Buyers Meeting Point procurement by Kelly Barner

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Displacing Incumbent Suppliers

Displacing Incumbent Suppliers

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.

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Procurement’s (Not so?) Finest Hour

Procurement’s (Not so?) Finest Hour

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.

 

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Are Suppliers Faceless Entities?

Are Suppliers Faceless Entities?

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 supplier

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.

Labels

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.

Who Cares?

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

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 future

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.

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Should procurement be paid commission?

Should procurement be paid commission?

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:

  1. 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.
  2. 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.
  3. Ensures operational costs are kept to a minimum.
  4. 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?

 

 

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The Contract as Catalyst for Cultural Change in Procurement

The Contract as Catalyst for Cultural Change in Procurement

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.

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