Friday, August 28, 2009

What Dirty Tricks Do B2B Suppliers Use?

Stories of business-to-consumer (B2C) suppliers playing dirty tricks to suck more money out of their customers' pockets are relatively common. Actually, my car dealership - Kelly Chrysler Jeep Dodge West in Moon Township, PA - tried to play their dirty tricks on me recently.

Fortunately, I didn't fall for them. But I'm sure that, sadly, many less-wary buyers fall for them and pad Mr. Kelly's bank account quite nicely.

Here's what happened. About 4 - 6 weeks ago, I noticed that my passenger-side windshield wiper needed to be replaced. So I replaced it.

My inspection was due, so I planned on having it done this week. Last week, I noticed that my driver's-side wiper was no longer doing its job. So I was prepared to get "that call" that said it needed to be replaced.

"That call" came in and the service representative said that both my wipers needed to be replaced in order to pass inspection at a cost of $35. I took him to task and said that I just replaced the passenger-side wiper. Was he sure that both of them needed to be replaced?

He put me on hold and came back to say that only my driver's-side wiper needed to be replaced to pass inspection but they recommend replacing both wiper blades at the same time. I told him to only replace the driver's side, reducing the cost to $20.

This gentleman then told me that my tires passed inspection but they were "pretty low" and I may want to consider replacing at least two, if not all four, tires.

Now, I'll admit that I don't know much about things like head gaskets or alternators or some of the more mechanical parts of my car. But tires? I know tires. It's pretty easy to evaluate the wear on one's tires. I look at my tires all the time.

And my tires are in fantastic shape!

I naturally declined. But what a shame, huh?

These types of stories are less common in the business-to-business (B2B) world. But they are out there.

What dirty tricks have your B2B suppliers tried to play on you?

Use the comment link below to share your story or post it on our LinkedIn Group.

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, August 27, 2009

Is Outsourcing a Convenient Excuse for CEO's (Even When Murder Is Involved)?

This story is unusually gruesome for one that is covered here on the Purchasing Certification Blog. But I can't help but see the procurement tie-in, no matter how indirect.

Ryan Jenkins, a contestant on VH1's reality show "Megan Wants a Millionairre," had apparently killed his wife, removed her fingers and teeth to impede identification, ran from authorities across both the USA and Canada, and was eventually found in a motel room after his own suicide. Yeah. Not a story you'd expect to see here.

What gets me is the old point-the-finger-at-the-supplier drama that unfolded. The media obviously pounced on VH1 with a "how could you let someone like this on your show?" investigation.

VH1's response? They blamed their supplier.

VH1 told the Washington Post "Ryan Jenkins was a contestant on 'Megan Wants a Millionaire' -- an outside production, produced and owned by 51 Minds, that is licensed to VH1." According to the Richmond Times-Dispatch, VH1 claims that “all outside production companies are responsible for the screening/vetting process of contestants for reality TV shows."

So VH1 essentially washes its hands of any association with a perpetrator of such a crime. Convenient, huh?

51 Minds then, to help absolve their customer while also pointing the finger at their supplier, issues a statement saying: “The company did have in place what it thought was a thorough vetting process that involved complete background checks by an outside company (emphasis added) for all contestants on its shows...Clearly, the process did not work properly in this case. 51 Minds is investigating what went wrong and taking steps to ensure that this sort of lapse never occurs again."

But isn't it a company's job to make sure that it suppliers perform properly? Shouldn't choosing and maintaining a relationship with a supplier have some type of responsibility attached to it?

Perhaps CEO's have a hidden, strategic reason to support outsourcing. They might be thinking "If something goes wrong, we won't have to take the blame."

If so, that's sad. There's no excuse to not know what failures are bound to happen within your supply base.

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, August 26, 2009

Whitepaper Wednesday - Achieving Savings on Indirect Spend

Welcome to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Driving Savings from Indirect Spend" from Ariba.

At the core of this whitepaper are five ingredients for successfully achieving savings on indirect spend categories. Those ingredients are:
  • Spend Access
  • Proven Sourcing Process
  • Category Expertise
  • Electronic Sourcing Tool
  • Compliance and Demand Management

This whitepaper is short - only 5 pages - so I can't elaborate too much without giving the whole whitepaper away. However, one thing that I think should be emphasized to executives who may not be completely in touch with what goes on "in the trenches" is the last point: compliance and demand management.

The whitepaper points out that "as much as 15 percent of identified savings are lost without effective compliance management processes." This means that the estimated savings can go right down the drain if your organization does not take action to ensure that its employees don't buy from the wrong suppliers, they do buy from the right suppliers, they don't buy what they don't really need, and the right suppliers charge the right price.

The whitepaper closes with "10 Things to Keep in Mind to Make Your Indirect Spend Initiative a Success." It's definitely a good overview of the things to consider when looking to indirect spend for savings. You can download your own copy of this whitepaper for free (registration required) from Ariba's Web site.

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, August 24, 2009

Subtleties of the Inventory Turnover Ratio

I hope that you have enjoyed the PurchTips article "Buyers: Know Your Inventory Turnover Ratio!"

While inventory turnover ratio seems like a pretty straightforward calculation, there are some things you need to consider when evaluating it, including:
  • Inventory turnover ratio must be evaluated alongside of stockout statistics. If your inventory turnover is really high, but your number of stockouts are too, that's not good inventory management. That's putting your organization at a competitive disadvantage.
  • A common mistake when calculating the inventory turnover ratio for the entire inventory is to use the price of the inventory when you sell it, rather than your cost.
  • You'll often see the denominator of the inventory turnover ratio expressed as "average inventory" in either quantity or monetary figures. In the article, I used an expanded denominator to show you how average inventory is calcualted. This helps prevent "guesstimates" that can distort your true inventory turnover ratio.
  • There is no "one-size-fits-all" ideal inventory turnover ratio. It varies from company to company and from item to item. While you may be able to find benchmarking statistics for your industry from an industry or supply chain trade association, most often organizations compare their inventory turnover ratio to past performance and look to increase their inventory turnover ratio from the previous year while reducing the number of stockouts.

Inventory turnover ratio is a very important and widely-used metric. Use it wisely and avoid some common mistakes and you can sell your value to management.

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, August 21, 2009

What's The Bottom-Line Benefit of Seeking Out Small Suppliers?

While many supplier diversity initiatives are criticized because they seem more like the byproduct of social responsibility rather than a profitable business plan, I always like to address the benefits of viewing your prospective supply base in terms of big suppliers and small suppliers.

In the PurchTips article, "Doing Better Business With Small Suppliers," I point out a few advantages of doing business with small suppliers such as "fewer channels to go through to get responses and sometimes even lower cost due to less overhead." Yesterday, Purchasing Magazine published an article on their Web site entitled "Spending with small business doesn't have to suffer in recession" that detailed aerospace giant Rockwell Collins' admirable approach to growing their spend with small suppliers.

The article cites some benefits that Rockwell Collins has realized as a result of their small supplier efforts. A Rockwell Collins sourcing executive is quoted as saying "Small businesses react well to our requests since we are typically a bigger percentage of their business than a large supplier."

In addition, being a small supplier may make change and improvements easier to drive. The article cites a Rockwell Collins' small supplier development initiative that resulted in a small supplier improving on-time deliveries to 99.8% from 96%. And we all know that better on-time delivery equals fewer costly production stoppages, less inventory, and, ultimately, higher profits.
There is definitely a bottom-line advantage to using small suppliers where appropriate. I hope that Rockwell Collins continues to take the lead with their small supplier development efforts and shows the profession how to achieve better documented results with such a program.

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, August 20, 2009

Dog-gone Supply Problems! Morningstar Farms Leaves Vegetarians Feeling Empty

While my wife is the only true vegetarian in the Dominick household, all of us eat many meatless meals and we endeavor to support cruelty-free agriculture. So, one of the staples you'll find in our freezer are Morningstar Farms' Veggie Dogs.

Well, I should say one of the staples you'll usually find. We haven't been able to find any Veggie Dogs anywhere lately, so our freezer has an empty space at the moment.

With a little research, my wife came upon a page on Morningstar Farms' Web site that says: "SORRY ABOUT THE DOG DELAY...We're sorry that Morningstar Farms® America's Original Veggie Dogs and corn dog varieties are temporarily out of stock. Supply issues have delayed production, and we do not yet have a specific date for the products' return to stores."

Ooh, supply issues! Time to investigate! Was this out-of-stock situation due to:
  • A supplier going out of business?
  • A Force Majeure event?
  • Supplier production and delivery problems (a.k.a. poor management at the supplier's plant)?
  • Quality rejections?
  • Poor supply chain planning on the part of Morningstar Farms?
  • A buyer-supplier dispute (perhaps due to something like the buyer failing to pay invoices on time)?

It could be any number of things. What was it?

I tried to get to the heart of the matter by contacting Morningstar Farms' PR firm and trying to arrange to speak with a Morningstar Farms representative. This, I thought, would be a good way for Morningstar Farms to get a positive message out to their customers as well as to provide an opportunity for readers of this blog to learn about handling a supply crisis in the real world.

After all, I am a devoted Morningstar Farms customer. I wanted to give them an opportunity to put their spin on this uncomfortable situation.

Unfortunately, all I got back was cut-and-pasted PR-speak that certainly didn't do Morningstar Farms any favors. The email said: "As you know, the MorningStar Farms America’s Original Veggie Dogs are temporarily out of stock at this time, due to a supply issue that has delayed production. We are continuing to work through this issue and hope to have the product back in stores as quickly as possible."

I gave them another opportunity to elaborate - after all, this sweep-it-under-the-carpet response was less than appetizing - but they declined.

While I understand that no company wants to reveal its weaknesses to a competitor, sometimes it is more important to be upfront with the constituency that matters more - your customers. Instead of doing this, Morningstar Farms' veil of secrecy and lack of a timeline will certainly compel their customers to source from Morningstar competitors sooner rather than later. And that, my friends, is an even better result for those competitors.

If executives can't understand how good procurement can create a competitive advantage, perhaps they can at least see how bad procurement (and bad PR) can create a competitive disadvantage. If that doesn't give them heartburn, I don't know what will.

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, August 19, 2009

Whitepaper Wednesday - Supplier Quality Management

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "The Business Case for Better Supplier Quality Management" from arcplan.

Because I see procurement leaders having trouble selling their management on the idea of establishing a supplier performance measurement program, I liked that this whitepaper started out by stating a large number of benefits of measuring and managing supplier quality in strategic terms. Those benefits included:
  • Uncover and remove hidden waste and cost drivers that erode profitability
  • Improve competitive advantage by reducing order cycle times
  • Avoid stock outs, which cause consumers to sample competitors’ products and strains your
    relationship with your customers

Did you notice the references to profitability, competitive advantage, and customer relationships? Good. Those are the types of words that matter more to senior management than cost savings and on-time delivery.

That isn't saying that cost savings and on-time delivery aren't important because they are. They actually facilitate profitability, competitive advantage, customer relationships, etc. But management is focused on the higher-level, bigger picture end results and you should be, too.

Another thing I liked about this whitepaper was that it not only addressed the "three critical performance drivers in the supply chain – Cost, Quality, Time," but also discussed several metrics for each, including how each metric is measured, where the relevant data resides, and the impact on the organization.

The whitepaper closed with the American Society for Quality’s Eight-Point Supplier Improvement Guidelines, which should be part of every procurement professional's collection of resources. Certainly, this whitepaper won't teach you everything you need to know about measuring, managing, and improving supplier quality, but it is a good primer. You can download your own copy for free from arcplan's Web site (registration required).

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

Tuesday, August 18, 2009

GPO Corporate United Is One Of The Fastest Growing Privately-Held Companies (Again)

I just got word that Corporate United, a sponsor of the Purchasing Certification Blog and leading group purchasing organization, has once again made it to the Inc. 5000 - an annual list of the fastest-growing privately-held companies in the country as compiled by Inc. magazine. Criteria for inclusion includes a leading growth rate and minimum revenues in both 2005 and 2008.

The company checked in at #2998 on the list with a 92.3% growth rate over four years. Last year, Corporate United claimed the #3255 slot, indicating sustained and improving growth.

After receiving their press release, I asked Corporate United some questions on how the rough economy of late has impacted their growth and why a procurement executive should care that they've grown the way they have. They responded with the following, which I thought was worth passing along:

"In a day and age when economic conditions are placing financial hardships on
U.S. companies, many businesses are experiencing unprecedented declines in
sales. As a result of these significant changes, across-the-board reductions in
staff have become the norm, which forces organizations to be more creative than
ever before to perform to their expected standards. With the top line stagnant
(or in reverse), bottom line impact is more important than ever. Prevailing
conditions are forcing procurement professionals to make that impact while being
handicapped by reduced volumes and increased resource constraints. By being
tasked to do more with less and with greater pressure to save money, procurement
must find ways to increase efficiencies.

"As the nation’s largest GPO,
we are uniquely positioned to address these concerns and serve our members by
delivering an unrivaled speed-to-savings advantage without placing additional
demands on their limited resources.

"While most businesses are going to
market with reduced volumes, our leverage is stronger than ever so we are able
to provide our members with the purchasing power they need to weather the storm.
With more than 150 member companies, a combined revenue totaling more than $450
billion and an active base of over 1.5 million employees, Corporate United is
the world’s largest virtual organization."

Congratulations to Corporate United and their members!

While I confess to not scouring the Inc. list to find other procurement-related companies, I did notice that Iasta also returned to the list in the 967th slot with a growth rate of 316.5% over four years.

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, August 14, 2009

Does Nike's Supply Chain Policy Imply That It's OK To Kill Animals But Wrong To Kill Trees?

Yesterday, Spend Matters covered a new supply chain policy put in place by Nike. In the post, Jason Busch cites a third-party article that says that it is the policy's "goal to make sure its supply chain doesn't source leather from cattle raised in the Amazon rain forest region, much of which has been clear cut for large cattle ranching operations."

Indeed, Nike's corporate Web site says that "Nike takes seriously the issue of deforestation in the Amazon basin. We understand how important rainforests are to health of the planet and the implications deforestation has on climate change and global warming," therefore, suppliers will need to provide "full traceability of cattle products and a guarantee that those products are not causing deforestation in the Amazon Biome. "

I couldn't help but see some irony in this. As if it is OK to kill animals but not OK to kill trees.

While Nike's Web site does list a lot of commendable socially responsible initiatives (e.g., diversity, supplier working conditions, the environment, charity, etc.), cruelty-free treatment of animals is sorely missing.

I have a lot of respect for the Nike brand and believe that every successful business evolves and does things better year after year. So, I am sincerely hoping that animal-friendly purchasing becomes a bigger concern of theirs in years to come.

Because the current approach to social responsibility seems incomplete at best, at least somewhat hypocritical, and careless at worst.

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, August 13, 2009

The Best Procurement Managers Are Great At Delegating

As I rose through the procurement ranks during my career, one of the most difficult things to learn to do was to delegate effectively. I was always a very detail-oriented worker. Having someone else handle the details of an important project made me uncomfortable.

From what I've seen, many procurement managers - especially new ones - feel exactly the same discomfort and reluctance. And a recent article in Kelly Services' Smartmanager newsletter hits the nail on the head when it comes to capturing the reasons for this reluctance, saying that new managers worry that their "performance and career will now be judged, not only on [their] individual performance, but the success of the [teams they] manage" and that no one can do a task as well as they do.

Unsettling feelings, indeed.

Fortunately, I've learned to delegate fairly well over the years. The rapid growth of Next Level Purchasing has forced me to. And though I never thought of how I gradually became more and more comfortable with delegation, Kelly Services does a great job of capturing five different "levels of delegation" that show a progression towards expert delegation:
  1. Please Just Do What I Ask
  2. Research It and Then I’ll Decide
  3. Research It and We’ll Discuss It and I’ll Make a Decision
  4. Research It, Evaluate It, and Suggest Action – Then I’ll Decide
  5. Research It, Evaluate It, Suggest Action, and Then You Decide (Be Sure to Tell Me First)

Of course, it helps when you have a highly competent team that you have tons of faith in. But this article is definitely a good read for those who want to become better leaders.

Speaking of leading a highly competent team, I'll take this opportunity to remind you that our whitepaper, "The Purchasing Leader's Guide To A More Successful Team," is still available. Click here to download your copy.

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, August 12, 2009

Whitepaper Wednesday - Meetings Procurement

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Integrating Corporate Travel, Procurement and Meetings Management: A Best Practices Roadmap to Strategic Meetings Management Success" from Starcite and Bitpipe.com.

As the trend is for more and more non-traditional categories to fall under the scope of the procurement department, a category that has been mentioned in more conversation than ever is meetings. While meetings management has been the responsibility of the corporate travel department in many companies, it appears that there is a lot of decentralized, one-off spending going on, making the situation ripe for funneling that spend into the procurement department.

While even knowing what meetings spending is going on can be a challenge, this whitepaper offers some good suggestions for knowing where to start. It suggests seeking out expenditures on things like "meals with 10 or more diners, audio-visual charges, large hotel room blocks or banquet charges, etc."

Where should you look for these expenditures? The whitepaper suggests corporate card reports, individual meeting planners, the finance department, and even suppliers.

The whitepaper says that the next step is to create policies around meetings. Unfortunately, I felt that this section could have used a few more examples. The one example it did provide stated that any contract that an internal meeting planner negotiates or modifies must be reviewed by Procurement.

The whitepaper talks about re-evaluating the supply base to consolidate business with suppliers who can accommodate both meeting-related transactions as well as what the whitepaper refers to as "transient travel."

The whitepaper identified four aspects of initial meetings integration (the placing of meetings spend under the Procurement umbrella) that can result in return on investment of an aggregate total of 11 - 25% of meetings spend:
  • Process automation
  • Policy compliance
  • Strategic sourcing
  • Visibility

Then, the whitepaper goes on to claim that additional savings beyond these "first returns" are possible as a result of using data gathered to reduce preferred rates, get bigger discounts, and increase corporate card rebates.

With these types of savings available, it is no wonder why larger companies are taking a harder look at meetings spend. My concern is that many companies will let this meeting spend slide under the radar for a couple of possible reasons: (1) they assume that their meetings spend is too small to matter or (2) they have always treated meetings as synonymous with travel, failing to take into account the market dynamics that may make integrating meetings spend into procurement a profitable endeavor.

If you are interested in delving more into the topic of meetings procurement, you can get your own copy of this whitepaper from Bitpipe.com (registration required).

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, August 10, 2009

Your Supplier Has Proven That It Offered The Best Deal..."So What?" I Say!

I hope that you have enjoyed the article "How Expensive Suppliers Negotiate, Part II."

As I mentioned last week, I keep coming across sales negotiation pieces that paint buyers as jerks for negotiating and that promote tactics to counteract procurement negotiation techniques. Today, I came across an interesting video on a sales negotiation site that I've mentioned before here, The Accidental Negotiator.

In the above-linked post, the interviewee, Brian Dietmeyer, says that the #1 technique that sales people face in negotiation situations is "I can get the same thing cheaper from your competitor." Mr. Dietmeyer suggests countering this technique by pulling out data to demonstrate that the seller's offer is indeed the best for the buyer.

Now, it appears that Mr. Dietmeyer would expect the buyer to look at the data, then wave the white flag and say "You're right. You have the better deal. Where do I sign?"

Even if the seller's deal is the best deal, there are plenty of ways to counter that. Like I said in my article, ask for more attractive pricing and terms anyway! Just a few of the responses that come to mind first are:

1. Say: "You may have the most attractive offer at this point in time. You may not. That's immaterial. You made the short list and we are giving each supplier on the short list an opportunity to make their offers more attractive. If you feel that this offer can beat anything your competitors put forth, fine. Just send me something saying that the offer you've already submitted was your best and final. If you are correct, then you have nothing to worry about, right?"

2. Say that there are intangible factors you are considering, such as risk when bringing a new supplier on board. If you are taking more risk, you require a higher reward in the form of a lower cost offer. The current offer isn't giving you the cushion you are looking for.

3. Turn the attention away from getting the price down to the competition's level and towards getting the price down to the minimum they are willing to offer. For example, you could say something like "I'm really having a hard time believing that you've looked at your price structure and this is the absolute least amount of profit margin you're willing to accept. My gut tells me that you'd be quite ticked if you lost the business and later found out that all it would have taken is a mere percent or two to put you over the top. Can you look me in the eye and tell me that you've reviewed the numbers and there is not room for any movement in the price and you're willing to lose the business over what may amount to be a couple of dollars?"

Stay tuned...I have the feeling I'll be finding even more anti-procurement negotiation techniques before long.

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, August 07, 2009

Is The ISM Report on Business Out of Sync With The Economy?

Before I get deep into the topic of this post, I think it is important to share a couple of definitions from About.com's "A Beginner's Guide To Economic Indicators" (or any Economics 101 course in a university, or even a good high school)...

Economic Indicator: "Any economic statistic...which indicate(s) how well the economy is doing and how well the economy is going to do in the future."

Leading Indicator: "[Economic] indicators which change before the economy changes."

Lagging (or Lagged) Indicator: "[An] economic indicator...that does not change direction until a few quarters after the economy does."

One economic indicator that people look at is the PMI contained in the ISM Report on Business. Now, ISM has always referred to the PMI as a leading indicator.

But is it?

Well, let's see. As I covered right here on this blog, when the United States' Gross Domestic Product - the true measure of the size of the economy - contracted after years of growth in the third quarter of last year, ISM's index indicated the opposite. The economy was growing according to ISM.

O-o-o-o-kiedokie.

ISM's PMI eventually indicated that the economy was contracting. So, at best, the PMI appears to be a lagging indicator.

Some recent posts on Supply Excellence have unintentionally amplified ISM's out-of-sync-ness by examining sub-indices that comprise the PMI - which covers the manufacturing sector but still is used by ISM to make a questionable correlation to the overall economy - and the NMI, which covers the service sector. Two days ago, SE blogger Pat Furey wrote that while the most recent employment sub-index for both the PMI and NMI were "well below the benchmark for expansion...the ISM Employment Index tends to lead the data from the Bureau of Labor Statistics, so don’t be surprised if the numbers above hit 50 before the broader unemployment data starts to decline."

Actually, just today, the US government reported that unemployment declined in July compared to June. So, while ISM says unemployment is rising, albeit at a slower pace, the real numbers prove otherwise. ISM's Employment Index may indeed show growth in the future but, when it does, it will be on a lagging basis, not a leading one.

One more point I'll make here...ISM's indices should never be displayed graphically. It only serves to confuse people.

Here's why...ISM's indexes are set up goofily where a number below 50 indicates contraction from the previous month and a number above 50 indicates expansion from the previous month. Except of course, when the PMI is above 41.2, which means that the manufacturing sector's contraction is small enough to indicate growth in the overall economy.

O-o-o-o-dokie.

So imagine a situation where you have the following index values:

Month 1 - 42.8

Month 2 - 44.8

Month 3 - 48.9

If these values were graphed, you'd think things are improving month to month. You'd have an upward trending line. What it actually means is that each month is worse than the previous month because all values are below 50.

With regard to an earlier Supply Excellence post on ISM's New Orders Index, I thought that there also needs to be clarification on what "bottoming out" means in the economic sense. Bottoming out means that the economy (or a subset thereof) has ceased to decline and is at the point to resume growth. For the way that ISM structures its indices, this means that the point at which 50 is reached after a period with values under 50 is where the bottom is reached (assuming the trend of improvement continues afterwards).

In that post, Mr. Furey analyzed a graphical representation of the ISM New Orders Index and wrote that "As one can see from the graph above, new orders for both goods and services began a steady decline last September. However, the manufacturing sector bottomed out in December at an all-time record low of 23.1." I don't like to be a stickler over words - especially because the quality of blogging at Supply Excellence is so darn good - but because the index value has not passed 50 since December, the values mean that July was worse than December. The bottoming out hasn't happened yet, according to the ISM numbers.

I think that this confusion makes it clear that ISM's reporting is poorly structured. In my mind, there is no excuse for that. There are plenty of well-structured economic indicators that they could use as templates. The economic indicators published by the Conference Board come to mind in this regard.

If you're interesting in reading more about how ISM's economic indicators are confusing at best, misleading at worst, here are some more posts that you may want to check out:

Caveat Emptor: Economic Indices Could Be Misleading You (November 30, 2006)

ISM's PMI is BS (February 6, 2008)

The ISM Index Gets More Amusing By The Second (March 4, 2008)

Another ISM Index Contradiction (March 5, 2008)

Today's GDP Release Leaves ISM With Egg On Its Face (October 30, 2008)

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, August 06, 2009

The Sales World Wants "Buyer" To Be Synonymous With "Jerk"

I don't know what it is, but lately I have been seeing many sales pieces that try to paint buyers as, for lack of a more appropriate word, jerks. If you didn't get that impression from the whitepaper I reviewed yesterday, you certainly will by watching this video that I have come across multiple times on the Internet.



Beyond just the video, some of the comments on YouTube provide additional insights into the perception of buyers and our approach to negotiation. Consider these:
  • "Along with 'partnership,' 'vendor skin-in-our-game,' 'shared risk & rewards,' these behaviors reflect the toxic reality of Technology Professional Services. CIOs, Purchasing & Accounts Payable Departments are all in fierce competition for Gold Medals in the Vendor Abuse Olympics."
  • "Always trust your gut and don't compromise for dead-beats."
  • "That is so true, sadly enough. I just wish we could stop trying to cheat off one another"

Now, I'm not saying that the techniques used by the buyers in this video represent corporate procurement best practices or anything. These people - as intended by the director - do come off as abrasive. But asking for better terms in and of itself is not shameful.

Today's business world is highly competitive. There is not infinite margin to go around. For some companies, negotiated savings is the difference between profitability and death. If those companies stopped negotiating, they wouldn't be around to be a client of their vendors anymore.

Negotiating isn't "trying to cheat." It is simply an attempt to reach a price point where the profitability of the transaction is mutually acceptable and balanced (not equal, balanced) for both parties. Often, list price is not mutually balanced, so buyers must ask - and receive - more attractive pricing and terms.

There's no shame in that. Keep negotiating.

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, August 05, 2009

Whitepaper Wednesday - How Suppliers Go Above Procurement's Head

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. Today, I'll be reviewing a whitepaper entitled "Value Creation Scorecard" from Toolbox For Finance.

Once I read the first words of this whitepaper, I knew I had to review it. It started out as such:

"The Challenge: Efforts to increase share of wallet are often hampered by the customer’s procurement organization, which focuses on 'price' for specific transactions rather than overall 'value creation.'" There Procurement goes again...hampering the poor supplier's ability to achieve "increased share of wallet."

The entire whitepaper is dedicated to helping suppliers develop a strategy for getting their procurement counterparts to not push so hard for lower prices. In fact - and by coincidence - the topic is very similar to what I've just covered in the PurchTips article "How Expensive Suppliers Negotiate, Part I."

The whitepaper is based on a case study of a supplier, named "Baker," who "lacks the strong 'corner-office' relationships necessary to communicate the value it can bring to the relationship. As a result, account managers end up discussing the value and savings it can deliver with purchasing professionals who are rewarded primarily for driving down unit costs."

The whitepaper reveals Baker's strategy for countering the procurement negotiation tactics that it is facing: "To get beyond procurement, Baker develops a scorecard built back from the customer’s key performance indicators. Baker and the customer jointly identify specific goals for each of five performance areas."

Now, is measuring supplier performance giving a supplier the upper hand in a negotiation? Absolutely not! It is a purchasing best practice for getting the supplier to continually improve its performance and, as a result, your company's profits.

However, how the scorecard is created makes a difference when it comes time to negotiate. Just consider this excerpt: "A bit of advantage, however, does accrue to Baker as the 'first mover,' as it can work with the customer to define the scorecard metrics in a way that is sure to underscore Baker’s strengths. Suppliers can realize a strategic advantage by being a first mover, as it is in the process of defining the scorecard inputs that a supplier can influence customers to define value to the supplier’s strengths."

While openly collaborating on goals and measuring performance is recommended for any strategic supplier relationship, a supplier intentionally influencing a biased scorecard in this manner is questionable at best and unethical at worst, in my opinion. And apparently suppliers expect more out of a performance evaluation program than just the privilege of continuing business and improving their own metrics: the whitepaper quotes a Baker executive who indicates an expectation for a bigger share of the business and higher prices.

Wow! Interesting to hear how sellers think, isn't it?

The whitepaper continues an analysis of the benefits of this sales approach. Of course, it couldn't resist one last pot shot at Procurement on the last page of content, saying "the customer’s purchasing posture must be open to the possibility of non-price negotiations. In the hands of Purchasing, the [supplier scorecard] will simply be used to exert additional price pressure."

While it gets me a little mad to think that suppliers want to use supplier scorecards to raise their prices, there is so much value to understanding the negotiation tactics that will be used against you. Therefore, I recommend that you get your own copy of this whitepaper from Toolbox For Finance's Web site (registration is required and - WARNING - the checkboxes for signing up for their newsletters, email list, etc. aren't apparent. I failed to notice them before submitting my registration information).

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

Tuesday, August 04, 2009

Know A Successful Co. In The Pittsburgh Airport Area?

If you know a successful company in the Pittsburgh Airport Area, please consider nominating them for an "ACE Award" through the Pittsburgh Airport Area Chamber of Commerce. Next Level Purchasing was the 2006 winner of the Innovative Business of the Year award and, this year, I am co-chairing the committee.

The awards include:

Young Entrepreneur Award - Recognizes the Founder, CEO, Owner or President of a company (must be under 40 years of age) who has demonstrated strong community involvement and displayed a positive and diverse social impact on the region. They will have used technology or new business practices to move a company from early growth to some maturity. (Employs no more than 100 employees).

Innovative Business of the Year Award - Recognizes a business that has developed a new technology, innovative product or service or applied a business system or service in an innovative way. The business must be able to quantify its growth and provide a detailed explanation of the new product, service, or system. Nominee should provide description of implementing innovative solutions to achieve operational efficiency and business results.
(Employs no more than 100 employees).

Small Business Advocate of the Year Award - Recognizes an individual who enhances a small business through his or her employment, community involvement or professional affiliation. This individual may work for a company that employs more than 100 employees and should be active in the community (not just networking)- making a difference!

Small Business Excellence Award - Recognizes a business started in the region who has survived for three or more years and has demonstrated the ability to overcome obstacles including access to capital, operational efficiency, control of expenses, customer loyalty and distribution of products or services.The business should also provide a historical index of growth in revenues and workforce. (Employs no more than 100 employees).

Do you know of a company that is deserving of one of these awards? Do them a favor and nominate them! Winning in 2006 was a great accomplishment for Next Level Purchasing and I'm sure this year's winners will feel fortunate and galvanized by a victory or even a nomination.

Just so it's clear, because I am co-chairing the committee, Next Level Purchasing is not eligible to win. But thanks anyway if you thought of nominating us! I would simply love to see another deserving business get due recognition.

For a nomination form, go to http://www.paacc.com/Ace%20Award%20Files/09%20ACE/09ACENominationform.pdf

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, August 03, 2009

One Reason Why Procurement Professionals Must Watch Economic Reports

On Friday, the Associated Press issued an article entitled "US Economy Appears Poised To Start Growing Again." This article reported that the US government estimated a drop in the Gross Domestic Product of just 1% in the April to June 2009 quarter. This represents an easing of the economic freefall that began last year and featured a GDP drop of 6.4% in the preceding quarter.
Beyond those general economic readings, the article featured a couple of paragraphs that should be a warning sign to procurement professionals. Let me just quote them here...

"Behind the better second-quarter performance were other signs of a fading recession: less drastic spending cuts by businesses, a resumption of federal and local government spending and an improved trade picture.

"Businesses did end up cutting their stockpiles of goods at a record pace in the second quarter, but that carries a silver lining. With their inventories at rock-bottom, businesses will likely need to ramp up production to meet customer demand. That would stimulate the economy starting in the current quarter.

"Some economists think growth in the July-to-September quarter could be more vigorous than previously forecast -- possibly 3 percent annual growth or higher."


Why should procurement professionals be concerned?

Because there are two opposing forces at work: increasing demand and decreasing inventory. With less inventory, suppliers are becoming less likely to be able to meet your quantity requirements on your time table.

But wait! There is a third economic prognostication that also could have a negative impact on supplier performance.

The article says: "Even if the recession ends later this year, the job market will remain weak. Companies are expected to keep cutting payroll through the rest of this year."

So suppliers are going to have more orders but fewer people and less inventory with which to fulfill those orders.

Do you see trouble brewing?

Now is the time that procurement absolutely must be strategically aligned with senior management. If senior management predicts increasing demand for its own products and services - and is counting on it to get the company out of the red - then it must be able to deliver to its customers better than its competition. If procured goods and services don't make it in time to allow your company to perform well, the competition may prevail at a time when your company can least afford to lose.

It will take visibility into the supply chain to know the ability of the supply chain to adapt to increasing demand - not just for your company, but for all of the companies that will be increasing their orders. You'll need to plan how you will get what you need to get when you need to get it.

It will also take good supplier relationships to be the "customer of choice" when there is only so much inventory to go around on short notice. Part of that involves sharing your plans and estimates so that your supply base can be prepared (after all, they may be contemplating laying off the very people that you need to fulfill your soon-to-be-increasing orders).

If the demand drivers for the products and services you buy changed such that your quantities to order spiked by 10% - and all of your suppliers' other customers demand changed just as much - what goods and services would not make it in time? How long would the delay be? What are the consequences of that extended lead time? Lost orders? Damage to your company's reputation? Terminated contracts?

Those are things you should know.

You also need to communicate the potential impact of demand growth to your management. If they are confident in growth estimates, it may be better to discuss with them the benefits of buying more now, while availability is good and prices are low.

A procurement professional can never know too much about economics. Whether you realize it or not, economics impacts how well you can do your job day in and day out.

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

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