Monday, April 11, 2011

Commodities - Learning About A Commodity

 To be successful in procurement negotiations you need to understand the nuances of the specific commodity you will be procuring.  While there are many similarities that may exist across many commodities, each commodity has their own uniqueness.  A commodity may be unique in terms of:
·      The tasks required to produce the product or perform the service.
·      The investments and risks in the market.
·      Inherent risks in the commodity.
·      The competitiveness of the market and ability of competitors to enter the market.
·      The risks of customers in purchasing and using the product or service.
·      The focus of the market and the target customer base.
Commodities and products of the commodity may also be unique to a business and specific business lines may have unique needs or requirements.

If you’ve never written or negotiated a contract for a specific commodity, how do you learn?  Here are a few suggestions:
  • Ask for a tour of a supplier to see exactly how the product is made or how the service is performed. A tour of a supplier location should provide you with information on the materials, labor and processes used at each step in the process. That provides you with a better understanding of what drives their cost for negotiation of price, what impacts their flexibility, what makes up their lead time and other time frames as part of negotiating flexibility, lead time, cancellation and rescheduling, it can also help identify potential problems areas.
  • Find someone that has significant knowledge of the commodity and have them explain what is different or unique. Someone that has significant knowledge of the commodity can tell you what’s unique or different along with potential problem areas or things to look out for.
  • Ask for the best agreement that your company has in place for that commodity. Review it to understand what’s included in the contract, specifications, statement of work. That will help you identify what’s different or unique. It also should provide you with past precedent if you are dealing with the same supplier or a competitive benchmark to hold other suppliers to.
  • Meet with service people for that commodity to understand what their issues and concerns are with purchasing that commodity and why. Service people are good at understanding what the life cycle cost would be and if a Supplier’s product has a high MTTR (mean time to repair) you can use that to look for concessions in other areas such as price.
  • Meet with the subject matter expert or engineering group that would review or qualify the product or service to understand what their issues and concerns are with purchasing that commodity and why. Many times they have been dealing with the commodity over an extended period of time and can share and help prioritize what’s important and what’s not.
  • Go to a trade show and listen to suppliers of that commodity explain their products or services and what may be unique about their products.
  • See if there is a trade association for that commodity and read through any materials they publish. Some may have standard agreements they recommend their members to use. If they do, read them to see what’s different or unique.
  • Identify the major players in the commodity. See how they would be classified. Are they technology leaders, followers, or mainly cost focused? This could affect your strategy depending upon the point in the product life cycle you are at.
  • Sit in on a negotiation with someone experienced in that commodity to see the issues that arise in the negotiations. This allows you to not only see the issues but how they handle it.
  • Some commodities have 3rd party training on how to procure that commodity. If possible take that training.
  • Read trade magazines, papers and websites that publish news about the commodities, trends, new products, problems, supply/demand positions etc.
  • Join a Procurement organization like the Institute for Supply Management (ISM) and attend meetings to network with others that manage the same commodities.
  • In discussions and negotiations with the Suppliers, act dumb and ask them to explain what they need and exactly why they need it.

If you want to negotiate contracts you need to do your homework to learn the commodity. One of the biggest weapons you can have going into a negotiation is the power of information.  I was negotiating a commodity for the first time and we wanted to require a specific process be used in the manufacture of the Product. The salesperson said that there would be an additional charge for that process. The problem for him was that only weeks earlier I had toured their plant, saw the process being used and was informed by the manager that they performed that process as standard process for all customers. When I mentioned that to the sales person, the request for additional charge quickly disappeared.  If you have information about the commodity, the Supplier’s processes, their competitors processes that’s information you can use in the negotiations to help get what you need.


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