Best Practices in Supply Management Journal

50th Edition, June/July 2011

Articles In This Issue
"Preparing for Tough Negotiations"
"The Declining Benefit of EOQ Calculations"

SPS News & Founder Appearances

 

 

New Cost Reduction Services!  In addition to our other cost reduction services, Strategic Procurement Solutions has formed alliance relationships which allow us to perform no cost saving assessments and provide expert cost leveraging services related to Freight & Telecommunications (Local, Long Distance & Data). Contact us for more information at Link to Strategic Procurement Solutions

 

New Spend Analysis Services! A new alliance has empowered Strategic Procurement Solutions to perform highly-sophisticated Spend Analytics and to enable our clients to also perform their own analytics.  Contact us for more information at Link to Strategic Procurement Solutions

 

A new article by Mark Trowbridge titled Building Procurement Superheroes appears in Inside Supply Management Magazine (June 2011).  The article can be viewed online at Link to Inside Supply Management Article 

 

Another article titled To Bid or Not to Bid by Mark Trowbridge appears in ISM eSide Supply Management electronic magazine (May 2011).  That article can be viewed online at  Link to eSide Article

 

The ISM Services Group's most-recent newsletter featured an article by Mark Trowbridge titled Myths About Consortium Buying.

 

 

And another article by Mark Trowbridge will soon be featured on the ISM Service Group's website.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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.

 

"Preparing for Tough Negotiations" - by Mark Trowbridge - Principal, CPSM, C.P.M. 

This article is being written 35,000 feet up in the air, somewhere over the North Pacific.  I'm returning from Shanghai - China where I just finished teaching a two-day conference workshop on Advanced Procurement Negotiations™ to a talented group of twenty procurement managers from twelve global companies.  Feedback from the participants about the new skills they had each learned, confirmed again just how important proper preparations are to a winning negotiation strategy.

 

Brilliant inventor Thomas Edison is quoted as having once said, "A genius is just a talented person who does his homework."   His contemporary and friend Alexander Graham Bell said, "Before anything else, preparation is the key to success."  These truths could not apply more aptly than to negotiations with key suppliers.  Experts have observed that 75% of the total time spent in a complex negotiation process should be occupied by preparation activities

This article is Part 1 of 2 that will provide a tips on how to properly-prepare before the negotiation begins (several more ways will appear in the next edition of this electronic journal):

Technique #1 - Prepare by Understanding the Supplier Company - Although Strategic Procurement Solutions usually trains corporate procurement groups about leading negotiation practices, we periodically train Fortune 500 sales groups on best practices they can use in negotiations.   My colleagues and I have come to know that the average sales team usually enters a high-value negotiation knowing far more about the buying organization than the other way around.  But there is little excuse for the procurement team to fail to do the following in advance of the negotiation event:

 

First, spend some time reviewing the supplier's company website.  This easily accessed information will usually provide detailed information about the supplier's various business lines, operational facilities, growth plans, company history, etc. 

 

Second, read the supplier company's annual report.  This public document not only provides important financial information of value to the buying organization (such as revenues, profitability, debt load) but also business plans about capacity, plans for expansion, etc.  I once saved my employer $2.5 Million by simply using a fact read in a key supplier's annual report before our negotiation.

Third, use the research functionality of your own online brokerage service (for example, ETrade, TD Ameritrade, Charles Schwab) to access stock analyst ratings and reports on the supplier company's stock.  Stock analysts are paid experts who review company operations and identify strengths and weaknesses...exactly the information we need to have before entering a key negotiation.   Your personal brokerage website can also be set up to flag the supplier's stock symbol, and let you know whenever key news breaks on the company.

Fourth, utilize information that your Finance or Sales organizations have available about the supplier.  This may include financial stability information about the supplier from sources like D&B or Experian, news stream sources like Reuters, company and industry analytic information from subscriber like Hoover's or the Corporate Executive Board.

Technique #2 - Prepare by Volunteering to Create an Agenda -Yes it's a pain.  But your negotiation team can learn valuable information about the supplier's team and their strategy even before the negotiation begins.  Email the supplier's team leader, and ask them for two key sets of information so you can prepare a written agenda document to be distributed to all the participants:

-  Attendee Names, titles, email addresses, and phone number of all the persons who will be representing the supplier in the negotiations. 

-  A list of key issues the supplier wants to discuss in the negotiation.

 

Your organization can then combine this information with your own team's information, and prepare a written agenda.  What does this accomplish?

1.  As any skilled negotiator knows, the 'discovery' portion of a negotiation pivots on the interrogatory questions asked of the other party.  Several categories of interrogatory techniques have been discussed by us in previous editions of this journal, but this advance type of inquiry is known as 'pre-questions'. 

2.  You'll know in advance who from the supplier's organization will be participating in the negotiations.  Pretty nice to know that their attorney will be attending, or a senior executive, or an engineer...  With this advance notice, you can arrange to have one of your company lawyers (or other stakeholders) also be prepared to participate.

3.  Receiving a list of issues the supplier desires to discuss will help to eliminate the possibility of them surprising your team with a topic to which you're not prepared to respond. 

4.  The buying team can order all the issues in the manner which will build momentum in the negotiation, logically allow resolution of key issues, and drive the negotiation to an optimal ending.

5.  providing the supplier with a list of the issues your team wishes to discuss will force them to come prepared for that interaction. 

Technique #3 - Prepare by Profiling the Supplier's Negotiating Team Personnel - The Federal Bureau of Investigation (F.B.I.) has talented analysts who "profile" criminal minds they seek to take down.  Just as importantly, skilled procurement negotiators should "profile" the behaviors, personality types, temperaments, and learning styles of their opponents in high-value negotiations.  This is something which must be done well in advance of a key negotiation, and can make a huge difference in how your team approaches the supplier's representatives.  Negotiations though, should take into account the personality types of the opposing party to achieve maximum effect.  There are many ways to learn about the senior leaders of the supplier negotiation team in advance of the negotiation event...

If the firm is a current supplier, take time to meet their executive team several months before a key negotiation event.  This can take place in a typical Business Review, or even by inviting them for a casual business lunch.

Another method is to strategically ask their sales representative or inside customer service person a little bit about the executive's personality type and management style.  If the negotiation is not in the immediate future, they will usually be glad to provide this information.  Once profiled, the negotiating team will be empowered to deal with their opponents in an innovative manner.

 

This article will be continued in the next edition, with some more ideas to help our readers Prepare for a Winning Negotiation.

About the Author - Mark Trowbridge is one of Strategic Procurement Solutions' founding principals.  His 27 years of procurement leadership experience have included 12 years in the consulting industry, following successful corporate positions in the Manufacturing, Transportation, and Financial Services sectors that culminated in a role directing all Contracting Management and most Strategic Sourcing activities for Bank of America (then the USA's 3rd most-profitable company).  Mr. Trowbridge's business travels have taken him throughout North America, Europe, Asia, Malaysia, and the Middle East.  He is a frequent author for publications like Inside Supply Management Magazine, Supply Chain Management Review Journal, and eSide Supply Management.

 

  

 

"Has Strategic Sourcing Really Been Done?"- by Robert Dunn, Principal, M.B.A.

Well, Strategic Sourcing has now been around for about 20 years.  What started as a movement from several leading consultancies and spread into the corporate marketplace due to articles like that in Fortune Magazine titled "Purchasing, the CFO's Secret Weapon", is now advertised as a success by many procurement teams. 

 

But it still surprises Strategic Procurement Solutions' practice leaders to find how few organizations have truly "sourced" their large spend categories.  This confusion seems to exist because many supply chain professionals still hold misconceptions about what Strategic Sourcing really means

 

This article will discuss three misconceptions about Strategic Sourcing held today:

 

Misconception #1 - Strategic Sourcing is the same as Competitive Bidding:  Many supply chain practitioners still largely equate "sourcing" with "competitive bidding".  They figure if most contracts were established according to organizational policy by following a solicitation process, then the spend category has been "sourced".  Wrong.  Wrong.  Wrong.  This misconception fails to recognize that real Strategic Sourcing requires a systematic approach to supplier consolidation, leveraging, and SCM re-engineering across entire spend categories.  Just doing "three bids and a cloud of dust" does not accomplish the goals of true sourcing.  And even though everything may have been "bid", it has not necessarily been "sourced".

 

The governmental sector is one where this is especially true.  By policy, nearly every public sector organization requires competitive solicitations to be performed for most transactions (except for true "sole" or "single" source expenditures).  But it is widely-recognized that most governmental agencies have not done a good job of consolidating and leveraging entire spend categories.  They may have bid out the expenditure, but spending, supplier selection, and product specifications remain largely fragmented between different buying groups.

 

Private sector companies also share this misconception.  They too have usually bid out some subcategories of spending, without ever doing large scale leveraging across an entire sector. 

 

Just because a procurement team is actively involved with their customer groups in doing bids and negotiations for standalone supplier acquisitions, does not at all mean Strategic Sourcing has been performed.  Only when entire spend segments have been properly leveraged can sourcing yield the benefits designed.

 

Misconception #2 - Strategic Sourcing requires Competitive Bidding:  This popular misconception fails to recognize that collaborative negotiation is one of the key techniques used by advanced supply management groups in the Strategic Sourcing process.  When we teach corporate procurement groups how to analyze specific spend categories, and put together a sophisticated sourcing strategy (we have a great three day onsite training workshop titled Expert Strategic Sourcing™), one of the key techniques is to correctly-identify sector attributes and choose a pathway (either Competition or Collaborative Negotiation).  

 

 A study of 5,000 procurement groups performed several years ago by the Institute of Management Administration (IOMA) found that the single-most-beneficial "best practice" they utilized was "renegotiation of existing supplier relationships".  

 

But for Strategic Sourcing to have been performed in processes which may involve collaborative negotiations rather than bidding, again a sourcing strategy methodology must have been designed, explored, and leveraged.

 

Misconception #3 - Strategic Sourcing results in more work for Supply Management:  False.  While the extensive requirements to do sourcing do take quite a bit of initial time, true sourcing reduces the transactional activities of the procurement team in several ways:

First, proper sourcing should consolidate the supplier base by a factor of 3x to 5x.  Fewer suppliers should be used, since a proper selection path has been followed that narrows down the qualified suppliers in each spend category (in many cases, establishing single source supply relationships).

Second, proper sourcing results in long-term contracts being awarded.  Less-frequent renewals and contract preparation should result in greater time availability from sourcing personnel.

Third, with the establishment of long-term contracts and implementation of eProcurement ordering technologies, procurement should be involved in a lesser degree of transactional purchasing activities.

These are just a few misconceptions which exist today about whether Strategic Sourcing has actually been done.  More certainly exist today.  The failure to recognize whether proper sourcing strategies have been applied means that value and efficiency have still not been achieved.  Strategic Procurement Solutions has measurable metrics and tests to properly help organizations answer this question about their key spend segments. 

 

About the Author: Robert Dunn is one of Strategic Procurement Solutions' founding principals. His corporate career included procurement leadership roles in the Government, Technology, and Financial Services sectors.  He served as President of two ISM chapters, and chaired the CAPS Banking Benchmark Committee.  Mr. Dunn's 35+ years of business experience have taken him throughout North America, Europe, Latin America, and Asia.

 

 

 

 

 

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