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An article by Mark Trowbridge  titled "How to Find, Maintain, and Motivate Top Talent" appeared in Supply Chain Management Review Journal (May/June Edition).  Our readers can view the article at SCMR Article Link

Mark was a presenter at the ISM International Conference, on the topic of Innovative Practices in Technology Contracting.  Contact us at Email Link to request a copy of the presentation.

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The technical supply chain term for this executive's comment is "Demand Management". True supply leadership has to manage both the "Supply" and "Demand" sides of product and services acquisition in order to be effective.

But too often, as my colleagues and I help global procurement groups improve their proficiency; we see procurement groups which seem only to focus on the "Supply" side of procurement. Don't get me wrong, the Supply side of procurement is incredibly important. Supply issues include:

- Identifying the best "suppliers" of products and services we need;

- Negotiating optimal costs with suppliers to ensure a stable and secure pipeline of products;

- Ensuring that the quality of products and services is what our organization needs.

 But today's top procurement professionals also have to understand the "Demand" side of supply management. Managing Demand is working pro-actively with our internal customers to minimize usage of certain products or services. Demand is inexorably tied to Supply in determining procurement's leveraging position in a marketplace.

Here are four ways we can effectively use Demand Management to reduce costs:

First, Increase Yield - Far too often, those of us in procurement try to get the lowest "unit cost" on a product. But that cost doesn't tell us how much utilization (yield) we are receiving from the product. In my first job after college, I worked for one of the largest manufacturers of fiberglass boats/yachts in the world. Our production lines used diamond crusted circular cutting blades to trim the edges off of molded boat hulls. We used a lot of diamond crusted saw blades, and they were expensive. We did a lot on the Supply side of procurement to reduce/control the price of the saw blades, but Total Cost kept going up. Until one day I decided to park myself at the end of three of our production lines.  I soon observed that it was "easier" for the operations personnel to cut using brand new blades. So they kept taking partially-used blades off of their saws and putting new ones on (even though the used blades might still have had 25% - 45% effective life still left). From then on, we allowed workers to replace their blades only after they had cut through a predetermined amount of material.   Total cost dropped, because we reduced the number of blades being purchased.

Second, Pay for Results - Strategic Procurement Solutions has worked with many clients in the minerals field. One of the largest global mining companies shared that they used to purchase replacement tires for their big earth movers (the 40' tall vehicles you see on the Discovery Channel) in various ways...always trying to minimize the "price per tire". The tire companies were paid whenever a new tire was mounted, whenever tires were rotated, and were penalized when a tire failed. The mining company had tried auctions, leveraged multi-year contracts, timing tire purchases to petro index prices (which factor into rubber pricing), etc. But their cost per tire kept on climbing. So the mining enterprise tried a new technique. They contracted with a major tire producer to provide them with tire management services, with payment being on a "cost per mile" basis. The tire producer was given performance standards such as rubber compliance, traction, grip, driver comfort, driver satisfaction, and safety which they were periodically tested upon. The tire manufacturer's personnel determined how often tires were rotated, what the optimal inflation pressure was, and when tires were replaced. Suddenly, the mining company noticed that the tire companies wanted tires to last as long as possible. They recommended rotation patterns and inflation pressures which increased tire wear. All because they were being paid for performance, rather than for selling more tires.

Third, Focus on Total Cost of Ownership (Not Just Unit Price)- While out shopping recently at a large retailer of consumer goods (using a shopping list my wife had written out for me), I witnessed a great example of where someone in a procurement function had apparently made a "Supply" decision without considering the "Demand" implications. The checkout person was bagging my purchases, and sarcastically-commented that the "stupid people at corporate have made the plastic bags even thinner". I laughed and joked that "someone in purchasing" had probably negotiated a "quarter of a cent in savings" by making the bags thinner. Then I noticed what the checkout person was doing. They were doubling up every bag, so that the bags wouldn't rip through. A partial cent savings doesn't last very far when the volume of bags doubles...

Fourth, Just Don't Buy it at All - Procurement should be the first group to question why something needs to be bought. As my boss observed, it's a 100% savings if we don't buy it at all. This concept can be applied throughout the supply chain, if we just take time to understand all the products and services which are being acquired. Examples might be:

- Why are we mailing multi-color marketing materials to customers, when social networking media could be more effective?

- Why are we storing company records and paying cubic foot storage fees, when those records could be scanned and stored digitally at much less cost?

- Why are we bringing in raw components and having our staff assemble them, when we could buy pre-manufactured sub-assemblies for a lesser cost?

- Why are we printing and mailing an expensive annual company report, when mailing out a high quality card invitation to customers (that links them to a color PDF annual report) could be done more cost-effectively?

- Why are we holding excessive "safety stock" inventory, rather than purchasing smaller quantities and avoiding "holding cost" expenses?

Any time a company can reduce the quantities of products or services it procures, we are exercising "Demand Management". And when our suppliers see that we can control how much of their products/services we need to procure, that positions us to leverage the "Supply" side of the relationship as well.

If you would like new ideas about how your organization can reduce costs through Sourcing, Demand Management, Supplier Management, and other techniques, consider having Strategic Procurement Solutions' experts perform a 360^o Supply Management Efficiency Review. Takes just a few weeks, and we help identify many ways to improve supply chain performance. More information can be requested at Info@StrategicProcurementSolutions.com

About the Author - Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 28 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors...culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, of Bank of America (then, the USA's third most-profitable company). During his final two years with Bank of America, Mark's areas of responsiblities delivered a Quarter Billion Dollars in cost reductions. During the last dozen years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, Asia, and Malaysia. He is a frequent author on supply management topcs, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, IFPSM's eZine, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal.  Mark's  LinkedIn profile is among the top 1% most-viewed (out of 250 Million members).

The longer I've been in the supply management field, the more things stay the same. I remember the first time I witnessed an e-Auction. The results of the event were impressive, with some good price compression through the event. My observation then was that auctions were a powerful tool, as long as the spend category was not too complex.

Over the last decade (+), most supply chain leaders have come to the same conclusion. Auctions work best when the products or services have similarity to a "commodity", i.e. when there is little or no differentiation in specifications, quality, units of measure, etc. between providers. Commoditization is ideal for auction leveraging, but not always (for example, the expenditure value still needs to be significant enough to warrant interest from suppliers; there must be multiple providers willing to compete; etc.).

Some buyers do feel differently, of course. Procurement leaders from companies like Google� and others have been summarized as saying "there is very little which can't be auctioned".

Auction technology has generated some very impressive savings in many spend categories, which have been credited to the technology itself (often by the software providers who market the tools). But I think it's about time to ask another question, "Did a savings result because we ran an auction, or because this spend category had never been properly leveraged beforehand?" It might be that some auctions are achieving results because the prior procurement staff members weren't bold in doing competitive bidding or negotiations. Or a different sourcing technique might have yielded even better results than did the auction.

If the answer to our question is the latter, we now need to decide whether an auction was the "best" tool or technique to apply to every sourcing event. Many times an auction is the best technique. But a good craftsman should have other tools in their toolkit. A ball peen hammer just isn't the right tool for many sourcing events. Sometimes a scalpel is a superior tool.

For example, a Request for Proposal (RFP) is a powerful tool used by leading sourcing groups for complex solicitations. These are ones which have multi-variant quality, specification, and TCO elements. The best tool for these types of sourcing events is usually still a RFP. But a RFP can be conducted in different styles that still enable price compression, sometimes much more significant than that in an auction:

(i) A Multi-Round RFP has bidders submit their initial proposals. The low price elements are then summarized and sent back out to all the bidders to submit a revised proposal; each seeking to bid out the low bidder on the various elements. This capability has recently been automated in a new type of technology tool called a "soft auction" by a leading technology provider. This allows multiple submissions of hundreds (or thousands) of pricing elements in a longer term auction style RFP. One of Strategic Procurement Solutions' clients recently called the provider's tool "Brilliant" for complex solicitations (contact us through our website for the technology provider's name).

(ii) FAFO plus Negotiations - Another style of RFP is a First and Final Offer (BAFO) followed by negotiations. In this solicitation, the suppliers are asked to submit a strong initial proposal. They know from the original RFP that the buying organization will use the initial proposals to select a "shortlist" of firms with which to conduct negotiations.

Do not underestimate the power of negotiations. Many top sales executive will admit that they will concede more to a well-prepared customer in negotiations, than they will give away in an auction. One of my colleagues knows a top sales executive for one of the largest global office supply companies. The executive shared that "none" of the firm's 15 lowest-margin customer accounts was achieved through an auction event. All 15 had been conceded through a traditional RFP coupled with strong negotiations.

Recently, one of Strategic Procurement Solutions' principals has been helping a corporate client organization conduct an analysis of Procure-to-Pay technology solutions. As the senior representatives of the solution providers demonstrated their eSourcing and Auction tools, my colleague was interested to hear several of them comment that their other customers seemed to be using auction technology less, and RFQ and RFP technologies more. Two providers commented that a lot of marketplaces were "auctioned out". In other words, just running another auction is not going to achieve a different result than the last time. This reminded me of the Albert Einstein quotation that, "The definition of insanity is doing the same thing over and over again, but expecting different results".

When a marketplace is "auctioned out", don't hit it again with a hammer. That tool just isn't doing the job. 'Auctioned out' marketplaces include those where the main suppliers won't participate anymore in any auction (parcel freight, for example). Or they are reflected in the 24% of all auction participants which never submit a secondary bid (firms input an initial bid so their proposal is considered by the customer, but never make a subsequent concession). Skilled procurement professionals need better tools and techniques if we want to achieve remarkable results.

Sometimes a different auction strategy may achieve different results.  Many procurement groups are experimenting with different combinations of auction concepts, including Open vs. Closed Auctions, Reverse vs. Forward Auctions, Dutch vs. Japanese Auctions, Auction Timing, Bid Decrements, Sequencing Events, etc.  And  innovative new tools are being developed, such as the "Soft Auction" mentioned in Mark Trowbridge's article above.

If you would like more information about all sourcing techniques, consider having Strategic Procurement Solutions present one of our onsite training programs to your staff members. Three programs which cover the spectrum of this article include Advanced Procurement Negotiations™ (2 days), Expert Strategic Sourcing™ (3 days), or Leading Practices in Competitive Bidding™ (2 days).   Just contact us at Info@StrategicProcurementSolutions.com

About the Author:  Robert Dunn, MBA, C.P.M. is one of Strategic Procurement Solutions' founders.  His 37 years in procurement leadership covered management positions in the Government, Technology and Financial Services sectors; culminating in a role directing all of BankAmerica Corporation's procurement operations.  He has served as President of two ISM/NAPM affiliates, and taught supply chain management at the post-graduate level for California State University - Hayward and St. Mary's College - San Francisco.  He has worked with major corporate and governmental clients in the consulting industry for the past 18 years.  Robert has worked on major procurement initiatives in North America, Latin America, Europe, and Asia.