Friday, January 14, 2011

Self Inflicted Wounds

Frequently the greatest obstacle to getting the best cost and terms is not the supplier, but the actions that occur within the Buyer’s company itself which impact the ability of the procurement organization to be successful. It’s one thing when you lose the battle because the supplier had the power or leverage to win against you. It’s a totally different thing when the source of the Supplier’s power or leverage comes from actions taken within your own company by your fellow employees or managers. Instead of shooting yourself in the foot, someone else is pulling the trigger.  To successfully manage cost requires that the process from end to end be managed in a manner where competition and leverage is maintained until the final supplier agreement is reached.

There are many ways to lose power or leverage. Sometimes it is done in-advertently by those who may not even think about it. Other times it may be done knowing that potential problems could occur, but it is outweighed by other factors they feel are more important at the time.
Suppliers have an arsenal of weapons they use in this battle. On the frontline they have technical sales personnel focused on helping designers with the goal of becoming designed in. Some of their weapons are the ability to provide design services to reduce development cost or design time, or the willingness to fund their own development activities to get a lock on the business. Other weapons are far more subtle, such as tracking the degree or acceptance of their products or how they stand against others so they will understand what, if any, real competition exists.

Most companies do a poor job of managing the process end to end process and maintaining competition and leverage. Many times they know that their costs are too high, but they are unwilling to attack the systemic problems that cause it.

As product life cycles have become shorter over time, the ability to correct the problem later such as during production is substantially diminished. Design resources that would be required to qualify an alternative probably have moved on to another development project, and the savings a new sourcing activity could provide is reduced due to the reduced life cycle. Those reduced savings always needs to be compared against the lost opportunity of using those same resources in development. What this means is that unless something is done to systemically change it, the problem will continue. 

Half the battle is education and it’s important that everyone involved in the process understand the impact of their actions. You won’t get the best cost / best deal if:
w  Activities commence and the procurement activity is an afterthought.
w  You invest substantial money in one supplier before concluding negotiations as that makes        
      changing suppliers more costly than any price differential.
w  You allow time to trap you into one supplier, where a change in suppliers would significantly
      impact your desired schedule, time to market, or time leaves you with no other choice.
w   The Supplier knows  they are the only one who can meet your schedule.
w  The Supplier knows that you need them more than they need you.
w  You lack the discipline which drives standardization.
w  You fail to re-use designs and materials.
w  You don’t have the operational discipline to drive usage through contracted suppliers.
w  You allow Groups to optimize their individual activity at the expense of the whole.
w  Every person on the team doesn’t stress the need for it to be competitive.
w  You’re internally restricted on what you can pursue.
w  You buy custom when standard will do.
w  You aren’t prepared when you negotiate.
w  You don’t ask for it.

While it’s nice to place the blame on others for the problem, many times the Procurement function may clearly be an accomplice or may even be driving the actions that are against their own interests.  Here’s an example: I was helping negotiate the renewal of an agreement with a Supplier and was having little success on getting the Supplier to agree upon a number of key terms that would have represented increased potential liability for the Supplier. I believed that I had leverage as there was potential new business that could be impacted. Part way into the negotiation I discovered that the manager of the Group I was negotiating it for was off negotiating a separate “partnership agreement” with the same Supplier where in return for a reduced price and extended payment terms the Supplier would get an increased percentage of the Business. Those “partnership” discussions totally undermined the negotiation I was having. The Supplier was clearly getting a message that all they needed to do to get more business was to lower their price and give longer payment terms. They simply had no fear of losing the business.  The correct way of doing it would have been to have coming to agreement on terms be a pre-condition of any additional commitment. I couldn’t believe that someone in Procurement was so dumb that they didn’t understand the impact of their actions.

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