Purchase Tips

8/8/2019 Purchase Tips

1/63

Page | 1

Compiled by: [email protected] back to index

Table of ContentsNegotiating On Behalf Of Your Suppliers ...................................................................................................... 3

Tactical Procurement of Rule #1 ................................................................................................................... 4

Sole Source Situations: Eradicate Them! ...................................................................................................... 5

How To Use Cost Savings Ratios & When ..................................................................................................... 7

Purchasing Ethics: 7 Sensitive Situations ..................................................................................................... 8

Revisiting Vendor Payment Terms: It's Time! ............................................................................................... 9

Sourcing Problems In A Slow Economy ....................................................................................................... 10

Measuring Cost Savings For Mid-Year Deals ............................................................................................... 11

Procurement Ethics: Use DRD & Stay Clean .............................................................................................. 12

How To Increase The Scope of Purchasing ................................................................................................. 13

Commodity Price Forecasting, Part I ........................................................................................................... 14

A 20-Point Proposal Evaluation Checklist ................................................................................................... 15

A 21-Point Negotiation Checklist ................................................................................................................ 16

Do You Make These Purchasing Mistakes? ................................................................................................. 17

Today's Biggest Supply Chain Threat? ........................................................................................................ 18

The 4 Worst Procurement Myths ............................................................................................................... 19

8 Supplier Selection Criteria & The SHoCC ................................................................................................. 20

Bad Negotiation Habits: Break Them Today! .............................................................................................. 21

What CFO's Expect From Procurement Professionals ................................................................................ 22

Negotiation Techniques With A Shelf Life .................................................................................................. 25

How Procurement & Finance Can Collaborate ........................................................................................... 26

The Vendor Performance Myth .................................................................................................................. 27

Supplier Quality Audit Basics ...................................................................................................................... 28

Good Negotiation Tactics That Can Backfire .............................................................................................. 29

Skillfully Managing Supplier Relationships ................................................................................................. 30

Buyer Performance Measurement Mistakes .............................................................................................. 31

Purchasing Services: The Pitfalls, Part II ..................................................................................................... 32

Cost Savings: From Potential To Actual ...................................................................................................... 33

Green Procurement: Let's Get Started! ..................................................................................................... 34


2/63

Page | 2


Negotiating Successfully In Inflationary Times ........................................................................................... 35

Global Strategic Sourcing Tools .................................................................................................................. 37

10 Step Procurement Transformation, Part I.............................................................................................. 38

Commodities Prices: Managing The Insanity ............................................................................................. 39

Assess Supplier Financial Risk Now! ........................................................................................................... 40

4 Rules For Negotiating By Phone ............................................................................................................... 41

Procurement Technology Success Secrets .................................................................................................. 42

10-Step Procurement Transformation, Part II ............................................................................................ 43

Supplier Partnerships: Your End of the Deal ............................................................................................... 44

Cost Reduction Ideas (Beyond Sourcing) .................................................................................................... 45

Negotiating After Backdoor Selling ............................................................................................................. 46

The Wrong Cost Savings Goal ..................................................................................................................... 47

How Purchasing Should Work With A/P ..................................................................................................... 48

How Purchasing Wins Favor In The C-Suite ................................................................................................ 49

Procurement ROI & Other Executive Terms ............................................................................................... 50

How To Influence A Negotiation Early, Part I ............................................................................................. 51

Negotiating After "No" ................................................................................................................................ 52

Supply Disruptions Don't Have To Be Fatal ................................................................................................. 53

The Superior Negotiation Advantage ......................................................................................................... 54

10 Procurement KPI's, Part I ....................................................................................................................... 55

10 Procurement KPI's, Part II ...................................................................................................................... 56

NIP Poor RFP Response In The Bud ............................................................................................................. 57

Negotiating Rebates: Best Practices .......................................................................................................... 58

How Expensive Suppliers Negotiate, Part II ................................................................................................ 59

How Expensive Suppliers Negotiate, Part I ................................................................................................. 60

Buyers: Know Your Inventory Turnover Ratio! ........................................................................................... 61

Defending A Procurement Business Case ................................................................................................... 62

Negotiation Brinkmanship Do's & Don'ts ................................................................................................... 63


3/63

Page | 3


Negotiating On Behalf Of Your Suppliers

Are Hidden Cost Savings Available For The Taking?

Do you have a strategic partner or sole source supplier

relationship? Are you the largest consumer of your supplier's

goods/services? If so, then you should look at negotiating onbehalf of your suppliers.

If your suppliers have gotten their costs as low as they can on

their own, negotiating with them pressures them to reduce their

profit margins - a contentious situation. However, by

negotiating with your suppliers' suppliers, you can reduce your

suppliers' costs and your costs while keeping the suppliers'

profit margins intact. Negotiating on behalf of your suppliers

helps enhance those relationships that you deem as strategic

and is a great way to gain additional insight and information

into the industry and into your supply chain.

Here are some points to remember.

#1 Negotiate The Supplier's Entire Volume. You want a

competitive advantage and may worry about the supplier passing

savings on to other customers. However, the larger the volume,

the greater your savings. Also add your volume for similar

items to the deal to get the leverage necessary for maximum

savings.

#2 Always Manage The Negotiations. You may have the knowledge

and technology to manage the negotiations better than the

supplier. This also gives you the control on timeline,

information, etc. Lastly, it provides additional insight into

just how big a customer you are to the supplier.

#3 Require That ALL Savings Must Be Passed Along To Your

Organization. Now that you are managing the negotiations and

helping your supplier achieve savings and efficiencies, you

should require that all savings generated on your volume (and

possibly a portion of the volume from other customers) be

passed directly along to you.

Successful negotiations should be those that are a win-win

situation. By negotiating on behalf of your suppliers, you

can provide a win-win-win solution. You win, your supplier

wins, and their supplier wins by gaining additional volume.


4/63

Page | 4


Tactical Procurement of Rule #1What Should Be The Focus In Tactical Procurement?

Unlike strategic procurement which has a long-term focus,

tactical procurement deals with the administration of

procurement transactions, including the occasional "one-time

buys." Now, just because a procurement is a one-time buydoesn't mean that it can be handled by anyone. A buyer still

needs to know some fundamentals of procurement for this

tactical purchase, which brings me to "Rule #1 of Tactical

Procurement."

My Rule #1 of Tactical Procurement is this: "The buyer must

first identify the product, service, and/or supplier with the

highest probability of being satisfactory in all aspects of the

transaction and then achieve the lowest cost for that product

or service or with that supplier."

What does this mean?

It means that the buyer is to first assess:

* Whether the product or service is the right one for the

purpose intended

* The likelihood of the product being delivered, or the

service being performed, in the desired time-frame

* The likelihood of the product or service meeting or

exceeding quality expectations

* The likelihood of the supplier being able to provide the

type of support anticipated when things go well or if things

go wrong

Only after this assessment is done should the buyer consider

cost in the decision. If multiple suppliers have an equally

high probability of providing a satisfactory experience, then

cost can be a differentiator or even THE differentiator.

"Cost" can simply mean price or can mean a carefully calculated

total cost of ownership. Which type of cost you use depends on

the value and the complexity of the purchase. But both are

factored into the decision only after the probability of

satisfaction is determined.

This rule means forces you to focus on a satisfactory

experience first, cost second. You never want to select a

supplier that provides an unsatisfactory experience just

because they offered the lower price.


5/63

Page | 5


Sole Source Situations: Eradicate Them!How Can You Prevent Sole Source Situations?

Negotiating with a sole source supplier is arguably the most

difficult situation for a procurement professional. Therefore,

it's important to know how to prevent sole source situations

from happening in the first place.Sole source situations often occur when an engineer or end user

writes a new specification that calls for the use of goods or

services from a specific supplier. Once the specified item is

launched, the specification and suppliers can be very difficult

to change.

So, how do you prevent sole source situations? "The first step

is actually just communication: letting the Engineering

community understand that the more specific they become with a

specification, the harder it is for Procurement to drive value

for the overall end product and the end user," according to Jim

Nelles, partner with Roland Berger Strategy Consultants.

Nelles says that procurement professionals frequently concedeto Engineering too easily when receiving a supplier-specific

specification. But, instead of playing victim, he recommends

reviewing specifications with engineers, identifying

alternatives and their price differences, and stating what

better profit margins mean for the company's competitive

advantage and the future of the engineering team.

If such collaboration isn't welcomed in an organization with a

politically strong engineering department, Nelles suggests

getting the best possible quote for the product or service as

specified, then running "a parallel process by which you get

quotes for the exact or similar performing substitute that you

then can go back and present to the group." Though this

approach can help on a one-off basis, the longer-term goal of

Procurement should be to secure a permanent role on the design

team ensuring early involvement in future designs.

"If you can have Procurement be a part of that process, they

can influence the decision up-front and have things done the

best way from the beginning as opposed to going back and trying

to change things," Nelles says. "It's always easier to do it

at the beginning than it is to go back and try to change

something once decisions have been made by people."

How can Procurement gain acceptance onto design teams? "At the

end of the day, it's really about being able to demonstrate

the value that Procurement has delivered," shares Nelles. "If

Procurement can demonstrate that they have worked in other

areas and found high-performing products that no one knew about

that they were then able to spec into a bill of materials, that

goes a long way with engineers."When engineers tell success stories about

Procurement, it influences their peers to be less resistant, says Nelles.

"But, once you are at the table, if you don't bring the value,

you're never going to be asked back again."


6/63

Page | 6


Sourcing Decisions: How To Support Them

What Do Good Sourcing Recommendations Include?

When you are leading a sourcing project but the ultimate

decision is going to be made by an executive not involved inthe day-to-day sourcing activity, you must be able to provide a

recommendation that addresses the executive's interests.

What are executives interested in? To simplify it, profits and

risk. So, your recommendation should answer the questions:

"Why is this sourcing decision the one with the most favorable

effects on our organization's profits?" and "Why is this

sourcing decision the one that represents the least risk for

our organization?"

When addressing profits, you can point out any of the following

that apply:* How the recommended supplier's price is lower than other

alternative suppliers

* How costs beyond just price (e.g., energy usage) are lower

than those of alternative suppliers

* How your organization can be more efficient (e.g., require

fewer employees) by choosing the solution of the recommended

supplier as opposed to those of alternative suppliers

* How your organization may increase revenue more by choosing

the solution of the recommended supplier as opposed to those

of alternative suppliers

When addressing risk, you can point out any of the following

that apply:

* How the recommended supplier is more financially stable than

alternative suppliers, using widely-accepted ratios of

financial health

* How the recommended supplier has more market share in your

specific industry and, therefore, is more likely to be able

to handle any challenges that are unique to your industry

than alternative suppliers

* How the recommended supplier has proven its ability to

perform through real-world case studies, trade publication

articles, references, and other forms of evidence


7/63

Page | 7


How To Use Cost Savings Ratios & When

Can Cost Savings Ratios Make Reporting Easier?

Reporting cost savings is easiest when you negotiate a lower

price and buy the same quantity of goods or services from one

year to the next. Then, your cost savings is equal to thereduction in spend.

Things get a little trickier when volume changes. For example,

if you paid $10 for an item last year and bought 100,000 units

and you pay $8 this year and will buy 150,000 units, your spend

will actually increase to $1,200,000 from $1,000,000 despite a

price reduction. In these cases, you have to communicate your

savings on a per unit basis: "we saved $2 per unit."

But it becomes even more difficult when both volume and the

exact composition of a category of goods or services changes.

Airline travel is a good example because the number of flights,

destinations, number of days in advance tickets are purchased,

and other factors will change from one year to the next.

How do you report cost savings in these types of categories?

"There's just no good way to do apples-to-apples based on a

total spend," says Jim Nelles, Partner with Roland Berger

Strategy Consultants. Instead, Nelles finds cost savings

ratios to be a solution.

For airline travel, Nelles suggests using a cost savings ratio

such as cents per mile flown and striving for a year-over-year

reduction in this ratio. But this type of cost savings ratio

is not just limited to airline travel.

"For something like office supplies, again you're rarely evergoing to buy the same market basket of goods from one year to

the next," according to Nelles. "But if you can calculate

office supply spend by... employee, it's a nice way to demonstrate

that [you] were spending $50.00 per employee last year and now

that number has gotten down to $47.50 this year."

So rather than tracking the spend on every single pen or line

item - especially when items are routinely discontinued - you

can use cost savings ratios to demonstrate your contribution.

Nelles contends that "it is by coming up with these interesting

ratios and these different ways to demonstrate savings that

people will start to believe what you are doing."


8/63

Page | 8


Purchasing Ethics: 7 Sensitive Situations

Do Your Internal Customers Consider You Ethical?

There are few things that cause purchasing professionals to

worry more than the topic of ethics. And this is understandable.

Even when cross-functional teams are formed to ensure

organizational buy-in of sourcing decisions, some internal

customers end up unhappy with supplier selections. This

unhappiness sometimes motivates the most bitter of them to -

correctly or incorrectly - question the ethics of the

purchasing department.

The following circumstances can serve as reasons why internal

customers may make accusations that the purchasing department

has behaved unethically:

1. A purchasing team member accepted a gift - perhaps even a

low-value item like a pen - from a supplier.

2. A purchasing team member has a personal or financial

relationship with a supplier or an employee of a supplier.

3. A purchasing team member owns a supplier's stock.

4. A purchasing team member mixes business and entertainment

with a supplier, for example discussing business over a meal

or a round of golf.

5. In a competitive bidding situation, the purchasing team

provided certain information to one supplier that was not

provided to other suppliers.

6. The purchasing team did not provide transparency for a

supplier selection, including failing to internally share

selection criteria, proposal details, and the rationale for

the decision.

7. The supplier selection criteria used was different than the

criteria noted in the RFP/tender.

Now, that is not to say that all of these circumstances are

inherently unethical. However, it is important to understand

how these circumstances look "through the eyes of the customer."

So, you should evaluate whether any of these circumstances

occur in your organization. If they do, you need to either

eliminate and prevent these circumstances or educate your

internal customers as to how the circumstances can exist

without ethical standards being violated.


9/63

Page | 9


Revisiting Vendor Payment Terms: It's Time!

Are Vendor Payment Terms A Hidden Opportunity?

One effect of the recent economic recession is that banks have

dramatically curtailed their lending, creating a"credit crisis." Companies who rely on credit in order to

operate have seen their cash balances dwindle.

Without cash, many companies have had to dismiss significant

portions of their workforces and curtail operations. These

companies may have included several of your vendors or even

your own organization.

Many buying organizations facing a lack of cash and restricted

access to credit have chosen to unilaterally extend their

payment terms with their vendors, commonly transitioning from

payment within 30 days to payment within 60, or even 90, days.

While this might be a smart move for companies that face a

"preserve cash or die" situation, it is a strategy that could

not come at a worse time for many of their cash-strapped

vendors.

With banks not lending and customers not paying promptly, some

of your vendors may run out of cash and become insolvent. So,

extending payment terms as a cash flow solution may cause the

even more costly problem of having key vendors driven out of

business.

As such, only unilaterally extend payment terms if your

organization is in a desperate cash situation and only for

vendors strong enough to sustain the change. If your

organization has a healthy cash balance, consider taking theopposite approach: shortening your payment terms.

Today, vendors are desperate for cash. After all, the banks

won't lend them cash and their other customers aren't paying

them for a long time.

By being willing to shorten your payment terms, you put

yourself in a strong position to negotiate a 1 - 2% early

payment discount. That can save your organization significant

money. And reduced spend may be more attractive to your CFO

than improved cash flow!

My advice: collaborate with your finance department to

determine whether cash preservation or expense reduction is a

higher priority. Then, implement a new approach to vendor

payment terms that keeps vendor solvency in mind. This is a

rare opportunity!


10/63

Page | 10


Sourcing Problems In A Slow Economy

Is The Slow Economy Causing Sourcing Problems?

In difficult economic times, suppliers usually behave

desperately and will do anything to earn business. This time,it's different.

Conventional thinking would lead one to believe that the

current slow economic conditions would result in high

RFP/tender response rates. That has not been the case.

Why would suppliers not eagerly try to earn orders when many

businesses are clearly struggling? Are onerous strategic

sourcing processes of recent years to blame?

"With the economic conditions now...almost all suppliers are

strained when it comes to time and resources," explains

Kathleen Daly, Project Analyst for Source One Management

Services, LLC. "Often sending out a complicated and lengthy

RFP results in suppliers being unwilling to engage in the

sourcing process if they feel that the response will take up

too many resources or if they feel they don't have a solid

chance of having the business awarded to them."

Strategic sourcing has often been characterized by suppliers as

a problem-filled process that involves arms-length

communication with buyers during the process and limited to no

feedback afterwards. Noting that a restrictive sourcing

process can limit the value that suppliers propose, Daly argues

that "when suppliers are engaged in an arms-length RFP process,

buyers tend to receive an arms-length result."

A timeless purchasing principle is that more competition results

in lower costs. So, naturally, you want to attract all the top

suppliers.

Therefore, in today's economy, you need to motivate your

suppliers to respond to your RFP's. Motivating suppliers may

mean making some changes to your sourcing approach.

Specifically, Daly recommends having suppliers give online or

in-person presentations before they are asked to prepare

written proposals.

Though such an approach may seem like it will extend the

sourcing process, Daly has found that a more collaborative,

less secretive approach helps to motivate the best suppliers to

bid on business and deliver more value to the buying

organization. This underscores the importance of always having

a sourcing strategy that is appropriate for current economic

conditions. Economic conditions change over time and problems

will arise if your sourcing approach doesn't change accordingly.


11/63

Page | 11


Measuring Cost Savings For Mid-Year DealsDo You Measure Mid-Year Cost Savings Properly?

Measuring cost savings in a way that CFO's embrace can be

challenging. This is particularly true when you implement anegotiated deal in the middle of your organization's fiscal

year.

In the fiscal year that the mid-year deal is finalized, do you

report the annualized cost savings or just a prorated portion?

Are there cost savings to measure in the next year? What about

the following year?

Well, here is some insight. First, understand that CFO's like

to compare fiscal year-over-fiscal year expenses. If this year's

expenses are lower than last year's expenses, they consider the

difference a cost savings.

Let's say that you spent $10,000,000 on a category of goods

between January 1, 2008 and December 31, 2008. After sourcing

in 2009, you reached a new deal with a supplier that brings the

cost of a year's supply down to $9 million - a reduction of 10%.

However, the contract didn't go into effect until October 1,

2009. As a result, in 2009, you were paying the old price from

January 1 until September 30 and the new price from October 1

through December 31.

So, for 2009, you spent $7,500,000 in January through September

plus $2,250,000 in October through December for a total of

$9,750,000 for the year. Therefore, your cost savings in 2009

would be $10,000,000 - $9,750,000 = $250,000.

Now, your lower price will continue to be in effect through

2010. Therefore, your spend in 2010 will be $9 million

($1 million less than your original baseline). But because

CFO's like to compare expenses for a year with the expenses for

the previous year, you would NOT be taking the difference

between $10 million (in 2008) and $9 million (in 2010). You

would be taking the difference between $9,750,000 in 2009 and

$9,000,000 in 2010. So your cost savings would be $750,000 in

2010.

If your pricing remains the same in 2011, your cost savings for

that year would be $0. Though it would be tempting to report$1,000,000 in cost savings for each year that the new contract

is in effect, doing so is in conflict with how CFO's think

about cost savings: fiscal year-over-fiscal year expense

comparison. If you want your cost savings measurements to be

accepted by the CFO, then you must think like a CFO!


12/63

Page | 12


Procurement Ethics: Use DRD & Stay Clean

How Can You Avoid A Procurement Ethics Scandal?

Plain and simple: it is unethical for procurement professional

to award an order to a supplier with whom he or she has apersonal or financial relationship. However, finding an

organization where none of its employees have a friend, spouse,

etc. among its supply base's thousands of employees can be

challenging.

So, what should you do if you have a relationship with a

current or potential supplier's employee?

I recommend a process called DRD, which I pronounce like

"dirty" for ease of remembering. DRD stands for Disclose,

Recuse, Document - three steps to take so that decisions are

made without unethical influence.

Disclose means to advise management of a relationship that may

appear to be a conflict of interest.

Recuse means to remove yourself from participation in a

decision in order to avoid a conflict of interest. When you

disclose the relationship to management, advise them that you

want no involvement in the decision due to the potential for

real or perceived personal gain.

Document means to produce and retain written correspondence

about your disclosure. Ethical accusations often arise months

or years after a decision is made. By then, it can be

difficult to remember the steps taken to maintain the integrity

of the decision-making process. Forgotten details onlystrengthen the appearance of impropriety. Good documentation

can prove that a decision was reached ethically.

A procurement department should then ensure that those with a

personal supplier relationship are prevented from accessing

sensitive information such as the pricing of competing

suppliers. Some organizations even go as far as maintaining a

conflict of interest database and requiring employees to

disclose certain relationships upon being hired, when permitted

by law.

Though you can't guarantee that every procurement team member

will be free of relationships with supplier employees, good

procedures can reduce the risk for accusations of unethical

procurement decisions.


13/63

Page | 13


How To Increase The Scope of PurchasingWhat Justifies An Increase In Purchasing's Scope?

Getting more spend under a purchasing department's management

is a common goal. Achieving it often requires using points

like these to convince senior management to support a change...

1. Purchasing personnel are measured on their performance of

purchasing processes. Other departments are measured on

different contributions to the organization. Assigning

purchasing responsibility to these other departments keeps

them from spending time on their primary functions within

the organization.

2. Purchasing personnel are trained in cost savings techniques

like negotiation and strategic sourcing. Engineers,

department heads, and other internal customers are typically

not, which can lead to paying higher prices.

3. The purchasing department has savings-generating tools, such

as eSourcing systems, at their disposal. Other departments

do not.

4. The purchasing department is good at identifying

alternatives, then guiding the organization to select the

best option. Too often, internal customers just go with the

first supplier found, committing the organization to a

suboptimal arrangement that endures for years.

5. By working with all departments, the purchasing department

is aware of enterprise-wide standards. As such, it can

leverage aggregated volume for lower costs, minimize

inventory, and avoid pitfalls previously identified withcompeting products.

6. Purchasing personnel are trained at evaluating supplier

viability. Engineers, department heads, and other internal

customers are not, which can result in the selection of a

supplier that goes out of business during the course of the

relationship.

7. It's not uncommon for suppliers to charge different

departments within the same organization different prices

when they can get away with it. By having the purchasing

department provide center-led oversight, the organization

can have more assurance that all departments are benefitting

from the organization's leveraged buying power.


14/63

Page | 14


Commodity Price Forecasting, Part IIn Which Direction Will Your Commodity Prices Go?

In this edition of PurchTips, I'll teach you four steps to

basic commodity price forecasting using an example. A future

edition will introduce more advanced concepts.

In today's example, your paper distributor just proposed a

fixed price arrangement in exchange for a one-year commitment.

The proposed contract would reduce your costs by 2% from last

year despite manufacturers in the industry indicating that they

will soon raise prices.

Should you accept the deal? Here are the steps I would

recommend to you in order to make the right decision.

First, properly categorize the commodity against an existing

price index (e.g., Producers Price Index, or PPI), being as

specific as possible. The more specific you can be (e.g.,

"newsprint" instead of "paper"), the better.

Second, examine the index to see price levels' historical

fluctuation. Historical price levels can help you determine

whether current levels are relatively high or low, but remember

that "past performance is not a guarantee of future results."

Looking at the PPI's Newsprint index, I see that newsprint -

and many other commodities' - prices dropped steeply after

peaking in November 2008. I also see that prices have begun to

climb gradually in the past six months.

Third, look at micro- and macro-economic factors that may give

hints as to where pricing may go. In terms of micro-economics,

the manufacturers are all saying prices will rise. In terms of

macro-economic factors, the general consensus is that therecession is over and that economic growth will resume.

Economic growth is often accompanied, to some degree, by

inflation. Currently, many financial news articles are

predicting rising commodity prices. Based on these factors and

the PPI, newsprint price increases seem likely.

Fourth, evaluate your starting point. If your original price

was established at the peak of the market and was not

established through best practices like strategic sourcing,

locking in a mere 2% reduction may not be enough because prices

today are 28% lower than they were 18 months ago. If your

original price was extremely competitive at the market's bottom

- say about 9 months ago - a 2% reduction might be great.

Having done these steps, you should have a rough estimate of

the direction of your pricing. Monitor the predictions you've

based on these basic steps over time and determine their

accuracy. And seek to learn and apply the more advanced

techniques needed for today's volatile commodity markets.


15/63

Page | 15


A 20-Point Proposal Evaluation ChecklistWhat Does A Compliant Proposal Look Like?

Proposals can contain a lot of information and are the basis on which

procurement decisions are made. So you must evaluate them

carefully for compliance with your requirements. Use the

following checklist to simplify your proposal evaluations and

ensure that a supplier is worthy of being considered.

Did the supplier:

* Submit its proposal on time?

* Confirm its ability to comply with the specification or

provide an acceptable specification?

* Answer all required questions?

* Provide pricing in the proper currency and unit of measure?

* Refrain from charging "over-and-above" fees?

* Confirm its ability to provide the required quantity?

* Confirm its ability to deliver to, or perform at, thedesired location(s)?

* Confirm its acceptance of the specified payment terms or

propose acceptable payment terms?

* Confirm its ability to comply with the specified freight

terms or propose acceptable freight terms?

* Confirm its ability to comply with the specified

delivery/performance dates or lead time or propose

acceptable delivery/performance dates or lead time?

* Confirm its ability to comply with the specified warranty

or propose an acceptable warranty?

* Refrain from taking exception to your contract terms?

* Provide financial statements?* Provide a cost breakdown?

* Offer value creating or cost saving ideas?

* Comply with proposal expiration date requirements?

* Provide the information necessary to be set up in the

purchasing system?

* Provide evidence of any required certifications?

* Provide any required samples?

* Demonstrate that it has the capacity to handle the

additional work if awarded your business?


16/63

Page | 16


A 21-Point Negotiation ChecklistCan A Negotiation Checklist Improve Your Results?

As we teach in our online course "Powerful Negotiation For

Successful Buying," preparing for a negotiation is critical for

success. Though not intended as a substitute for learning how

to prepare or actually preparing, this checklist can guide yourpreparation for great results.

* Identify the primary supplier to negotiate with.

* Identify your second-best option in case you cannot reach

agreement with your primary supplier.

* Determine the format (i.e., face-to-face, phone, etc.) and

location of your negotiation sessions.

* Invite the primary supplier to negotiate and learn who the

supplier's principal negotiator is.

* Ensure/insist that the supplier assigns a negotiator with

decision-making authority.

* Assess your leverage over the supplier.

* Determine your overall negotiation strategy (e.g., hardball,

collaborative, etc.).

* Identify all the terms that you will negotiate.

* Set targets and least acceptable alternatives for each term.

* Determine your negotiation tactics (e.g., threatening to use

another supplier, emphasizing the benefits to the supplier

of doing business with you, etc.).

* Decide what to concede if necessary to reach agreement.

* Develop a timeline for the negotiation process.

* Identify the risks to achieving your terms, timeline, and

other goals and plan to mitigate those risks.

* Develop and share internally a communications plan stating

who must be updated on negotiation progress and what

information they must keep confidential.

* Review notes from previous negotiations, courses, etc. fortips for success.

* Anticipate your supplier's reaction to each tactic.

* Create an agenda for the negotiation and practice.

* Start the negotiation confidently.

* Document agreements made and share with the supplier

throughout the negotiation process to ensure that no

misunderstandings later derail a negotiation in which you

have invested much time.

* Self-assess after each negotiation session and adjust

strategy and tactics if necessary.

* At the end of the negotiation, help the supplier feel

positive about the new relationship rather than feeling like

it lost the negotiation.


17/63

Page | 17


Do You Make These Purchasing Mistakes?How Many Of These Six Mistakes Have You Made?

1. Assuming that a small order doesn't warrant much time. A

purchase doesn't have to involve a large monetary expenditure

to represent a big risk to the organization if it isn'tfulfilled at the right time with the right quality item or

service. So, evaluate the criticality of each order and

invest an appropriate amount of time based on the degree of

criticality.

2. Assuming that supplier offerings are equal except for price.

Most suppliers strive to differentiate their products or

services. You should seek to understand those differences,

what value those differences have to your organization, and

which offering is the best overall fit for your organization,

price and other factors considered.

3. Failing to allow suppliers to suggest alternatives. Suppliers

may know a better or cheaper way to accomplish your goals.

Restricting them to your requirements without giving them the

chance to suggest other options may result in forgoing profit

improvement opportunities.

4. Failing to build stakeholder consensus in purchasing decisions.

A big determinant in things like whether supplier onboarding

is smooth, estimated cost savings are achieved, or volume

guarantees are met is the compliance of stakeholders in your

organization. If you give them a voice in the purchasing

decision, the likelihood of compliance - and purchasing

department success - is much higher.

5. Failing to qualify a new supplier. You should select asupplier because that supplier is the best fit for your

organization, not because the supplier was the best proposal

writer. Always qualify new suppliers in a way that is

appropriate for the value and criticality of the purchase.

This may even mean "dating the supplier before marrying the

supplier."

6. Agreeing to things that the organization can't support. When

purchasing agents focus solely on price, there may be

temptation to do anything to achieve savings. But being able

to trade concessions for lower prices means knowing your

organization's limits. For example, don't agree to pay a

supplier in 10 days or via EFT if you haven't confirmed that

your organization can actually do those things.


18/63

Page | 18


Today's Biggest Supply Chain Threat?

Are You Ignoring A Big Supply Chain Threat?

What if your most critical supplier suddenly had no Internet

capabilities for an extended period of time? What if there

suddenly was no Internet? How would your organization survive?

Think a long, worldwide Internet outage is impossible? Thinkagain.

The Internet is showing signs of vulnerability at a time when

business is depending on it the most. Last month, our website

was brought down for days by a DDoS attack. (Student access to

courses, though, was virtually uninterrupted thanks to the use

of a backup site.)

When a site like ours gets attacked the way that "household

names" like Twitter or CNN.com have, it shows that any supplier

of yours could be a target. But website downtime is only the

tip of the iceberg. I personally know of two companies whose

entire Internet capabilities for employees have been down for

months due to Internet security problems.

These types of situations are likely to become worse and more

widespread. In the book "Cyber War," authors Richard Clark and

Robert Knake write "If cyber warriors crash networks, wipe out

data, and turn computers into doorstops, then a financial system

could collapse, a supply chain could halt, a satellite could

spin out of orbit into space, an airline could be grounded.

These are not hypotheticals. Things like this have already

happened."

Governments are responding to this threat. But part of the

response may make you more concerned than at ease. For example,

the Protecting Cyberspace as a National Asset Act of 2010, if

passed into law, would give the President of the United States

of America the power to shut down the Internet for up to four

months.

Leading companies avoid depending too heavily on a singlesupplier due to risk. But, if all of your suppliers depend too

heavily on the Internet, the potential for a long, worldwide

Internet outage represents perhaps the biggest threat to your

supply chain.

Are you prepared to conduct procurement in a world without the

Internet? You better be.

I suggest that you research the vulnerability of the Internet,

express to management any concerns about Internet

over-dependence, and use these steps to develop a contingency

plan for an "Internetless" supply chain:

* Ask your organization "How would we conduct business if the

Internet was unavailable to anyone for an extended period of

time?" Then, document those ideas and begin transforming the

document into an actionable plan.

* Ask your critical suppliers "How would you conduct business

if the Internet was unavailable to anyone for an extended

period of time?" and require formal, documented responses.

Scrutinize their responses and work with them to ensure

readiness.


19/63

Page | 19


The 4 Worst Procurement Myths

Do You Believe These Common Procurement Myths?

Myth #1: More specific specifications are always better.When all suppliers bid on the same exact requirements,

you get the assurance of an equitable or

"apples-to-apples" comparison and the ability to use

fewer variables when comparing suppliers. While that's

good in some situations, overly restrictive specs may

keep you from capitalizing on the strengths of

suppliers whose capabilities can offer more profitable

options.

Myth #2: Total cost of ownership (TCO) analysis is always the

best method on which to base a supplier selection.

TCO analysis is indeed a very useful practice.

However, when different supplier offerings can deliverdifferent value to your organization in the form of

things like higher revenue opportunities, TCO analysis

may not lead to the most profitable decision. Total

Value Management may be a more appropriate method.

Myth #3: Privately-held suppliers will never share their

financial statements. Many privately-held suppliers

do resist sharing financials with prospects. However,

making the disclosure of financial statements a

condition of awarding business and being willing to

make accommodations - such as signing a non-disclosure

agreement and limiting access to the statements - can

convince suppliers to share financials.

Myth #4: Long-term contracts should always begin immediately

after a sourcing process. While customary to award a

long-term contract after reviewing a proposal and

negotiating, a supplier selection that seemed smart

"on paper" can be disappointing in reality, leaving

you stuck trying to make it work because you've made a

long-term commitment. When you structure your

sourcing process to include a short trial period, if

the most attractive bidder fails to perform, you can

explore the next alternative. I call this practice

"dating suppliers before marrying them."

For a fifth myth, go tohttp://clicks.aweber.com/y/ct/?l=8Fmud&m=1c2tZAYiIFUBRn&b=Kp01RNpQd1tjp2OF6EB

6IQ


20/63

Page | 20


8 Supplier Selection Criteria & The SHoCC

How Do You Prioritize Supplier Selection Criteria?

You should use a Sourcing Hierarchy of Constraints & Criteria

(SHoCC) for every major sourcing process you lead. I'll explain

the SHoCC by defining its components.

Criteria are attributes that a buying organization values in its

arrangements with suppliers. There are eight common supplier

selection criteria, in no formal order:

1. Cost

2. Quality & Safety

3. Delivery

4. Service

5. Social Responsibility

6. Convenience/Simplicity

7. Risk

8. Agility

Depending on the situation, you may use them as-is, use more or

fewer, or use a different combination of eight.

Often, sourcing team members will want some criteria to be

treated as constraints - unbreakable rules in the supplier

selection process. Examples of constraints include: there can

only be one supplier, we must select the low bidder, delivery

must be within six weeks, etc.

Your job as leader of the sourcing team is to determine whether

the proposed constraint is a truly warranted constraint or

simply an important criterion. You can do so by asking

questions like "If we had to choose between (a) having the bestquality for all items by using two suppliers and (b) having the

best quality for only half the items by using one supplier,

would we still insist on using one supplier?" or "If we could

save 34% by accepting a seven week lead time instead, would we

choose to save the money or would we still need to insist on the

six week lead time?" The fewer constraints, the more flexibility

the team has in its decision-making.

After agreeing on the constraints and criteria, the sourcing

team must agree on a hierarchy - an order of these attributes

from most important to least important, with constraints

preceding criteria. In most cases, supplier offerings will

differ and there will be tradeoffs involving the criteria: you

may get a better price from one supplier (cost) but that supplier

insists on contract terms less favorable to you (risk).

Creating a SHoCC in advance will help your sourcing team remain

focused on what's most important to make a balanced decision.


21/63

Page | 21


Bad Negotiation Habits: Break Them Today!

Do You Have Any Of These Bad Negotiation Habits?

Bad Habit #1: Not Sharing Information. When negotiating, somebuyers withhold information from suppliers. For example, a

supplier may ask about the size of your budget. Some buyers

refuse to share that, thinking that the supplier will inflate

its prices to capture every bit of that budget money.

While you and your supplier may have a few opposing interests,

the goal is for you to work together as partners - not opponents

- at some point. This means that it may benefit you to share

certain information at some point in the negotiation.

If a supplier knew the budget constraints you have, it may be

able to recommend and/or customize a solution that works

optimally for the amount of money you have available. Withoutknowledge of your constraints, your supplier is left guessing

and may end up proposing a solution that is too expensive or not

optimal for the budget you have.

Bad Habit #2: Overusing The Word "Honest." Some people use the

word "honest" as a "filler" in their conversations. "Honestly,

I never thought about that" and "To be honest with you, we don't

have enough money to pay that much" are two examples of how

"honest" is commonly used.

But when prefacing a statement with a "disclaimer of honesty,"

the other person may think that other things you've said were

not honest. Trust is important in negotiation for a supplier to

know that you will stand by your commitments when they improvetheir terms for you. Disclaimers of honesty don't build trust,

they degrade it.

So, if you catch yourself about to use a disclaimer of honesty,

use the word "frank" or "frankly" instead. For example, "To be

frank with you, your price is substantially higher than we're

able to pay."

For Bad Habit #3, go to

http://clicks.aweber.com/y/ct/?l=8Fmud&m=1bU5vO7_eFUBRn&b=B3imOIkjhlcXP3skhvS

Jqg


22/63

Page | 22


What CFO's Expect From Procurement ProfessionalsToday, Next Level Purchasing is launching an exciting two-course

Finance For Strategic Procurement Series. To celebrate this

launch, I am sending out this extra, condensed edition of

PurchTips to share with you at no charge some tips for aligning

your procurement work with your Finance organization.

Specifically, I'll share four things that Chief Financial

Officers (CFO's) expect today's procurement professionals to

know. Knowing or learning these principles will help

procurement departments gain more respect in their organizations

and be better prepared to deliver greater results.

So, without further ado, here are four things CFO's expect

modern procurement professionals to know:

1. How To Read Financial Statements. Financial statements serve

as a scoreboard for your organization, indicating how well the

organization is performing. The three most important financial

statements procurement professionals should be familiar with

are the balance sheet, the income statement, and the cash flow

statement. It's not enough to know what's on them - you are

expected to know how to interpret them to know if performance

is improving or declining, whether new strategies are needed,

or if the organization is facing significant risk.

2. How To Communicate Procurement's Impact On Net Income.

Arguably, net income is the single most important metric used

to measure the performance - and determine the compensation -

of the senior management of for-profit companies. Therefore,

it is important to communicate specifically how procurement

activities are improving net income. If you think reporting

cost savings the traditional way is all that needs to be done,

you're wrong. What many procurement departments report as

cost savings does not correlate to a corresponding improvementin net income. Ensure that your cost savings reports are

aligned with how net income changes considering all related

factors, such as increasing demand and commodity price

fluctuations.

3. How To Evaluate The Financial Viability of Suppliers. One of

the biggest supply risks is having a supplier experience

financial hardships or even go bankrupt, even in good

economic times. Yet many procurement professionals do not

know how to determine or predict supplier financial health.

Use time-tested processes and tools such as ratio analysis

and the Altman Z-Score to evaluate the financial viability of

suppliers, mitigate risk, and ensure the continuing

successful operation of the organization.

4. How To Justify Capital Investments. Procurement departments

always complain of having too few resources to accomplish

what is necessary. However, if you build a business case

based on financial principles that are used by CFO's, you

have a much better chance of getting approval to add

headcount, invest in modern procurement technologies, or get

funding for any other initiative that will relieve the strain

of the current workload. Use return on investment and

payback period analysis to appeal to CFO's.


23/63

Page | 23


5 Components of Ethical Procurement

What Are You Doing To Keep Procurement Ethical?

It would be great the front pages of newspapers featured the

procurement profession for the fine work that is done within it.

Sadly, most news coverage of procurement comes when something

unethical has happened.

You don't want your organization to be covered for a procurement

ethics lapse. So, how do you ensure that your organization's

procurement ethics are upheld? It starts with having these five

components in place:

1. An ethics policy. An ethics dispute should never be the

result of a difference of opinion between the procurement

department and a company employee. Every organization shouldhave a written policy making it clear what top management

considers ethical and what it considers unethical. If you

don't have an ethics policy, don't wait for an ethics dispute

to arise to realize that you need one!

2. Ethics training. The great part about having an ethics policy

is that the rules are in tangible, indisputable form. The

unfortunate part is that no one reads ethics policies!

Supplement an ethics policy with procurement ethics training

for anyone who is involved with the purchase of products or

services and/or who meets with suppliers.

3. An ethics ombudsman. Some organizations appoint an ethics

ombudsman - a person in the organization with whom anemployee can confidentially communicate any real or perceived

ethical violations. Because it is difficult to confront

internal customers who may be more "politically powerful,"

having an ethics ombudsman can make procurement employees

more comfortable in revealing behaviors of questionable

ethics.

4. A process with checks and balances. Every major procurement

should require management review to confirm that all

guidelines were followed and that no ethical violations have

occurred or will occur.

5. Audits. Periodically, audits should be performed to verifythat all procurement activities were conducted ethically and

in accordance with procedures. Audits also serve as a

deterrent to future unethical behavior.


24/63

Page | 24


Calculating The Cost of a Stockout

How Much Does A Stockout Cost Your Organization?

It is no secret that companies have been keeping their

inventories extremely "lean" in an effort to contain costs inthe unstable economy of the past three years. But when sales

are lost, there is a such thing as "too lean."

I was recently reminded of this when I went to have my car tires

replaced and my preferred retailer was out of my size of tires

and couldn't get them in before my state inspection was due to

expire. So, I had to buy another set of tires from this

retailer's competitor.

Tires aren't cheap - I spent about $700. I wondered if the tire

retailer's headquarters is calculating the cost of its stockouts

in order to realize the need to improve its inventory levels.

Calculating the cost of stockouts can be done using a formula

like this:

CS = (NDOS x AUSPD x PPU) + CC

Where,

CS = Cost of a Stockout

NDOS = Number of Days Out of Stock

AUSPD = Average Units Sold Per Day

PPU = Price Per Unit (some use Profit Per Unit)

CC = Cost of Consequences

Cost of Consequences generally will apply only to stockouts of

raw materials or subassemblies, not finished goods. These

consequences includes costs associated with a production line

that has been idled or must be switched over to accommodate

another process due to the stockout. They can also include

penalties payable to customers for failure to deliver on time.

Most experts agree that carrying costs - the downside of having

extra inventory - are 18 - 35% of an item's value for a year.

This translates to 0.05% to 0.1% per day. Though profit margins

are certainly tight in this economy, getting a sale is many

times more profitable than avoiding inventory carrying costs.

The moral of the story is that, when it comes to inventory

levels, be lean. But don't be too lean. Stockouts negatively

impact your organization's revenue and put money in its

competitors' pockets.


25/63

Page | 25


Negotiation Techniques With A Shelf Life

Can You Time Your Negotiation Techniques Right?

While the global economy teeters between growth and a double diprecession, this may be your last chance to use a few negotiation

techniques that work extremely well in rough economic times.

Here are three techniques that you can still use effectively

before the economy truly does improve.

"Make The Supply Chain More Competitive." It can be a challenge

to get direct materials suppliers to be excited about reducing

prices and improving their terms for you. However, if your

organization loses deals because customers consider its proposals

"too expensive" and your supplier competes with the suppliers of

your organizations' competitors, helping your suppliers see that

slightly lower prices can result in significantly higher volume

through more deal wins by your organization can make negotiationeasier. This technique is extremely effective because you and

the supplier are on the same team seeking mutual gain.

"Share In The Sacrifice." Suppliers are never happy to trim

their profit margins solely just to make their successful

customers even more profitable. However, if you can point to

layoffs, salary reductions, and budget cuts in your organization

as evidence that your organization isn't negotiating strictly

out of greed, it can make suppliers feel more sympathetic than

defensive.

"Forced To Consider Competition For Everything." Few things

strain buyer-supplier relationships more than the threat to

switch suppliers or competitively bid deals with current supplypartners. However, the threat of competition is sometimes the

only technique that motivates suppliers to reduce costs. In

such situations, discussing how economic conditions have forced

your organization to reevaluate market pricing for everything it

buys can make aggressive negotiation feel less like a personal

attack, thus limiting damage to the relationship.


26/63

Page | 26


How Procurement & Finance Can CollaborateDo You Collaborate With Finance In These 4 Ways?

1. Agreeing on Cost Savings Reporting Standards. When

procurement departments use the term "cost savings," they areoften referring to price reductions. When CFO's hear the

term "cost savings," they often expect to see a reduction of

expenses from the previous year's income statement to the

current year's. Not every price reduction is reflected on the

income statement like that and, as a result, some CFO's doubt

Procurement's cost savings claims. By agreeing with Finance

on standards and using the income statement to "keep score,"

Procurement's cost savings reporting will be more believable.

2. Considering The Downsides of Certain Cash Flow Strategies.

As credit became harder to get in recent years, organizations

sought ways to hold onto cash longer. One way was for CFO's

to insist on extending supplier payment terms to 90 or more

days. That improves cash flow, but Procurement sees

consequences that Finance may not: supplier relationships

being strained, suppliers raising prices to compensate for

slower cash receipt, or even having fewer suppliers willing

to do business with the organization. By collaborating,

Procurement and Finance can construct a more balanced cash

strategy.

3. Determining a Balanced Inventory Approach. One line on a

balance sheet that CFO's watch to evaluate performance is

inventory. CFO's generally don't like high inventory. They

feel that using cash to procure items that sit idly on the

shelf is wasting the opportunity to invest that cash in

activities that will provide a return on investment.

However, Procurement knows the operational realities of

inventory: many organizations need it to make sales and

continue operating through unexpected events like a spike in

demand or an interruption in supply. Again,

Procurement-Finance collaboration can help by identifying the

inventory needed to balance operational continuity and

working capital strategies.

4. Considering Supply Market Forces When Setting Financial

Goals. Finance sets expense goals. If these expenses

involve commodity purchases, Finance may not have the same

awareness that Procurement does with regard to how commodity

prices fluctuate. By Procurement and Finance collaborating,

the organization can avoid setting unrealistic financial

goals that will harm them later.


27/63

Page | 27


The Vendor Performance Myth

Can You Predict Vendor Performance?

"The key to superior vendor performance is measuring vendor

performance." Let me unequivocally say that this statement is

a myth.

Yes, it's true that measuring vendor performance is very

critical for improving vendor performance. However, the most

important element in achieving superior vendor performance is

sourcing and selecting the right vendor.

There is no foolproof way of selecting a vendor whose

performance will never disappoint you. However, there are

three questions you can ask about a vendor that will help youbetter predict that vendor's future performance:

1. Is this category the vendor's core competency? Some

vendors do only one thing and do it well. Others do a

multitude of things but specialize in one. That area of

specialization is called a core competency. An office

supply vendor may also provide printing services. A

computer manufacturer may also make printers. You need to

identify what the vendor's core competency is. If you

purchase products or services outside of a vendor's core

competency, the risk of poor performance is greater.

2. Does the vendor have experience with requirements like

mine? Find out if the vendor has provided products or

services of similar specifications, with similar leadtimes, to similarly-sized customers in similar industries.

The more similar the vendor's successful experience is to

your requirements, the more likely that the vendor will

perform well for you.

3. How will my contract impact the vendor's capacity? Some

purchasing professionals will research the answers to

questions 1 and 2. Those are important questions, but

there is still a significant probability that the vendor

will fail unless you confirm the vendor's capacity.

Capacity represents the available people, equipment,

and/or facility space required to fulfill your orders.

Just because a vendor is successful with a customer similar

to your organization doesn't mean that they have the

resources to duplicate that success simultaneously. Forcritical contracts, you need the vendor to thoroughly

explain how they are going to allocate people, equipment,

and/or facility space to your orders. Are those resources

in use today? Will they be freed up by a project coming

to completion? Will the vendor have to add resources? If

not, how challenging will it be for the vendor to squeeze

your requirements into the current resources' capacity?


28/63

Page | 28


Supplier Quality Audit Basics

What Should You Do On A Supplier Quality Audit?

For important purchases, ensuring acceptable supplier quality

is critical. Performing a supplier quality audit is one step

in ensuring the selection of a capable supplier.

A supplier quality audit is more than just walking a supplier's

shop floor and looking around. You should leave a supplier

quality audit with a greater understanding of at least the

following items.

Quality Methodologies - Many quality methodologies are used

today including Total Quality Management, Six Sigma, and Lean

Six Sigma. Ask the about the methodology the supplier employs

and how it's used.

Lot Determinations - Asq.org defines a lot as "a defined

quantity of product accumulated under conditions considered

uniform for sampling purposes." In quality recalls, good

suppliers know exactly which lots were affected by the

non-conforming material, ingredient, etc. So learn how the

supplier tracks lots.

Tools - How is the supplier monitoring its quality? One

common tool used is Statistical Process Control (SPC) charts.

SPC identifies an acceptable range of quality measurements and

then graphs actual measurements both between upper and lower

limits of acceptability and outside those limits. Ask the

supplier to show you how quality tools are used to monitor

quality.

Improvements - Suppliers often use numbers to gauge theirquality performance. Ask the supplier for a few years of

reports with these metrics. Are the metrics getting better,

worse, more static, or more erratic?

Team Empowerment - Experts agree that quality improves when

line workers are empowered to watch for defects. Can the

supplier's employees tell you what they do when a defect is

discovered?

Sampling Arrangements - In mass production, not every unit

made is inspected. How does the supplier choose the size and

composition of inspected samples?

Inspection Process - How does the supplier inspect items

before shipment? Is this inspection method similar to the

way your company evaluates conformance?


29/63

Page | 29


Good Negotiation Tactics That Can BackfireDo You Use Negotiation Tactics In Wrong Situations?

One of the reasons that negotiation is one of the most

exciting business processes is that there isn't 100% certainty.

In this edition of PurchTips, we'll cover three negotiation

tactics that have proven to be very effective, yet still can

fail if not applied in appropriate situations.The Crying Poor Tactic. The Crying Poor Tactic is used by

publicly-held companies whose poor financial performance is

well known and also by small companies. Buyers from these

companies will stress to the supplier their financial state

(e.g., "You know we don't have a lot of money, so we need

lower pricing.").

This negotiation tactic can indeed be effective. However, it

can also raise suspicion in your supplier that can have a

negative effect on the deal. The supplier may be wary that

they won't be paid on time or at all. The supplier may worry

that your company won't be around to fulfill its contractual

commitments. And, as a result, the supplier may withhold its

best deal.

The Get It From Someone Else Tactic. The fear of losing a

deal to a competitor can get a supplier to its lowest price

very quickly. Saying "If you can't lower your price, that's

OK - we'll buy it from someone else" can work in certain

competitive situations.

However, not all markets are so competitive where you can

indeed buy the same exact item from any supplier and get

equivalent quality, delivery, and service. Suppliers in these

less competitive markets know this.

If you attempt to use the Get It From Someone Else Tactic on

them, they will realize that you have less knowledge of the

marketplace than them, which will make them feel like they

have more leverage in the negotiation and they will be less

likely to concede.The Saving The Toughest Issue For Last Tactic. Deciding the

order in which the various issues will be discussed with your

supplier is critical. Some negotiators like to save the

toughest issue for last.

Saving the toughest issue for last does work well in certain

situations. It allows you and your supplier to agree on

easier issues, thus building a rapport and spirit of

cooperating for mutual success. It also helps you assess

your supplier's negotiation style, strengths, and weaknesses

while preparing to negotiate the big issues.

However, if there is a deadline for your negotiation, saving

the most difficult issue for last can be disastrous. You

could have little time left to finish the negotiation and feel

pressured to concede to a less-than-optimal deal.

So, while deadlines can work for you in a negotiation, they

can also work against you. Evaluate the deadlines: When are

they? Who has imposed them? Are they negotiable? And if

the deadline has been imposed by an internal customer or

management and is not negotiable, address the most difficult

issues sooner rather than later.


30/63

Page | 30


Skillfully Managing Supplier Relationships

What Nuances Does Relationship Management Have?

One of the keys to maximizing the positive impact of a

supplier relationship is 'getting your own house in order.'

In other words, if your own systems, processes, and people arenot up to par, you can adversely affect the supplier's

performance.

Michael Massetti, the Vice President of Global Procurement &

Quality for Tekelec, agrees, using a golf analogy: "If you're

a 95 or 100 golfer and you get the latest, greatest Nike

driver, it's certainly unlikely that your game is going to

improve. I look at the relationship you have with suppliers

similarly. If you're doing work with suppliers and you don't

have processes that are consistent, that are sustainable, that

execute the same way over and over again, it's unlikely that

to ask them to perform very well in an uncertain environment

is going to lead to very good results."

Massetti knows first-hand about looking internally to solve

supplier relationship problems. Tekelec recently had some

concerns about a supplier's delivery performance. Naturally,

the tendency of internal customers was to blame the supplier.

However, "when we started looking at the root cause of the

problems, we realized that there were things on our side that

were contributing to that lack of performance," he says.

"When we really started unpeeling the proverbial onion, we

found out that there were some issues with our own forecasting

process and how we were managing inventory," Massetti shares.

But collaborating with the supplier and making changes

internally "allowed us to improve the overall deliveryperformance remarkably."

Not all suppliers are equally important to your organization,

so you shouldn't take the same approach to managing supplier

relationships with each of them. For example, you wouldn't

redesign a complex internal process to improve a relationship

with a low-spend supplier of non-critical items. Massetti

bases his team's approach to relationships on Tekelec's

supplier stratification scheme that includes three tiers:

Partners, Suppliers, and Vendors.

Tekelec's Partner relationships involve executive engagement,

dedicated resources on both sides, scorecards to evaluate

performance at least quarterly, and time and effort spent to

develop the relationship.


31/63

Page | 31


Buyer Performance Measurement Mistakes

Are All Buyer Performance Measurements Good?

Measuring buyer performance can be tricky. Here are three

mistakes commonly made when setting goals against which buyerperformance is measured.

Mistake #1 - Having Cost Savings Be The Lone Metric. One of

the most important metrics a purchasing department can share

with top management is cost savings. But just because it is

one of the most important metrics doesn't mean it should be

the only metric.

If you only measure buyer performance on cost savings it could

incent buyers to sacrifice quality, on-time delivery, and/or

supplier service for lower prices. So a cost savings metric

should be balanced by measuring these other aspects of

purchasing performance to produce a clear assessment of the

buyer's impact on total cost and overall company performance.

Mistake #2 - Not Using Net Cost Savings As A Metric. When

calculating cost savings, price increases should be deducted

from price reductions to produce a "net" cost savings number.

One reason for doing this is that top management expects

reported cost savings to equal actual profit improvement.

But also consider buyer motivations. By counting only gross

cost savings, buyers may be inclined to ignore opportunities

to minimize price increases on large spend categories while

focusing their time on less critical categories where price

reductions are possible, resulting in an overall lower

positive impact on profit.

Mistake #3 - Not Taking Markets Into Account When Setting

Goals. When some purchasing managers set cost savings goals,

they look to "last year's numbers" or some other arbitrary

figure to determine the targets for the next year. This can

set buyers up for failure.

In the last few years, there has been cost volatility in many

markets. If the purchasing department promises year-over-year

price reductions in markets where prices are rapidly rising

industry-wide, top management will likely be disappointed when

actual performance is compared with those goals. So give

consideration to market conditions when setting buyer goals.

That isn't to say that price increases should be readily

accepted just because that's the direction of the market, but

rather that goals should estimate how much an aggressive

effort can offset market price increases.


32/63

Page | 32


Purchasing Services: The Pitfalls, Part II

How Can You Mitigate Services Procurement Risks?

One reason that services procurement can be more challenging

than goods procurement is that performance levels for servicesare often determined by one key person on the supplier's team.

Be it a software implementation project manager, a consultant,

an equipment installer, or any other type of service personnel,

that one person's success can determine the success of the

service procurement.

When deciding between service suppliers, learn about the key

person for each supplier. Here are six questions to ask

service suppliers' management. I prefer to ask these in person

because it's too easy to make up fake answers with the lag time

allowed for written responses.

1. What are the key person's qualifications? This information

can help you develop a measurable comparison between

suppliers.

2. How long has the key person been employed there? To get

this information, I like to see a copy of the key person's

resume/CV. If the person hasn't been there long or has a

pattern of leaving a job after a consistent interval, you

may be able to assess the risk of the person leaving the

supplier during your project.

3. What other projects is the key person working on? This

question can help you assess the risk of the key person

being distracted from your project, which could lead to

unacceptable performance.

4. What could happen to make one of those projects become a

higher priority for the key person than our project?

Knowing the risks, challenge suppliers to give you the

confidence that those risks will not occur.

5. If the key person was to leave the company or be

unexpectedly out of the office for a long period of time,

who would be his or her backup? If the supplier only has

one person capable of performing for you, there is a

heightened level of risk for this procurement.

6. How do the backup person's qualifications compare to those

of the key person? Having a backup is great, but if the

backup is not qualified, you can be facing just as much

risk as if there was no backup.


33/63

Page | 33


Cost Savings: From Potential To Actual

How Can You Achieve Your Cost Savings Potential?

Many times, the cost savings estimated at the beginning of a

contract exceeds the amount that you actually save. This

failure to achieve cost savings potential is called "leakage"and poses a threat to the credibility of purchasing

professionals and departments. Leakage occurs when a

purchasing department establishes an enterprise-wide contract,

yet many users within the organization still buy from other

suppliers.

Why does leakage occur? "I've come up with four key reasons,"

says Barbara Ardell, a Vice President of consulting firm

Paladin Associates. "Communication, inconvenience, fear of the

unknown, and lack of trust."

In my recent conversation with Ardell, she shared eight

strategies for mitigating leakage, including these three:

Monitor Expenditures To Identify Any Leakage - According to

Ardell, "spend visibility is really vital" to understand when

and where leakage is occurring. The better your spend analysis

capabilities, the quicker you'll be able to take corrective

action when leakage happens.

Celebrate & Publicize Sourcing Successes - Trade publications

welcome stories of companies that achieve successful results.

Securing an interview with a trade publication and having your

stakeholders participate, "gives credit to internal customers,

builds ownership, and also creates accountability," Ardell

states. "How are you going to back down on a savings

commitment when the CEO has seen it in a news report?"

Involve Stakeholders In The RFP/RFQ/Tender Process - "One easy

way to do that is to have them involved in scoring the supplier

surveys," explains Ardell. "You can also invite participation

in the analysis of the RFP or RFQ responses or invite them to

participate in the live [reverse] auction. There's nothing

that gets excitement going in the stakeholder community than

actually participating in a live bidding event."

I strongly endorse stakeholder involvement. If you want to

drive compliance with a new contract and achieve the true

savings potential of the contract, your new supplier must not

be perceived by your stakeholders as "Purchasing's supplier."

It must be regarded as "our supplier" - one that the company

collectively chose.

If the "Purchasing's supplier" perception exists - especially

if you've ousted a popular incumbent - your stakeholders may

exploit the reasons why choosing the supplier was a bad

decision. In many companies, stakeholders have the power to

either help you achieve your cost savings potential or prevent

you from reaching it. So it's important to work in harmony

with them.


34/63

Page | 34


Green Procurement: Let's Get Started!How Can You Implement Green Procurement?

Unless you've not had access to any media in the last year, you

know that environmental responsibility is more critical than

ever in business. Companies are evaluating their impact on the

environment by measuring their carbon footprint - a metricrepresenting the amount of greenhouse gas emissions generated

by the activities of a company.

Why is green procurement arguably the most critical initiative

for companies that want to reduce their carbon footprints?

"Our data indicates that that upwards of 60 to 70 percent of a

company's carbon

Documents

Purchase Tips