Thursday, January 31, 2008

Back To The Dual vs. Single Source Question

Back in September, I wrote the PurchTips article "Dual Source vs. Single Source" to make some suggestions to help determine whether dual sourcing or single sourcing was a better alternative for a contract.

Specifically, I wrote: "Upon bid receipt, compute the cost of doing business with the two qualified suppliers who bid the lowest for the 70% and 30% chunks of your business. Compare that cost with the lowest qualified single source bid. Is there a cost difference between the single and dual source options? If so, does the lower risk justify the premium?"

Since then, I've gotten some questions that have made me wish I was more specific how to do that comparison. To do that comparison, you have to identify the total cost of all possible combinations.

For example, if you had three suppliers bidding, your combinations would be:

  • 100% to Supplier A
  • 100% to Supplier B
  • 100% to Supplier C
  • 70% to Supplier A + 30% to Supplier B
  • 70% to Supplier A + 30% to Supplier C
  • 70% to Supplier B + 30% to Supplier A
  • 70% to Supplier B + 30% to Supplier C
  • 70% to Supplier C + 30% to Supplier A
  • 70% to Supplier C + 30% to Supplier B

The more bidders you have, the more combinations you have. But the bottom line is to make sure you've identified all of the combinations and have computed total costs for each combination.

If your number of suppliers and/or distribution percentages get bigger or more complicated, then it may be time for you to consider investing in sourcing and supply chain optimization software.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Wednesday, January 30, 2008

A Supply Chain Guy's $6 Million Idea

From what I've read, companies pay about $3 million for a 30-second commercial on the Super Bowl. I understand that they typically hire ad agencies to come up with the ideas for, and produce, the commercial itself. I believe that those ad agencies get paid a commission that is a percentage of the cost of the placement (e.g., 15% of $3,000,000 = $450,000) plus the expenses of shooting the commercial.

So the concepts for these commercials are developed by the world's brightest and most seasoned advertising professionals.

Except in one case this year.

Earlier this week, I read an article in the Pittsburgh Post-Gazette that a supply chain guy came up with the concept for Pepsi's 60-second ad to run during Sunday's Super Bowl.

Wow! Way to go Clay Broussard! I hope you're in supply chain because you love it, because you'd probably make a lot more money if you specialized in Super Bowl advertising!

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Monday, January 28, 2008

Cost Savings & Multi-Year Contracts

I hope that you have enjoyed the article "Calculating Cost Savings In Multiple Years."

Like many other cost savings topics, what I've shared is best practice among large companies but certain to be disputed by some in the purchasing and supply management space. So let me add these pieces of advice:

1. If you report cost savings differently than the way described in the article and senior management accepts that - great! Don't change a thing. The whole point of reporting in the manner described is to gain integrity with senior management.

2. If you negotiate a fixed price throughout the multi-year contract, you may not be able to "officially" claim cost savings in all years BUT you can still communicate your impact verbally. Something like "If we hadn't negotiated a reduction in price, our cost over the next three years would have been $300,000 higher." It may not be official, but it doesn't hurt to show your true impact.

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Tuesday, January 22, 2008

Hey DJ...Cue Kool & The Gang!

We cracked open the champagne here at Next Level Purchasing headquarters today. We are celebrating reaching a major revenue milestone since I founded the organization in 2000.

I would like to sincerely thank all of our clients and students who have trusted us to help them improve their workplace results and purchasing careers and who have, in turn, helped us achieve our own success.

Now, if you'll excuse me, I'm going to pour myself another glass of bubbly...

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Monday, January 21, 2008

A New Purchasing Blog Worth Your RSS Subscription

Reading the sector's blogs like Spend Matters, Sourcing Innovation, Supply Excellence, and the eSourcing Forum are part of my everyday activities. However, beyond those, I've been pretty disappointed with the quality of new purchasing blogs that have popped up over the past year.

Sometimes I have to chuckle that some of the newer bloggers think that CPO's are actually out there taking their advice even though these bloggers haven't spent as much as one day of their lives as a buyer, let alone a CPO, director, manager, or even supervisor of purchasing. So hearing about a new purchasing blog makes me yawn. And the quality has more often than not left a lot to be desired. I usually don't even check out new purchasing blogs anymore.

But I actually was excited when fellow Pittsburgher Robert Rudzki - author of several highly-respected purchasing books - told me about his new blog "Transformation Leadership" on Supply Chain Management Review's Web site. Mr. Rudzki brings a lot of real-world expertise to his blog, as he is the former CPO of Bayer Corp. as well as a former purchasing executive at Bethlehem Steel.

Building an audience and sustaining momentum is difficult. In the past year, we've seen Purchase Realm drop off the face of the planet, Procurement Central become Business & Technology Nexus, and Supply Excellence cut its pace of posting by about half. But if Rudzki can kick out the content, not get bored, and see some ROI from his blog (which few bloggers actually do), Transformation Leadership could become the best purchasing blog out there.

Time will tell.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Friday, January 18, 2008

Negotiation Semantics

A subscriber to PurchTips recently sent me the following message:

"Normally we have been using a word 'best' for price negotiations with suppliers as in 'Your price is too high, please quote your best price.' and sometime 'better.' Kindly advise which is the suitable word for price negotiations, which as I understand that is 'better.'"

Actually, when you are leading a procurement negotiation, I feel that you should use the word "lowest" rather than "better" or "best" when discussing price.

Think about it. The "best" price in the mind of the supplier will not likely be the "best" price in your mind, right?

If a supplier says "We gave you our best price" that may be true because the best price for them is the highest price. If the supplier is convincing, then you may believe that they've given you their lowest price.

But the best price for you is the lowest price. So ask for the lowest price, not the best price.

There are so many subtleties of the language that come into play in negotiations. Think about the words you use when negotiating and whether a slight tweak would make more sense.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Thursday, January 17, 2008

Warranty vs. Guarantee

Before I begin this post, I should say that I have not done much legal research on this topic. Therefore, it should not be considered legal advice as much as it is an observation about common practice.

One of our students asked if there was a difference between a "warranty" and a "guarantee."

In practice, these words are used pretty much interchangeably. They are meant to convey that a buyer of a product will have some recourse if something goes wrong.

Perhaps the biggest difference that I've observed in practice (and it is a small difference) is that "guarantees" sometimes use buyer satisfaction as the criterion to determine whether or not a remedy is due to the buyer. As in "satisfaction guaranteed or your money back."

In contrast, for a remedy to be due to the buyer under a warranty, there usually is other objective criteria such as durability for a certain period of time or conformance to specifications. There are also specific warranties that may apply under the law.

While I've seen some (non-expert) people post that warranties are time-bound and guarantees are not, I feel that this is untrue. Most sellers do not extend their guarantees open-endedly. For example, Next Level Purchasing offers a money-back guarantee for 30 days to those individuals who enroll in the SPSM Certification Program. I've also seen "lifetime warranties" offered.

I believe both to be legally enforceable. You don't need the word "warranty" or "guarantee" in a clause of a contract for that clause to become a legal obligation. But it always does help to specify in the warranty or guarantee to indicate what remedy the buyer will have in the event the warranty or guarantee is exercised by the buyer.

Which term do I prefer to use in contracts? Warranty.

Why?

Simple. Because the Uniform Commercial Code - which is the body of law that governs sales/purchase transactions for goods between parties in the USA - uses the term warranty.

Being consistent with the terminology of the law is never a bad thing. It could make a court case easier to win, if it ever came to that.

So that's my take on warranty vs. guarantee.

For more contract-related educational material, check out our online class "Supply Management Contract Writing."

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Wednesday, January 16, 2008

Is Government Procurement Efficiency Bad For The Economy?

A few days ago, the Pittsburgh Post-Gazette ran an article that indicated that new Medicare competitive bidding procedures soon to go into effect may favor large suppliers vs. small suppliers. While the article described the new procedures, it didn't really discuss the current procedures so that one can understand what is wrong today.

But the effort seems geared toward the timeless cost reduction principle of supply base consolidation as the article states "a list of 20,000 nationwide suppliers would be culled by several thousand."

The changes are being protested by small business advocates who feel that quality will decline and small businesses will go out of business.

On a separate but related front, Jason over at Spend Matters yesterday posted a blog entry noting that the University of Texas divides its $271 million in annual spend among 1.5 million suppliers. He remarked that "Methinks everything really is bigger in Texas -- including the cost of procurement!"

But I have this question: is government procurement efficiency bad for the economy?

Doing business with fewer suppliers means that small suppliers, who do not have the capacity to handle large volumes, will not be able to compete and survive. And aren't small businesses critical to a successful economy? After all, "small businesses create two out of every three new jobs and account for nearly half of America's overall employment," according to the White House's Web site.

Now, in the private sector, I feel strongly that being inefficient for the sake of philanthropy is wrong in the sense that it may conflict with an organization's mission to maximize profits. But in government, I'm actually undecided, believe it or not.

OK. Government has a duty to reduce costs to benefit tax payers. So instead of awarding business on a single-transaction bid, it will look at consolidating its spend into longer contracts.

But will this truly reduce costs? I think that there will be some increases in cost and some decreases in cost, actually. And I don't know what the net effect will be.

What do I mean?

Well, when bidding on single transactions, small suppliers may beat the prices of large suppliers. That's how they get so much government business to begin with.

But if those single transactions were now packaged with other transactions, those same small suppliers may not have the capacity to fill the order. The large suppliers' package unit price will likely be less than their individual transaction unit price, but it is not known whether the total package price will be less than the sum of all small suppliers' individual transaction prices. And, if it isn't, whether the premium will offset the savings of dealing with fewer suppliers. Plus, with fewer small suppliers to compete against, big suppliers may feel less pressure to keep prices low.

But it goes beyond that.

If small businesses are no longer able to compete for a large amount of government work, theoretically jobs will be lost. What happens when jobs are lost? Who picks up the tab? That's right, the government!

You watch. If the economy does slip into recession, you will probably see the government extend the term of unemployment benefits. You will probably see tax cuts in the form of advance checks sent to tax payers. All of this will increase the national deficit. And increase government costs.

So keeping small businesses in business through inefficient government procurement may actually benefit the economy.

Look, I don't have a definitive answer on this. But I do know enough about the situation to say that there are economic benefits to the inefficiencies that help small businesses get government contracts.

Would I ever teach government purchasers to remain inefficient? Well...no.

This could be a topic that many of you will have strong opinions on one way or the other. I'd love to hear them. The hundreds of other daily readers of this blog probably would, too. So feel free to post a comment!

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Friday, January 11, 2008

Changes In Purchasing

I hope that you have enjoyed the article "Top 10 Purchasing Changes In 10 Years."

If you've already read it, you're likely to have identified a change that you thought should have been on the list. It was tough to limit it to 10. Here are some other changes that didn't make the top 10:

  • The Internet Made Supplier Research So Much Easier (actually this is more like 15 years)
  • Win-Win Negotiation Got Even More Popular
  • More Purchasers Discovered The Risks of Single Sourcing
  • The Buzz Over Six Sigma Subsided
  • Purchasing/Supply Chain Management Become A Career Destination
  • The SPSM Certification Becomes The Premier Purchasing & Supply Management Designation (this would be #1 in my view, but I decided to be modest)
  • Too Many More To Mention

So what else has changed from your perspective?

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Thursday, January 10, 2008

Profit Surge Because Of, Or In Spite Of, Procurement?

An article in today's Pittsburgh Post-Gazette reported that Alcoa had a big quarterly profit surge. I found the CEO's quote a little ambiguous as to the reason.

He said: "We battled substantially higher material input and energy costs, and currency impacts while simultaneously continuing to execute on the largest capital investment program in our history."

So, with sales declining and profits increasing, costs obviously went down. But because three of their business units reported lower earnings, the fact that "Alcoa blamed [those units'] slide on higher freight and energy costs," and the CEO saying they "battled substantially higher" procurement-related costs, it is unclear whether reductions in other costs more than offset higher procurement-related costs.

I searched the Internet for their 4Q filing to see if the cost of goods sold decreased, but didn't find one yet.

So did they "successfully" battle those costs or not?

I'm confused.

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Monday, January 07, 2008

The Career Strategy That Wastes Time

After years of observing a problem, it's time to step in and help the situation.

We have a Web page called "Jobs For SPSM's." This is a place for employers and recruiters to post available supply chain and purchasing jobs.

Nonetheless, some of our site visitors send us resumes thinking either that we will post their resume or we will consider them for a Next Level Purchasing job. That's not what the page tells the visitor to do, but so be it.

But, beyond that, we've noticed a pattern of poor communication that certainly isn't helping these resume-senders get what they want. Here are the details...

We receive lots of emails to the address on our Jobs For SPSM's page where the individuals simply attach a resume. No subject line. No text in the body of the email. Just an attached resume.

If you've done this to a prospective employer, you're wasting your time.

First, with the proliferation of spam, viruses, spyware, ad nauseum, people just don't open unsolicited email attachments, particularly if they look like they have been mass emailed. Second, if someone isn't professional enough to at least write a message saying which job they are applying for, why they would be a good fit, that a resume is attached, and how they can be contacted, I would think that most employers won't be impressed enough to give one bit of consideration.

So if you want your resume to be read, put at least 10 extra seconds into the email that you attach it to.

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Thursday, January 03, 2008

A Habit Of Success

The final numbers haven't been crunched for 2007, but it looks like we'll have ended up quadrupling our business in the past two years. I'd like to thank all of our students and their companies for seeing the value in what we offer and allowing us to help them deliver better results.

The success we've had continues a pattern of rapid growth for us. And, reflecting on it, there are many reasons why we are able to grow and succeed year after year. There are several habits that we have as a team that I think should be adopted by every purchasing and supply management professional so that you, too, can achieve greater success.

One of those habits is having a true commitment to success demonstrated by actions, not just words. I think that successful purchasing and supply management professionals and leaders embrace this habit and, when there is an opportunity to make an improvement, they choose to make progress sooner rather than later.

The rest? Well, they find themselves always waiting for "the right time" to take action. They use the buzzword "conflicting priorities" as an excuse.

Sure, it's impossible to do everything at once. And you certainly should choose the appropriate order of activities given limited resources.

But over-playing of the "conflicting priorities" card usually keeps a purchasing and supply management department in tactical mode. Senior management usually sees right through it. To them, conflicting priorities means inability to handle the workload.

It's resolution time.

Are you willing to help your employer quadruple in size in two years?

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

Wednesday, January 02, 2008

Negotiation Psychology

I hope that you have enjoyed the article "Negotiation Psychology That Suppliers Use."

To experienced purchasers, this article might be pretty basic. But there is an important point of this article that even the most seasoned negotiators must remind themselves of during each negotiation preparation.

That point is that it is not enough to have your own arsenal of negotiating tactics. You must also consider your counterpart's game plan.

How many of us armchair quarterbacks watch a football game and say "They should have run the ball more" or "They should have exploited their passing attack?" When we say such things, what we don't take into account is that the other team is using a defensive scheme that influences the play calling.

Similarly, the supplier's tactics must influence our "play calling" in the context of a negotiation. The concepts taught in today's article are a good first step in considering what the supplier is thinking and adjusting your negotiation approach accordingly for maximum results.

Let's hope that the Steelers can expertly read the Jaguar's game plan this Saturday and make the adjustments necessary to win.

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

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