an unfamiliar exercise. In this post, I will attempt to provide a crash course on spend analysis, answering some of the most commonly asked questions about the topic: What is a spend analysis? Why should I do one? And finally, how do I do it?
A spend analysis is a very broad term that refers to… you guessed it! Analyzing the spend of an organization with the objective of understanding where money is being spent and where there may be opportunity for cost savings or process efficiencies. Spend analyses are conducted by procurement professionals in an attempt to get a comprehensive view of all of an organization’s expenditures and they are frequently the starting point for beginning the strategic sourcing process. There are a number of benefits to conducting a spend analysis, but the most important is transparency. A spend analysis provides a holistic view of all spend (indirect and/or direct) in a given time period, typically during a fiscal or calendar year. By doing this, you are able to gain visibility into where spend is being allocated, who the top suppliers are, how many suppliers you use for certain services, and areas of opportunity. For decentralized organizations, a spend analysis may reveal potential service redundancies across departments/brands and provide insights into areas of consolidation across supply bases. Along the same lines, a spend analysis provides organizations with the information needed to increase spend control by showing where and how spend/budgets are being allocated. Although there are many reasons why an organization would conduct a spend analysis, the benefits are consistent.
It is not uncommon for procurement to receive a bonus payment based on the savings the department has achieved. In this post we discuss if procurement would benefit more from being on a salary plus commission payment structure.
AFTER READING, TAKE OUR TWITTER POLL: Should procurement be paid commission?
The traditional approach for calculating pre-contract savings is to obtain a minimum of three supplier quotes, select the mean as the base point then count the additional savings achieved above the base point. The challenge for the CFO is because the savings are subjective, they are unable to truly identify tangible and quantifiable savings from procurement’s impact, therefore the level of bonus they might apportion directly to procurement is limited.
Assessing bid submissions based not just on initial costs but total forecasted end to end costs is becoming more prevalent as businesses take a wider view of the true cost of ownership. However, since the model for encouraging procurement to strive for savings remains focused on the bid submission, applying this approach to determine bonus compensation has a high likelihood of conflict. The bonus payment approach could arguably be stated as outdated, thereby creating an opportunity for procurement. An alternative approach might be to replace the bonus model with a commission structure, based on the end to end total contract savings.
Procurement benefits would include:
- Ability to be recognised for the full business value a team/individual delivers.
- Encourages and rewards end to end contract ownership and relationship management.
- Encourages post-contract collaboration, ultimately leading to the possibility of generating post-contract savings within the same contract term.
The potential benefits for the business include:
- Maximises pre and post-contract savings. Post-contract savings is an area currently underdeveloped as the main focus remains on pre-contract savings, which is understandable given it is the main area for bonus achievement.
- Creates a catalyst for procurement cultural change, focused on supplier collaboration and successful implementation. This unlocks the supply chain and drives innovation and collaboration across the business to increase bottom line profits.
- Ensures operational costs are kept to a minimum.
- Encourages and rewards end to end contract, maximising contract savings
There are many people within procurement who have “fallen” into the role rather than pro-actively sought to become procurement professionals. Even those who have deliberately sought after the role, few may still believe it was a good career choice. The change to commission based compensation has the potential to raise procurement salaries to new levels, provide a catalyst for change, and enable procurement to reflect their full business value, which could in turn could attract new talent and retain experience that is sorely needed.
Like all new ideas, there is an upside but also a downside. Moving onto a commission structure based on the overall savings from successfully managing the contract could quickly lead to some personnel being identified as under delivering. The key to gaining business support in this initiative is by demonstrating greater profitability for the CFO in undertaking this route. The central question is: does procurement want to undertake this direction?
If you were to review your own procurement team’s achievements and capabilities from the perspective of a customer, would you buy from you?
The principle of using an internal business function which is currently a cost centre, and turning it into an revenue generating business proposition, is not new. Examples can be found in most areas ranging from IT through to Finance. The principle is based on creating such a leading business function others will pay to use.
How often can you find 80% savings in your telecom bills? When it comes to legacy services, more often than you’d think!
In all industries there are mergers and acquisitions: Telecommunications and Technology being one where M&As occur more frequently than most. These changes can have significant impacts on the products and services customers are purchasing in terms of the actual technology being offered and the prices they are paying for it.
I recently completed an audit for a customer in the healthcare industry where I was asked to review their telecommunications invoices and look for more cost effective solutions than their current voice services. The first thing I noticed was how high their bills were for basic voice services - almost 480% higher than normal industry standards! The customer had not really looked at their bills for years and simply continued to pay the same monthly charges thinking all was right as rain. Understandably, patients are the priority for them - not the cost of their phone service. For this specific customer, the technology they had in place was a legacy service where the underlying carrier had recently been bought by a global industry leader, who had subsequently developed more cost effective products offering the same functionality at a much lower price. Unfortunately, carriers do not always offer up the insight into technology changes and lower cost options when it is in their best interest to keep the higher price bills in effect.
Presented below are some quick tips for reviewing your telecom bills to determine if a change in service is viable, beneficial, or more cost effective:
- Recurring Charges: How long have you been paying the same price? Pricing changes are common with technology-driven services. If you have had the same price for 3-5 years and under multiple contract terms, it is time to take a look at the market with fresh eyes. There are always compelling reasons or special circumstances for contracting a fixed price for longer terms such as newly implemented networks and systems; but for basic voice services…I don’t think so.
- Time Passed Since Last Going-to-Market: As mentioned, most telecom companies are continuing to develop new innovative ideas and upgrades to their technology; most likely within 3 years of their current technology. If you have the same service in place for more than 5 years, it is probably time to take a look. I know “if it ain’t broke, don’t fix it”; but why not just get a feel for what is available and for a potentially lower cost? After all, it may be up to procurement to determine when something is ‘broke.’
- Contract terms: When was the last time you looked at your contract? Do you (really) know what your current terms are? If you cannot answer these questions, chances are the answer is probably too long and you are month-to-month or under some ridiculous auto renewal clause. It is important to read the small print in your contract as you could be committing to an unrealistic term length with no out...unless of course you are planning to spend more money with the same supplier for an even longer term.
When we presented the opportunity assessment to our healthcare client, they were understandably shocked. We moved forward by leveraging the market-competitive offers to contract a new technology at almost one fifth of the current cost. The soft dollar costs of implementing the new service were eclipsed by the overall savings, making this a huge financial and technological success.
As I encourage you to review your bills more closely, let me add that the idea of tracking down wasted spend and going to market for legacy products and services is not limited to the telecom industry. It can be applied to any business commodity and begins with simply questioning the products and services you’re paying for.
Leadership is a rare and valuable attribute that will separate a good professional from a great one. A leader will possess a unique vision and the ability to transform this into a tangible reality. Most importantly, a leader should inspire others to do the same.
A united, forward-looking outlook is the best way to continue to propel the logistics industry forward. As a fast-growing sector affected by globalisation and advancements in technology, innovators must be a driving force. Having access to new ideas will play a fundamental role in building each leader’s influence and unique impact on the organization.
Check out these five key signs of a logistics leaders to enhance your own professional standing.
According to TechInsider, there are warehouse robots currently in place that could potentially boost productivity up to 800%. Yes, you read that correctly: eight hundred percent. With huge boosts in productivity, it comes as no surprise that companies such as Amazon are taking automation to the next level, but what impact will it have on their employees? If the numbers stack up, the robot takeover could be imminent, but that does not necessarily mean human warehouse employees will become obsolete.
As with most technological advances, employees must adapt. Remember when basic computers were introduced to the workplace? Let’s take a look at some of the robots being used today, how they’re being utilized, and most importantly, what it means already or is going to mean for their human ‘coworkers.’
Scenario 1: The supplier contacts you in writing to state they have submitted the wrong pricing in the bid…what is your first response?
- Tough luck you submitted it
- That’s typical of suppliers, always trying to trick you
- Expect the price is going to increase
- Interested to see if they are submitting a lower price
Scenario 2: The supplier approaches you and states they think they have a solution to deliver the contract more efficiently...what is your first feeling?
- They are looking to upsell
- I don’t believe them
- They are trying to make me look bad
- Want to discuss in a supportive and engaging manner
Scenario 3: The business reduces its requirements 2% in the contract and understandably do not want to pay for what is not required. Do you;
- Tell the supplier to “suck it up” and not re-negotiate the contract
- Re-negotiate the contract to ensure they are fairly compensated
Unfortunately we all know the responses because it is an attitude that is the default towards suppliers; confrontation & mistrust. For many within procurement it is a justified attitude because in the past any leniency has been abused by suppliers.
Millennials are known for many things, and while there is no one ‘Millennial profile”, they are unquestionably natural with technology. Business technology is changing because providers are seeing demand trends from these digital natives. Since Millennials will make up 40% of the workforce by 2020, they are a group that will improve our current solutions because they have high expectations for technology. The challenge is to meet their expectations and bring more experienced users along with them.
Continuous cost reduction in the manufacturing industry is a supply chain best practice, but all too often it is mistakenly seen as unsustainable by strategic sourcing and procurement departments. For many companies the question is, ‘how can I reduce costs while limiting the impact on quality?’ Before jumping right to substituting materials, there are other options for delivering cost savings - yes, even over time.