Tuesday, April 22, 2014

Tricky Cost Savings Calculation Example

I hope that you have enjoyed the article, "Tricky Cost Savings Calculations."

In the article, I walked you through four calculations that you may use in situations where calculating cost savings is not cut-and-dried.  I'd like to take this opportunity to walk you through an example.

Let's say that your price for an item was $100 on January 1 of last year.  You bought 300 units at that price until the price changed to $90 on October 1 of last year.  You bought 100 more units at that price last year and 100 more units in the first quarter of this year.  Then, for the rest of this year, you bought 300 units at $85.

What is your cost savings for this year?

Some procurement professionals, in an effort to boost their cost savings numbers, would say that each unit they bought for $90 would produce a savings of $10 and each unit they bought for $85 would produce a savings of $15.  That would result in a cost savings of $5,500.

That's not correct!

The correct cost savings is $3,600.

"Whaaaat?," you ask.  Let me explain...

The issue with the calculation of $5,500 in cost savings is that the highest price from last year should not be your baseline.

So, what should be the baseline?  $90?

Nope, not that either.

Walking through the calculations from the article...

Calculation A: Last Year's Average Price = Total Spent Last Year / Number of Units Purchased Last Year

Last Year's Average Price = ((300 x $100) + (100 x $90)) / (300 + 100)
Last Year's Average Price = ($30,000 + $9,000) / 400
Last Year's Average Price = $39,000 / 400
Last Year's Average Price = $97.50


Calculation B: This Year's Average Price = Total Spent This Year / Number of Units Purchased This Year

This Year's Average Price = ((100 x $90) + (300 x $85)) / (100 + 300)
This Year's Average Price = ($9,000 + $25,500) / 400
This Year's Average Price = $34,500 / 400
This Year's Average Price = $88.50


Calculation C: This Year's Cost Savings = (Last Year's Average Price – This Year's Average Price) x Number of Units Purchased This Year

This Year's Cost Savings = ($97.50 - $88.50) x 400
This Year's Cost Savings = $9.00 x 400
This Year's Cost Savings = $3,600

So, each unit purchased will contribute to cost savings by the difference between the price paid and a baseline price of $97.50.

Got it?

Good!

To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer - Next Level Purchasing Association
Author - The Procurement Game Plan
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
www.NextLevelPurchasing.com


Friday, April 18, 2014

3 Confessions of a Buying Maverick

Maverick Buyer

(The name has been changed to protect the innocent)

I have a confession to make: my name is Josh and I am a buying maverick.  However, I am in recovery now that I work for the Next Level Purchasing Association.

So how did I come to acknowledge my problem?  In two words, “procurement education”.

Working in an environment where I am surrounded by great material like SPSM Certification courses, “PurchTips” and our express courses, has made it much clearer to me that I had erred in my ways.

I assumed I was saving my previous employers time and money, in the long run, I was causing greater problems for the organizations as a whole.

Under the Radar:
I worked for a gentleman for many years whose goal was for our department to do things “under the radar”.  He himself was somewhat of a maverick and instilled such qualities into our team.  Admittedly, it made us a stronger group utilizing the “us against the world” mentality which is so often seen in professional sports.  Purchasing wise, it wasn’t beneficial for our company.  We had no accountability and were able to purchase items that on occasion became huge assets to the business, but more often than not became paper weights in our offices.  Purchase Order reviews were done by the Human Resources department who “rubber stamped” just about everything because they didn’t know our business function and didn’t want to be bothered.  Talk about a lost opportunity for measuring ROI, cost savings and containment!

Enablers Along the Way:
In one of my previous positions, I was told by one of the owners of the company to, “skip the procurement manager on hardware purchases”. Since I reported directly to him, I took it as a great opportunity to make my life easier.  However, there was a caveat to this directive.  I had to use a particular “buyers group” for all hardware purchases.  As I quickly learned, this “buyers group” was no bargain, purchases of desktop PC’s alone were 25% higher than buying online straight from the manufacturer!  Even though I reported my findings back to my boss, I was told to keep purchasing hardware in this way.  You can draw your own conclusions from this story, however it did keep me away from the purchasing manager’s office.

There’s No Such Thing as a Free Lunch:
In my first senior level position, I was suddenly overwhelmed with all the attention I received from vendors, consulting organizations, etc.  Somebody always wanted to take me out to lunch to discuss their latest and greatest offering.  In the past, I’d never had a problem saying no to people. But let’s face it, regardless of how ethical one tries to be, such perks eventually wear you down and your judgment becomes a bit clouded.  Purchasing SaaS or technical support services is easier to do when someone is schmoozing you and talking up their product line constantly than when you have to dig really deep into the nuances of a product or service you truly know little about.  Hence, you make buying decisions based on the words of convenient acquaintances rather than sound judgment. 

4  Realizations of a Buying Maverick:
  •        Maverick buying is harmful to all levels of your organization.  Just say no.
  •             Maintaining a standard of ethics at all times in crucial to your employer.
  •              While your input is important, leave purchasing decisions to the purchasing department – that’s  their specialty!
  •            Businesses need to have an educated purchasing professional; no longer should purchasing be cast upon someone with no procurement experience.
H      Here are 6 critical tips to stop maverick buying within your organization.

Share with us your stories of maverick buying and how you have dealt which such detrimental situations.


To your career success,


Greg Uhrlen
Next Level Purchasing Association

Thursday, April 10, 2014

50 Procurement Tips for the 100th Day of 2014

This week, we here at Next Level Purchasing Association (quietly) celebrated Charles' 300th PurchTips newsletter.  Over the years, PurchTips has become a "must-read" for over 260,000 purchasing professional across the world.

Since I am in the mood to celebrate, (hey it is the 100th day of the year, it's almost Friday and the sunshine has finally reappeared in this part of the USA!) I have taken 50 quick procurement tips Charles has authored over the past 300 issues of PurchTips and condensed them into one article.  Enjoy and here's to the next 300!

1.  Your supplier's first impression of you impacts how much you will be able to persuade that supplier in a negotiation.
2.  Require suppliers to complete and return a Notice of Intent to Participate provided in your RFP so you can predict participation.
3.  Identify the risks to achieving your terms, timeline, and other goals and plan to mitigate those risks.
4.  Anticipate your supplier's reaction to each tactic.
5.  Create tiered risk/rewards scenarios for Service Level Agreements.
6.  See if the supplier has implemented a leading quality improvement program like Lean, Six Sigma, or Lean Six Sigma.
7.  Determine the format (i.e., face-to-face, phone, etc.) and location of your negotiation sessions.
8.  Regular oversight can ensure that your global suppliers are behaving properly and reduce risk for your organization.
9.  Don't make your offer seem like a predictable negotiation tactic.
10.  Factor internal customers' interests into supplier selection criteria.
11.  Find out what motivates the vendor and make it win-win. 
12.  Create an agenda for the negotiation and practice.
13.  Develop a timeline for the negotiation process.
14.  Identify your second-best option in case you cannot reach agreement with your primary supplier.
15.  For each metric, determine the value that would separate "good" performance from "average" or "mediocre" performance in your particular situation.  
16.  Analyzing suppliers' "financials" is a critical activity in supplier qualification.
17.  Look for small "value adds" to enhance the deal.  
18.  Self-assess after each negotiation session and adjust strategy and tactics if necessary.
19.  Identify the risks to achieving your terms, timeline, and other goals and plan to mitigate those risks.
20.  Check if the supplier has a quality-related certification like ISO9001.
21.  Develop and share internally a communications plan stating who must be updated on negotiation progress and what information they must keep confidential.
22.  Comply with your employer's policy on accepting gifts, meals, and entertainment from suppliers.
23.  Ensure/insist that the supplier assigns a negotiator with decision-making authority.
24.  Review notes from previous negotiations, courses, etc. for tips for success.
25.  Start the negotiation confidently.
26.  Evaluate the probability of political unrest in the supplier's country including uprisings, war, or sanctions by your country.
27.  Knowing how direct costs, overhead, and profits comprise suppliers' prices gives you a negotiating advantage.
28.  Decide what to concede if necessary to reach agreement.
29.  Evaluate the probability that the supplier will covertly use prohibited materials (e.g., lead paint).
30.  Agree on an objective price adjustment method for the future.
31.  Evaluate the likelihood that the supplier's quality performance will not be within acceptable limits.
32.  Identify changes that you can make that will help you improve your numbers. If you already exceed the standard, aim even higher!
33.  Evaluate the probability of new legislation that would require a design or materials change.
34.  Invite the primary supplier to negotiate and learn who the supplier's principal negotiator is.
35.  Evaluate the probability of work stoppages (i.e., strikes) for multiple tiers of suppliers.
36.  Identify all the terms that you will negotiate.
37.  See if the supplier uses parts-per-million (ppm) as its quality unit of measure, not percent defective.
38.  Define the criteria for being a good purchasing professional.
39.  Set targets and least acceptable alternatives for each term.
40.  Never buy or hold the stock of your employer's suppliers.
41.  Research the probability of a natural disaster (e.g., proximity to fault lines, hurricane belt, flood plains, etc.) in the supplier's region.
42.  Determine your overall negotiation strategy (e.g., hardball, collaborative, etc.
43.  See if the supplier's quality efforts are focused on preventing defective items from being produced.
44.  Never share a supplier's proposal details with another supplier unless required by law.
45.  Investigate how a safety issue (e.g., fire, explosion, accident, etc.) might disrupt supplier production.
46.  Prohibit maverick buying as a company policy.
47.  Investigate if the supplier has a documented record of continuous quality improvement over several years 
48.  Identify at least one secondary source in the event of a failure of the primary supplier.
49.  Evaluate the probability of the supplier going bankrupt or experiencing financial challenges.
50.  At the end of the negotiation, help the supplier feel positive about the new relationship rather than feeling like it lost the negotiation.

To your success,

Greg Uhrlen
Next Level Purchasing Association

Tuesday, April 08, 2014

Your Supplier Needs To Get His/Her Boss Involved In Your Negotiation...Now What?

I hope that you have enjoyed the article, "In Negotiations, Small Talk Can Be Huge."

In the article, I mentioned that buyers can push for more concessions than a supplier's salesperson is authorized to give.  At that point, the salesperson will say “I’ll have to ask my boss if we can do that.”

I've seen buyers react to this in various ways - some great, some atrocious - throughout the years.  Here are three reactions I've observed and my commentary on each.

"Oh, that's alright."  This is the worst possible response.  It means that you have gotten all of the concessions you're going to get.  You've given up.  Called it a day.  Thrown in the towel.  It probably comes from a polite person's innate desire not to inconvenience others.  But, let's face it, it is not in any buyer's job description to make suppliers' salespeople's lives as convenient as possible.

"OK."  Unlike the previous response, the negotiation is staying alive and that's good.  And, as described in the article, the salesperson may in fact be an advocate that will go to bat for you and get a good deal.  But the opposite can be true, too.  So, even though the negotiation is still alive, you have conceded control.  And conceded control to someone who may have goals that are quite different than yours.

"Thank you for that idea, but it may be a great time for me to meet your boss.  Why don't she and I have that conversation directly."  A core principle of powerful negotiation is to negotiate directly with the people who have the authority to give you what you are asking for.  This is your opportunity to do just that and ask for much more than your front-line sales counterpart would ever be authorized to give.  Go for it!

To Your Career,
Charles Dominick, SPSMSPSM2
President & Chief Procurement Officer - Next Level Purchasing Association
Author - The Procurement Game Plan
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
www.NextLevelPurchasing.com

Thursday, March 27, 2014

The Most Common, Stupid, and AVOIDABLE Excuse For Procurement Ethics Violations

Cheswick, Pennsylvania is a small town.  For most purposes, it's pretty much irrelevant. But, for this story, it is very relevant.

Why?

Because there are probably just over a bajillion small towns just like Cheswick in the USA.  And, right now, procurement ethics violations could be happening in each and every one of them right at this very nanosecond just like they were happening in Cheswick from about 2010 to 2013.

What was going on in Cheswick?

Well, apparently, a Cheswick councilman during that period owned a company that was a vendor of the town.  Now, that itself isn't necessarily an ethical violation.  But, according to an article in the Pittsburgh Post-Gazette, the former councilman, Brian Harvanek,  failed to file documents or abide by contract value limits that would have made his being a vendor permissible.

That, my friends, is what you call a classic conflict of interest.

And, unfortunately, Harvanek's "excuse" for this conflict of interest was equally as classic.

The article states that Harvanek said that all of this stuff went down because of him being "ignorant of the ethics laws when he took office."

Almost every time that someone is investigated for a procurement ethics violation - either in the public sector or in the business world - they always say "but I didn't know that was an ethical violation."  While we would all like to think that procurement ethics are common sense, they clearly are not.

And that's sad.

It's sad because organizations have done implemented so much new employee training on other "grey areas."  Sexual harassment is a good example.  From what I understand, back in the day, male employees would often say things to female employees in the workplace that are simply unthinkable today.  Organizations have done a good job at clarifying the definition of sexual harrassment, codifying it, and training and communicating to their employees in a manner that certain behaviors don't happen nearly as often as they once did.


Why organizations don't do the same with procurement ethics is beyond me.  It's not like there aren't resources, expertise and procurement ethics training out there.

How many more of these Cheswick situations are going to happen in the USA before something changes?

Organizations could stop most of these Cheswicks from happening if they simply took away that most common, stupid, and avoidable excuse used by Harvanek and the countless others that made the same bad decisions.

To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer - Next Level Purchasing Association
Author - The Procurement Game Plan
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
www.NextLevelPurchasing.com


Tuesday, March 25, 2014

Negotiating The Non-Disclosure Agreement (NDA)

I hope that you have enjoyed the article, "When A Supplier Should Sign Your NDA."

The NDA, short for non-disclosure agreement and also called a confidentiality agreement, is usually one of the easiest contracts for a procurement professional to negotiate.  The problem with NDA's is not usually in the negotiation of them, but knowing when you should be using one.

Unfortunately, there are many sensitive situations where they should be used and they're not due to the buying organization's ignorance.  Hopefully, the above-linked article will serve to eradicate some of that ignorance from the world.

There is one negotiation thing to look out for when negotiating an NDA.  If your organization's standard template is one-sided - in other words, protects your confidential information but not the suppliers - suppliers will often ask for it to be made mutual.  Ideally, your legal department should have a mutual NDA template at the ready.  If not, then ask about using the one that they draft as a template in the event that you find yourself in a similar situation in the future.

Other than that, NDA negotiation is pretty straightforward.  Now, if only other types of procurement negotiation would be so easy...

To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer - Next Level Purchasing Association
Author - The Procurement Game Plan
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
www.NextLevelPurchasing.com


Friday, March 21, 2014

What Do The Missing Malaysian Airplane & Procurement Certifications Have In Common?

As of this writing, it has been two weeks since Malaysian Airlines Flight 370 went missing.  In each day since then, there have been many "experts" emerging on the news with different theories about what happened.  Pilot suicide, terrorism, a rapidly spreading fire that knocked the pilots out before they could call for help, and an explosion of batteries are just a few of the myriad explanations for what might have happened.

And despite the fact that each "expert" so adamantly justifies his or her theory and makes it sound so logical, the aircraft has not been found.  In fact, the search area has shifted a whopping 4,000 miles from where it started!

No matter how this tragedy turns out, this means that a lot of these "experts" will end up being wrong.

Oddly enough, I see a parallel between the "expertise" sought when a procurement professional seeks advice on what certification to obtain.

So, what's the parallel between the missing Malaysian airplane and procurement certifications?

Well, it's pretty common to see procurement professionals post online a request for advice about which certification to obtain.  And the responses vary so wildly!

One person may say that APICS' is the only "procurement certification" recognized by the employers that he or she is familiar with.  The next person may adamantly argue that point and say that APICS is not a procurement institution but more of a supply chain/production institution and that ISM is more aligned to the procurement side of the supply chain.  Still another person may say that the NLPA's certification (the SPSM) is much more results-oriented than ISM's and, therefore, the best choice.  Someone else may cite ISM being in business the longest as an advantage while others may retort that quality matters more than time-in-business.

I've seen all of these arguments and more.

The person that asked the question becomes easily confused.  So confused that they may never decide on a certification to pursue.

In other words, they hear so much "expertise" that they may give up on "finding the plane."

What's my advice?

Well, as the founder of the NLPA, I don't really need to state my recommendation for a specific certification, do I?  What I will say is that, if you are considering more than one certification, take a little time to research each.  Compare some of the materials that each offer.  Whose material appeals more to your style of learning?  Who seems to have the type of service that meets your expectations?   Whose material is updated frequently enough for your satisfaction?  Whose is not?

In other words, what are your own, personal observations?

Relying on others for advice on the topic of procurement certifications can open up a can of worms for you.  You're an adult.  Come to your own conclusions.  Make your own decisions.

You wouldn't ask a stranger to select your organization's most important supplier for you, would you?  So, don't delegate your certification choice to others.

On one final note, I will also say that procurement certifications are not mutually exclusive.  There's no reason why you can't have certifications from the NLPA, APICS, and ISM.  From the strong and diverse opinions on "which one is best," it's easy to see how you might go to a job interview bragging about your certification from ISM only to find out that the hiring manager prefers the SPSM Certification.

If you cover all your bases, you won't have that problem.  That's why dozens of countries are not just searching one part of the world for that Malaysian plane.  They are spreading themselves out,  refusing to listen to one single expert, in order to maximize their chances of success.

Not a bad strategy for your procurement certification ambitions.


Post-Script:  While many are captivated by the disappearance of Flight 370, it is important to not forget the potential tragedy of this occurrence.  Families are wondering whether their loved ones are alive.  All of us at the NLPA are hoping that the plane is located and that all on-board are found safe.  Our heart goes out to their families. As an educator, I always try to help my students see parallels between "hot topics" and what is going on in their own world.  By noticing similarities between seemingly dissimilar situations, one can often achieve a higher level of learning that would be otherwise difficult or impossible.  That is what I tried to do with this post.  I realize the risk of citing a potentially tragic situation and I sincerely hope that no one interprets this post to be playing down the seriousness of the worst case scenario.  That is not my intention at all.  Those that know me personally know my respect and love for my fellow human beings.  My heart does ache for the families of those on board and I hope that this story has a happy ending.

To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer - Next Level Purchasing Association
Author - The Procurement Game Plan
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM® Certification Online At
www.NextLevelPurchasing.com


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