Best Practices in Supply Management Journal

49th Edition, April/May 2011

Articles In This Issue
"Selling the Value of Procurement to Internal Customers"
"The Declining Benefit of EOQ Calculations"

Upcoming SPS Public Appearances



Orlando Florida - Robert Dunn & Mark Trowbridge will both be featured presenters for the ninth consecutive time at the ISM International Conference in Orlando, Florida (USA).  They will be presenting a one-hour seminar titled "Strategic Contracting - Best Practices in Leveraging Contract Portfolios" at 10:20 a.m. Tues May 17th. (If you will be at the International Conference, please take a few minutes to visit the Strategic Procurement Solutions booth in the Exhibit Hall). 


Shanghai, China - Mark Trowbridge will present our two day Advanced Procurement Negotiations™ workshop at the Four Points by Sheraton Hotel in Shanghai (May 26th - 27th).  More information is available through the Marcus Evans Events training company by clicking the following web link:  Shanghai Conference 


Dubai, UAE - Mark Trowbridge will also be presenting our three day Expert Strategic Sourcing™  workshop at the Sheraton Dubai Creek & Towers June 7th - 9th.  More information is available through Bridge Knowle Events by emailing Register@BridgeKn 









































































































































































This electronic journal is now distributed bi-monthly to nearly 10,000 Supply Management Professionals around the globe.  Click on the "Join our Mailing List" button if you would would like to receive without charge, and feel free to forward to your SCM colleagues!  In return, just keep SPS in mind if your organization ever needs top quality Supply Management Consulting, Employee Skills Testing, Training, P2P Efficiency Reviews, or Staff Augmentation Services.


"Selling the Value of Procurement to Internal Customers" - by Robert Dunn, Principal, MBA

Have you ever wondered what it is like to be the sales executive on the other side of your desk?  Well now's your chance, because today's supply management professionals must be effective "Sellers" as well as "Buyers".


Being the most skilled procurement team in the world doesn't make any difference, if our internal customer departments won't work with us.  Selling the value of procurement is foundational to our success.  This is often very difficult.


Many of the traits which make procurement professionals good "buyers" tend to limit our ability to be effective "sellers"...especially if our organization is perceived as a non-responsive, reactive, or low value bottleneck. 


In many of the 360 Degree Supply Management Efficiency Evaluations our firm conducts for Fortune 500 companies and public sector agencies, the failure by procurement to properly-align with their stakeholder groups is a frequent finding...and a strategic opportunity.  Moreover, a 2010 study by the Hackett Group documented the fact that a full 54.3% of procurement groups feel they need to 'improve alignment' with their key stakeholders.


Supply chain organizations must become 'marketers' if we are going to be able to add value by driving savings to the bottom-line.  Our internal customers need to understand how we can support and assist them in reducing costs while sourcing top-quality products and services.  Many current (and potential) customers don't understand our role...because, in many cases, we haven't told them in an appealing way.


An important aspect of procurement's role is to reach out to our current (and prospective) customers departments to explain the benefits of utilizing the procurement organization.  We need to be pro-active in bringing this message to them.  If we are to sell them, we need to develop and begin to use effective sales techniques and skills to increase our customer capture rate.


Why Do People Buy?  When developing our internal marketing strategy, we must first put on our sales caps and determine "Why People Buy?"  Buying decisions are motivitated by a desire or need.  We can only convince our internal customers that they have a need for procurement's services, when we can demonstrate value they don't currently have.  Consider the following premises of selling, which are understood by the sales executives who call upon you:

  • Needs are perceptions which exist in a customer's mind.
  • Perception of needs vary by individual and by situation.
  • Customers will act to satisfy a need when that need becomes strong enough.
  • All of procurement's services have features, which can be adjusted or enhanced to appeal to the needs of our customers.
  • The right combination of features can satisfy a customer need.
  • If a feature can satisfy a need, the result is a benefit to the customer.
  • Need + Feature = Benefits

Remember, if customers don't perceive any 'need' then there will be no perceived 'benefit' in utilizing procurement's services. 

Needs Procurement Can Satisfy.  Consider presenting the following procurement services as "features" to satisfy your internal  customer's "needs":

  • Reduced total cost
  • Participation in enterprise volume agreements
  • Skilled negotiation support
  • Ease of ordering via catelog-based eProcurement technologies
  • Lower risk
  • Shorter Procure to Pay (P2P) cycle times
  • Higher product and service quality
  • Contract management expertise
  • Supplier performance benchmarking

Just as the sales executive has a strategy for reaching customers so should the procurement team.  A good procurement marketing strategy should address the following elements (at a minimum):


First, determine your major customer groups (existing and those who don't currently work with procurement). 


Second, develop marketing tools to help procurement staff educate and support customers (Departmental Brochure, Procurement Manager Contact List, Roles & Responsibility Matrix, Internal SLA, PowerPoint Presentation on Procurement Services & Methods, etc);


Third, prepare for customer interaction, determining the procurement managers and personnel best-equipped to fulfill each customer's needs;


Fourth, schedule regular meetings with key customers to become familiar with their needs and to pro-actively become involved in their upcoming procurement actions (and just like the sales executive, try buying lunch for your key customers every now and then).  If it's practical, be a regular participant in customer project manager meetings (for example, Information Technology, Operations, Production); 


Fifth, after every key sourcing or supply chain project, immediately contact the customer to review and critique the project, enhance future interactions, and identify additional opportunities; and


Sixth, through the company newsletter or internal web site, continually advertise the 'value add' of new procurement programs.


About the Author - Robert Dunn, MBA is one of Strategic Procurement Solutions founding principals.  More than 35 years of procurement and materials management leadership experience includes key corporate roles in the Technology, Government, and Financial Services sectors  Mr. Dunn has worked with consulting clients throughout North America, Latin America, Europe, and Asia. 


Please email if you would like information about  our 360 Degree Supply Management Efficiency Reviews or would like one of our company leaders to present an onsite workshop (or online webinar) training on  Outstanding Customer Service for Procurement Professionals.

"The Declining Benefit of EOQ Calculations" - by Mark Trowbridge, CPSM, C.P.M.

A classic inventory management calculation that's been used for years by supply chain groups is Economic Order Quantity (EOQ).  This metric calculates the optimal order size to replenish inventory of a particular product item or Stock Keeping Unit (SKU). 


EOQ is calculated as the order size where the cost to place and receive an order, the Acquisition Cost (AC) equals the cost of holding inventory, the Carrying Cost (CC).  It was a very essential formula as supply chain groups sought to balance the cost of investing in inventory with the transactional costs of placing an order and receiving the product.


As I've trained major company groups recently on Best Practices in Inventory Management, we've begun to increasingly focus on Total Cost of Ownership (TCO) methodology as an potentially more-beneficial means of determining order quantities than EOQ. 


Why is EOQ Less Meaningful Today?  In past days some of us still recall, the cost was much higher to create and place a purchase order, receive a shipment, and place product into inventory.  In the days when EOQ modeling first became popular, (i) purchase orders were manually-typed, (ii) buyers placed PO's via telephone or mail to suppliers, (iii) multi-part forms were burst and parts physically distributed to departments and suppliers, (iv) acknowledgement copies physically solicited, (v) receiving copies completed upon delivery fulfillment, (vi) physical matching performed by payables personnel, and (vii) checks manually printed and mailed. 


But that isn't todays reality, is it?  With automated purchasing, inventory, and payables technologies in play, most of the foregoing process is now automated.  The Acquisition Cost (AC) has dramatically shrunk to levels far below those of 10, 20, or 30 years ago. 


And if AC is lower, there has been a formulaic shift in the average EOQ formula calculation...which is the core of many MRP, MRP II and ERP technology module calculations.  If AC drops in value, then the average order size calculated by our technology tool is going to be skewed towards being smaller as well.


How Does a Shrinking EOQ Impact TCO?  For those of us with a sourcing background, the answer is immediately clear.  Placing repetitive small-quantity orders will increase the typical supplier's cost of doing business with our firm.  And when the supplier's cost goes up, our TCO typically does as well.


If we can just put on the supplier's shoes for a moment, it makes sense that most firms can produce and ship products at a lower average unit cost for larger quantitites than for lower ones.  So of course it makes sense that to place a fewer number of orders may result in a lower cost.


One of Strategic Procurement Solutions' services is staff augmentation.  We place (on a direct recruit or temporary project basis) skilled procurement professionals with many leading companies.  Recently, one of the largest global energy firms has been utilizing us to find senior materials experts to increase the efficiency of their international SCM operations.  As I was conducting second-round screening interviews with three top finalists this week, all three commented that EOQ was becoming less and less meaningful. to them and their employers (you don't think I came up with this article topic myself, do you?).


So What Can Be Done?  Leading supply chain organizations seem to be taking the following paths to identify optimal order sizes... 


First, some I.M. modules of ERP systems have the ability (or can be customized to have the ability) to plug in variable/tiered unit pricing for differing order sizes.  This functionality exists in some of our firm's client SAP, Oracle, and Epicor installations, and most-likely exists in your organization's as well.  This functionality may allow you to alter the EOQ calculations to properly reflect the benefits of order size optimization.


Second, it is important to understand that EOQ calculations can work well in certain spend categories.  These are typically categories where (i) demand is consistent, (ii) supplier costs do not vary dramatically by order quantity (for example, a distributor rather than manufacturer), and (iii) lead times are relatively short.  An example where EOQ can work well is in Maintenance, Repair, and Operating (MRO) supplies.  With some exponential smoothing, EOQ fits this spend category pretty well, even in today's environment.


Third, there are many other cost-drivers beside AC and CC.  Leading companies are starting to utilize TCO calculations at a SKU level to determine optimal order quantities.  One of our clients is a Multi-Billion Dollar producer of children's toys, which are manufactured and distributed internationally.  This company's supply chain team chose not to utilize their SAP system's EOQ functionality to determine reorder points and quantities, but rather is utilizing TCO modeling to select the optimal procurement patterns.


Economic Order Quantity is still a valid tool to use, but should not be implemented in a blanket manner without some strategic thought.  Other scheduling techniques may yield better value to your organization.


About the Author: Mark Trowbridge is one of Strategic Procurement Solutions' founding principals. He is a featured author in supply chain publications like Inside Supply Management, Supply Chain Management Review, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal.   He is an invited speaker at international supply  chain conferences, and his consulting travels have taken him throughout North America, Europe, Asia, Malaysia, and the Middle East.


If you would like information about our 360o Supply Management Efficiency Reviews, onsite training programs like Best Practices in Inventory Management, or Staff Augmentation Services, please visit our website at

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