Wednesday, September 30, 2009

Whitepaper Wednesday - Sourcing Professional Services

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Sourcing With 'The Pros'" from Global eProcure.

This whitepaper covers the sourcing of professional services. And, actually, covers it quite well.

I like the fact that this whitepaper starts off at the basics of professional services sourcing. It first defines professional services, giving examples such as "accounting, architecture, management consulting, legal, advertising and investment banking."

The whitepaper then discusses how professional services are sourced at many companies today, with little involvement from the procurement department. Why is this a problem? Because, according to Global eProcure, "both exceptional savings and preferential service levels can be achieved with professional service firms through a highly collaborative, finely tuned strategic sourcing approach."

However, it is not a matter of simply running professional services through the same sourcing process the company used for office supplies. There are some unique challenges, such as:
  • The mission-critical nature of some professional services engagements make the risks high;
  • Professional services are often customized and highly interactive, which makes it difficult to compare suppliers; and
  • Often a company's political environment makes it uncomfortable to entertain ousting a supplier who has a strong relationship with a senior-level company representative

The whitepaper goes on to introduce six leading practices for overcoming these challenges and successfully sourcing professional services. A couple that I found most interesting were:

  • Collaborate Like Success Depends Upon it (Because It Does). The section describing this practice included a real-life example of a cross-functional team that was charged by its COO to "work together to reduce the firm’s legal spend by 15% or risk having their internal support teams reduced by similar amounts." This charge created unity in the type of situation where there is often conflict and the story had a happy ending.
  • Seek Creative Pricing Strategies. This section did an excellent job of summarizing several different pricing options and indicating the best conditions in which to use each.

This was definitely one of the best professional services sourcing whitepapers I've read. And even though it was 14 pages - regular readers know I rarely review whitepapers that go past 5 pages - it was an easy and interesting read. You can get your own copy of this whitepaper from Global eProcure's Web site (registration required).

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Hungry For More Ideas On Improving Purchasing Performance?
Check Out Our Web Site's New White Paper Page At
http://www.NextLevelPurchasing.com/supply-chain-white-papers.html

Tuesday, September 29, 2009

One Quick Way Of Determing If Management Is Clueless About Purchasing

In my line of work, I see a lot of purchasing leaders trying to get their training budgets reinstated now that the worst of the economic recession seems to be over. Some have success, while others really have to fight for funding.

The latter group often finds that the reason they have to fight is because their management is clueless about what a well-trained purchasing department can accomplish. Their management will say "They've already been trained on SAP/Oracle/Lawson/etc. and have been using the system for years. How can you tell me they need more training?"

These management teams think that knowing how to be successful in purchasing simply means knowing how to create a purchase order. That's being clueless.

They have no idea that good purchasing is all about identifying and acting upon opportunities to improve corporate performance and increase profitability. They have no idea what it is costing them to have that mindset.

Where is your management on the "clueless continuum?" If they think that learning how to create a purchase order is all a purchasing professional needs in terms of training, be prepared to educate them on the value that purchasing best practices can deliver to the organization.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
What Is The ROI Of A Well-Trained Procurement Department?
Download The Whitepaper "Purchasing Skills & Profit: The Correlation" At
http://www.NextLevelPurchasing.com/supply-chain-white-papers.html

Monday, September 28, 2009

The Most Critical, And Often Overlooked, Piece Of Supplier Collaboration

Last Wednesday, I reviewed Ariba's new whitepaper entitled "Supplier Nominated Savings: Accelerating Savings through Strategic Partnerships." Though I pointed out much value in the whitepaper, I did write that the approach seemed more like an RFP than a true collaboration.

Apparently, I wasn't the only one.

In response to a related post on Supply Excellence (Ariba's blog), the Hackett Group's Pierre Mitchell commented that supplier nominated savings programs are most effective when they are not "narrowly defined," cautioning procurement organizations not to disguise the "price reduction wolf in a collaborative sheep’s clothing."

Ariba followed up with a second post on Friday, trying to clarify the "win-win" nature of good supplier nominated savings programs. While the follow up was valuable, I think that there was something that could have been said more simply. And, actually, it is the most critical piece of a successful supplier nominated savings program. So I am going to help Ariba articulate it.

What is it?

It is communicating the benefit to the supplier.

What is in it for them?

An extension to the term of the contract?

A larger percentage of the business?

A bigger profit margin due to lower costs for the whole supply chain (not just the buyer's organization)?

Oh, you didn't think of why the supplier should be excited about a supplier nominated savings program?

You should be thinking about it. After all, the goal is to motivate your suppliers to help you.

"Bring us cost savings, and you will get _____." And the blank cannot be filled in with "the privilege of our business" or "a thank you letter."

I'm explicit in my advice. You need to be explicit when communicating the benefit to 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

Friday, September 25, 2009

Cost of a Purchase Order: The Great Mystery of Procurement

One of the most common questions in procurement - and the one that has never seemed to have a definitive answer is - "how much does it cost to process a purchase order?" I get asked this question so much that I have decided to dedicate this blog post to it.

Ask 10 "experts" what the cost of a purchase order is and you're likely to get 10 different answers. Here are a few stabs that people have made at answering this elusive question...

  • A 2006 report from APCQ found that the cost of a purchase order differed depending on the capabilities of the procurement department on a continuum from bottom performer to top performer. This report indicated that the cost of a purchase order ranged from $35.88 to $506.52.
  • A 1994 study by the Environmental Protection Agency on its own processes revealed that some of its procurement officials had estimated the cost of a purchase order to be as high as $300, but published a conservative estimate of $94.20 per PO.
  • The Supply Management Handbook says "it often costs organizations more than $100 in administrative expenses to generate a purchase order" and that "in many firms, the cost of managing and generating a purchase order can exceed $200 per transaction."
  • CAPS Research indicates that the cost per purchase order varies by industry, from $59 in industrial manufacturing to a whopping $741 in the petroleum industry with the average being $217.

Would one of these benchmarks apply to your organization? Maybe, maybe not.

There are many variables, including: the procurement department's capabilities, the industry, the organization's specific processes, the systems used, etc. If you want a number that is true to your organization, you'd really need to track everything involved with an order; know the salaries of each individual who gets involved in an order; amortize the price paid for systems by the number of purchase orders generated over the life of the systems; know the telecommunications and/or paper costs; factor in overhead costs such as facilities, supervision, and benefits, etc.

The cost of obtaining such information would likely outweigh the benefits of having that information. This is a true example of a situation with the potential for "paralysis by analysis." So you may just want to pick a number out of the range of benchmarks I previously mentioned - like $100, $150, or $200 - being as conservative as you need to be to fit the culture of your organization, and go with it.

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, September 24, 2009

How To Be A "Heavy Hitter" In Purchasing

We recently received some great feedback from one of our students and I wanted to share it with you. Here is what he had to say...

"While I found all of the courses informative and extremely useful, there was one that I found to be exceptional. That was your Supply Management Contract Writing course. I began using the knowledge I obtained from this course immediately, and I am currently in the process of negotiating a handful of purchasing agreements that include several of the references you review in your course. I've even gone as far as to 'beef up' our standard Purchasing T's & C's, and I firmly believe that my organization's best interests are protected more now, than they ever have been.

"I'm sure you've heard this numerous times, but I must say 'Thank you.' Not only have you broadened my abilities in an extremely competitive game, you've enabled me to play like a heavy hitter. Needless to say, management has already noticed the impact your courses have made. I must admit, I'm even a little impressed myself, with the knowledge that I am now able to bring to the table. I should have done this years ago!"








Jerry Cassiano, SPSM

Senior Buyer/Planner

San Bernardino, California, USA

Wednesday, September 23, 2009

Whitepaper Wednesday - Supplier Nominated Savings

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Supplier Nominated Savings: Accelerating Savings through Strategic Partnerships" from Ariba.

I went into this whitepaper with a preconception. By "supplier nominated savings," I thought that this approach was going to be similar to PPG's $AVE program that I described in a previous post. But that was not the case.

Ariba's approach to supplier nominated savings outlined in the whitepaper is a six-step process:
  1. Supplier & Spend Segmentation
  2. Conduct Market Research
  3. Develop Letters & Partnership Program Information
  4. Virtual Supplier Summit
  5. Negotiate
  6. Implement Savings

One of the newer practices in this approach is the conducting of a virtual supplier summit. While supplier summits are nothing new, conducting them virtually is.

Let's face it. Some suppliers have struggled for a long time under the current economic conditions. Imposing a travel requirement on them at this time is likely to (1) tick them off, (2) result in less than optimal attendance, and/or (3) whittle away at already fragile supplier bottom lines. A virtual summit is a good idea, especially now that webcasting technology has gotten much more reliable than it had been in years past.

So how does cost savings result from this process? A leader in the purchasing organization will send "fact-based letters requesting cost savings" to the supply base and those letters "highlight that the purchasing organization is looking to continue to do business with the providers, but
need competitive pricing in order to do so." Then, "once suppliers respond to the savings proposal request...the buying team must decide whether to accept the proposal or request additional savings."

Sounds a lot like an RFP/sourcing process except that the suppliers are told they have already won, huh?

Though I'm a little disappointed that the whitepaper didn't discuss a PPG-like approach to soliciting ideas from suppliers, I really liked the fact that it listed potential risks and mitigation strategies for those risks.

So that's a brief summary of the whitepaper's most salient points. It is five pages long so there is more to be gleaned by obtaining your own copy of it. You can download it for free from Ariba's Web site (registration required).

By the way, Next Level Purchasing has added a new White Papers page to our site. We have a couple of our existing whitepapers available now and will be adding more in the future. Check it out if you get a chance!

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, September 21, 2009

How Is Brinkmanship Different Than Other Negotiation Techniques?

I hope that you have enjoyed the article "Negotiation Brinkmanship Do's & Don'ts."

In the article, I gave a brief definition of negotiation brinkmanship. Here, I would like to expand upon that definition, contrasting brinkmanship with other forms of negotiation.

Here are the characteristics that make brinkmanship different than standard negotiation:
  • Brinkmanship is used at the end of a long negotiation
  • Brinkmanship usually is focused on one issue or a small subset of all issues that comprised the negotiation
  • Brinkmanship is usually centered around an impending deadline
  • Brinkmanship commonly involves a terrible alternative for both parties, yet somehow one party convinces the other that it is willing to accept that alternative if the other party doesn't agree to its terms
  • Brinkmanship is used by a purchaser after the supplier has already said it can move no further from its position

A couple of examples of brinkmanship that stick in my head are these negotiations:

  • The negotiations between US Airways and its pilots in the late '90's where company executives Stephen Wolfe and Rakesh Gangwal said that if the pilots agree to a favorable contract, US Airways would grow into a global carrier and, if they didn't, US Airways would shrink to its regional carrier roots. An agreement was reached and US Airways began growing until 9/11 dealt its near-mortal blow to the airline industry.
  • The negotiations between the ownership of the Pittsburgh Penguins and the State of Pennsylvania where the Penguins said if the state used gambling revenues to build a new arena, they would stay in Pittsburgh for the long term and, if the state didn't, the team would move to Kansas City. An agreement was reached and now the Consol Energy Center is being built. Interestingly enough, the casino that pledged money is disputing when the first payment is due.

Both negotiations came down to the last minute. Fun stuff!

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, September 18, 2009

Purchasing Professionals: What's Your Excuse?

Richard Weissman penned an interesting piece on his Purchasing.com blog. In it, he compares purchasing training to working out at a gym.

Richard shares that his gym features a "No Excuses" sign and members write lame excuses on the whiteboard underneath to motivate other members invest their time in their health. He then goes on to say that he has communicated with many purchasing professionals who offer up similarly lame excuses for not furthering their purchasing education.

It is a good piece that really makes a strong point for not being lazy about advancing your education and your career and is further supported by an articulate reader comment. That reader writes "there are those with excuses...those who do not make time or sacrifice to meet the end goal...if they have one at all. These unfortunate ones...fall into the lower tax brackets of this country and blame others for not overcoming their personal/professional roadblocks."

I tend to agree.

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, September 17, 2009

Did Poor Procurement Cause A Customer Backlash For Morningstar Farms?

A few weeks ago, I reported that Morningstar Farms was losing business because supposed "supply problems" prevented them from keeping their popular veggie dogs in stock at grocers.

Well, I didn't expect that post to become so active with comments. In one of the latest comments, a poster pasted a message from Morningstar Farms in which a representative wrote that "We are sorry to tell you that our Morningstar Farms® Veggie Dog products including Morningstar Farms® America's Original Veggie Dogs, Morningstar Farms® Corn Dogs, Morningstar Farms® Mini Corn dogs, and Morningstar Farms® Corn Dogs Made with Natural Ingredients have been discontinued. Our veggie dogs have been out of stock for several months due to supplier issues. Unfortunately, we have not been able to secure an appropriate facility to manufacture them."

In a quick look around the Internet, consumers are raving mad about the discontinuation. "Supplier issues" and the inability "to secure an appropriate facility to manufacture" the veggie dogs appear to squarely point the finger at Morningstar Farms' procurement department for what could become a nightmare for this company that has built itself up to venerable status among vegetarians.

What are the potential consequences for Morningstar Farms? Only the opportunity for competitors to steal their customers and the loss of hard-earned customer loyalty.

Could this spell doom for the Morningstar Farms brand? Quite possibly.

Now, I don't know the specifics about this situation - Morningstar Farms declined an interview request - so I can't say with certainty that this debacle was the result of incompetent procurement. But with the limited information that is out there, it certainly seems that way.

Could you risk destroying your company's brand with a procurement slip-up? Imagine yourself in Morningstar Farms' situation and figure out what you would do. Then, apply that same strategy to your own situation.

You don't want bloggers like me publicizing the impact of your errors, right?

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, September 16, 2009

Whitepaper Wednesday: Dealing With Performance Issues

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Dealing With Performance Issues" from IdeaBridge.

All of IdeaBridge's whitepapers are directed towards leaders and are presented as a series of bulletpoints. Because procurement leaders deal with performance issues of both their employees and their suppliers, I felt that some of the content was quite appropriate. Here are a few of the more interesting excerpts...
  • "Great coaches give opportunities, resources, and playing time according to players' past performance. The greater the performer, the greater the opportunity."
  • "Many people avoid confrontation. Some fear being disliked and rejected. Others are afraid confrontation will make things worse by creating anger and resentment in the person they confront. But when a person's behavior is inappropriate, avoiding confrontation always worsens the situation."
  • "Great Leaders recognize good work as quickly as they recognize poor work."
You can get your own copy of this three-page whitepaper from IdeaBridge's Web site.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Improve Your Purchasing Team's Performance?
Download "The Purchasing Leader's Guide To A More Successful Team" At
http://www.NextLevelPurchasing.com/team-success-application.php

Tuesday, September 15, 2009

Supplier Reduction: A Sign of Good Purchasing, Years of Neglect, or Executive Scheming? Part II

In yesterday's Part I of this series, I stated that a massive supplier reduction initiative could either be viewed as good purchasing practice or an indictment of previous years' purchasing performance. However, I also believe that many supplier cuts are driven by senior management without intimate knowledge of the company's purchasing operations. They have to show their stockholders that they are doing something to boost profits.

Imagine this conversation...

CEO: "Our stock price has been floundering. We need to regain investors' and stockholders' confidence. What can we do?"

CFO: "Well, consumer demand is down for the entire market. The top line is almost impossible to increase. Cutting costs would be an easier way to boost our margins. But we already cut 10% of our workforce and we're struggling to keep up as a result. I don't think we can do any more layoffs without seriously jeopardizing our ability to deliver."

CEO: "I remember reading something about ABC Company announcing a supplier reduction effort that would save them millions of dollars a year. I think that their stock went up right after that announcement. Could we do that?"

CFO: "I don't see why not. Last year, the finance organization wrote checks out and transferred payments to about 60,000 companies. There has to be some of those that can be eliminated."

CEO: "Sixty thousand, huh? Let's start chopping!"

CFO: "Do you have any concerns about what that would do to our operations? I mean, we did kind of shoot ourselves in the foot with the layoffs."

CEO: "No. We'll just tell Purchasing to find a way to make it work."

CFO: "Will it work? Can we just eliminate all those suppliers and still be the same company we are today?"

CEO: "Look: the stock price will go up immediately after the announcement. That means your net worth will go up and my net worth will go up. I don't think that any supplier reduction initiative has put a company out of business. It may be uncomfortable for a while, but we'll survive."

CFO: "Yeah, it would be nice if that stock price got a boost. Should we involve Purchasing in the decision?"

CEO: "You and I both know what kind of excuses we'll get. It is what it is. We need to cut the supply base in half. Get it done."

Following a conversation like this, the purchasing department is usually given a mandate to limit business to a certain number of suppliers. While the number is not negotiable, which suppliers are cut and which remain on board is up to them.

Is this an unrealistic conversation?

I don't think so.

It may be exactly why you will soon be given a supplier reduction task and told to make it work, irrespective of how little detail was considered in pulling this "magic number" of suppliers out of the air (or some other unnamed place). So, would you be able to sever relationships with half your supply base?

It may be wise to have that answer in the back of your head. You never know when the mandate will come down.

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, September 14, 2009

Supplier Reduction: A Sign of Good Purchasing, Years of Neglect, or Executive Scheming? Part I

What a coincidence...this weekend, I've been spending a lot of time thinking about all of the recent supplier reduction announcements that companies have made over the last few months. Then, today, Supply Excellence posts a well-written piece on Kraft's supplier reduction initiative.
While Supply Excellence points out the benefits of such a large-scale initiative - cutting Kraft's supply base in half "would affect more than 30,000 companies" according to CNBC - one has to wonder if these types of moves are signs of good purchasing or years of neglect. After all, if half of the suppliers a company is using are unnecessary, why is the company using them in the first place?

I really don't know Kraft's business, so I can't comment on them directly. But I wonder: is a large supplier cut essentially saying that a company's purchasing department has performed poorly in the past? That it has neglected its supply base management responsibilities for years?

Think of supplier reductions in terms of managing the clutter in your house. Are you a better "clutter manager" if you wait 10 years until your house is bursting at the seams before you decide to do a massive attack on the clutter or if you do annual "spring cleaning?"

Personally, I think that reviewing the size of the supply base is something that should be done annually or bi-annually. Despite being a smaller organization than the Krafts of the world, we do that here at Next Level Purchasing and have made some good decisions about which suppliers supply our various categories of purchases.

Actually, it would not surprise me if Kraft and other companies who have announced supplier reduction initiatives have indeed done a good job with their supply base management over the years. With these types of announcements, there may be some "executive scheming" that goes on behind the scenes to drive supplier reduction initiatives moreso than a great purchasing idea or actual inefficiency. So a supplier reduction initiative may indicate neither good purchasing nor years of neglect.

I'll elaborate on this executive scheming in Part II tomorrow...

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Want To Improve Company Profits Via Better Procurement?
Learn How To By Downloading "Procurement Skills & Profit: The Correlation" At
http://www.NextLevelPurchasing.com/procurement-skills-application.php

Friday, September 11, 2009

Procurement Professionals: Know What An Economic Rebound Will Do To Demand

Yesterday, I posted a piece about how a hospital's new purchasing policy hurt a local pizza shop's sales. And that got me thinking...not only should a company's senior management know what drives, and can impact, demand for its products, but that company's procurement team should know that as well.

Consider another example...Campbell's Soup today reported that its soup sales were up in the most recently completed quarter. An article on Yahoo Finance says that "soup sales were up as more people prepared their meals at home" likely due to the bad economy curtailing eating out budgets.

What about Ford's August 2009 sales? According to an article in the Washington Post, Ford's August vehicle sales were "up 17 percent compared to August of 2008, juiced by the government's cash-for-clunkers program."

Think about GameStop - a video game retailer - whose same store sales in the last quarter plummeted over 14% according to an article in the eCommerce Times. In that article, GameStop's CEO is quoted as saying "due to the effects of the recession and strong prior year comparisons, the video game industry experienced a sharp decline in consumer spending during the quarter."

All of these changes - both positive and negative - are a result of the shaky economic situation we've been in for the past year plus. Hopefully, each of these companies' procurement teams anticipated the recession and adjusted their strategies appropriately.

But, as all recessions do, this one looks like it is coming to an end and various demand drivers (such as the now-concluded cash-for-clunkers program) will change as well. Does that mean that people will eat less soup? Will they buy fewer cars? Purchase more video games?

The procurement professionals at these companies need to know this. And you? You should know:
  • What factors drive demand for your company's products and/or services?
  • If the economy recovers, how will that demand change?
  • What strategies do you need to change in light of that anticipated change in demand?

Get your answers now. Then, next quarter or next year, you'll be able to demonstrate how you've thought strategically and helped the company outperform its competitors in a time of change.

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, September 10, 2009

How In The World Can Procurement Policies Be Bad For The Local Economy?

This past weekend, I attended an event back in the neighborhood where I grew up. I had the chance to catch up with people that I haven't seen since I moved out nearly 12 years ago.

It's weird, but I can't seem to do anything or go anywhere without the topic of procurement following me. That's fine by me - procurement is obviously my passion!

So, here's how the topic came up. I ran into an old friend who owns a pizza shop. He asked me what line of work I was in and how business was.

I then said to him that he must be doing well, because his shop has survived all of these years (at least 20 by my estimation). He said that they were doing "OK" despite what was going on in the economy.

I expressed a little surprise that the economy hurt his business because I thought that pizza would be a lower cost alternative to eating at a fancy restaurant. He said that the economy was only part of his struggles.

The other part?

Well, this pizza shop is located across the street from a hospital. And that hospital, part of one of the smaller health systems in the city, has recently adopted a policy forbidding employees from accepting gifts and meals from suppliers. Apparently, suppliers would often buy pizzas for hospital employees. As a result of this policy, this pizza shop is hurting.

Who would have thunk it? A procurement policy having a negative impact on the economy of its community.

While I'm sad for my friend, unfortunately, the fact of the matter is that it is not the hospital's responsibility to keep the local economy thriving. The flip side is that - hopefully - more objective procurement decisions will be made by the hospital, making the hospital more financially viable and keeping health care costs down, which should indirectly help the local economy. While that alternative is less measurable from the local business owner's perspective, it really is the better one in the grand scheme of things.

Maybe I'll buy a pizza the next time I'm in the neighborhood. While it is not the hospital's responsibility to help local small businesses, the current and former residents of the community have the ability to keep the neighborhood economy alive.

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, September 09, 2009

Whitepaper Wednesday - Supply Chain Risk Management

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. Today, I'll be reviewing a whitepaper entitled "Essential Characteristics of a Supply Chain Risk Management Strategy" from Kinaxis.

This whitepaper starts off by essentially segmenting supply chain risks into two categories: those that are anticipated and those that are not. Obviously, the more effort you can put into identifying risks, the less likely you'll experience a risk that is unanticipated, although unanticipated risks certainly can - and do - happen.

For those risks that you do identify, the whitepaper suggests a three-phase approach to managing them:
  • Visualize and understand risks that apply to the supply chain. The whitepaper lists several categories of risks, including: natural disasters, flu/pandemic, economic risks, political risks, transportation, unstable demand, and unstable supply.
  • Measure and prioritize the risks.
  • Take action. Decide which risks need to be addressed and develop mitigation strategies for those risks.

The second half of the whitepaper goes on to discuss managing "unanticipated events." The whitepaper defines an unanticipated event as "a disruption that despite best efforts was not foreseen, and therefore a mitigation strategy has not been prepared."

The whitepaper notes that "the speed with which the company reacts and responds [to unanticipated events] can mean the difference between an insignificant blip and a full-scale crisis." The whitepaper concludes by listing six capabilities that a risk management assessment and response tool should have to assist companies in their management of unanticipated events.

At 11 pages, this whitepaper more thoroughly covers the topics that I have summarized here and is a worthy download. You can get your own copy of the whitepaper from Kinaxis' 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

Friday, September 04, 2009

A Procurement Business Case Example

I hope that you have enjoyed the PurchTips article "Defending A Procurement Business Case."

PurchTips is always in a very concise format, so I didn't have much room to include examples. But I will do so here.

I'm just going to pull numbers out of the air here, so don't take the numbers themselves literally. Focus on the methods.

Let's say that you are going to propose to the president of your company the idea of investing in an eSourcing system with optimization capabilities at a cost of $100,000. You expect the system to enable your department to conduct 50 sourcing projects a year instead of 40. In addition, you expect the optimization capabilities to enable your department to identify twice the amount of annual savings you had in the past (20% of sourced spend vs. 10% of sourced spend). The average spend per project is $200,000.

This means that, without the system, you would be sourcing $8 million worth of spend per year (40 x $200,000) and achieving savings of $800,000 per year ($8 million x 10%). With the system, you would be sourcing $10 million worth of spend per year (50 x $200,000) and achieving savings of $2 million per year ($10 million x 20%).

The net financial benefit of implementing your business plan, therefore, is $1.2 million: $2 million in savings with the new system less the $800,000 you'd save without it. Now, let's walk through the four things from the article that you need to know to defend your business case...

1. Your alternatives with a fraction of the funding. So, if your management only authorized you to spend $70,000 instead of the $100,000, what would you accomplish? You couldn't buy the system you wanted to buy. So does that mean it would be a bigger waste to spend that $70,000 on a less-optimal solution? You better know the answer!

Let's say that with $70,000 you would be able to afford an eSourcing system without optimization capabilities. How would that impact your savings? Well, maybe your average savings would only be 15% instead of 20%. Then, your annual savings would be $1.5 million ($10 million x 15%). You'd be sacrificing $500,000 in cost savings to avoid spending $30,000. Does that seem worth it? Unless you defend your procurement business case with this type of analysis, your management may not know.

2. The timeframe in which benefits will accrue. The easy way out is just to say that you'll save $1.2 million more over 12 months so you will save $100,000 per month and the system will "pay for itself" in 30 days.

Be careful. There is likely some lag time between agreeing to buy the system and when it will start showing tangible benefits. Be realistic.

Maybe it will take you 30 days to implement the system and train users before it can be used in a real souricng project. Maybe the first sourcing project will take 90 days to conduct and conclude. And, spreading that $200,000 in spend over a year from that point forward (as well as spreading that $20,000 in additional savings over a year), you may only really achieve $1,667 per month from that first sourcing initiative. If you only did that one sourcing initiative in the 12 months following your purchase of the system (and you subtracted the 120 days of implementation and sourcing), the benefit of the system in the first year would be a mere $13,333 ($1,667 additional savings per month x 8 months).

So, go to this level of detail to identify what projects you will be utilizing your investment on, any lag time associated with those projects, and when the real money will drop to the bottom line.

3. The importance of timing. Here, you answer the question: "What happens if we put this off?" Fortunately, it is quantifiable. Let's say that, as per point #2 above, you determine that there will be a 4 month lag time before contracts are signed that result in the additional savings from using the system. That gives you 8 months - or 2/3 of a year - to accrue benefit. Two-thirds of your additional annual savings of $1.2 million is $800,000. You can say that putting off investment will cost your organization $800,000 in higher prices in this year alone.

Pretty powerful stuff when put this way, eh?

4. Multiple options for success. In this case, you might compare the eSourcing with optimization vs. the eSourcing without optimization alternatives that I discussed in point #1 above. Or you may show what the costs and benefits would be if you hired a consultancy to do your 10 extra projects vs. buying the system that would improve your department's productivity. Or you may show two or three options of any variety. When presenting a procurement business case for approval, the worst thing you can do is to relegate the decision to a "go" or "no go" decision.

All too often, the "no go" decision looks more attractive to executives. Give them a "choice of yeses" as they say in marketingspeak.

It's not enough to put together a business case. You must anticipate what your audience (i.e., senior management) will be thinking. I hope that these tips help you get your investments in improvement procurement approved.

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, September 03, 2009

A Tip For Measuring & Charting Trends

If you read my rant on Tuesday, you are well aware that I think that you should be measuring buyer performance.

As you measure performance, a natural tendency is to gather and report statistics monthly. This is good. However, you may find that monthly trendlines on a chart can be very "zig-zaggy."

We struggled with that with some of our internal measurements. Then, one day, our sales coach said: "Why don't you do quarterly charts, too? You might be better able to decipher the direction of performance trends."

And, you know what? He was right!

So, if you are having trouble identifying patterns with your monthly charts, I would recommend the same for you: make quarterly charts. You might be surprised!

And if you are, let me know!

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, September 02, 2009

Whitepaper Wednesday - Ten Steps To Lower Procurement Costs

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Ten Steps to Lower Procurement Costs in Life Sciences" from SciQuest and Archstone Consulting.

While the whitepaper purports to be focused on the life sciences industry - one of SciQuest's target markets - the core advice in this whitepaper is really applicable to procurement in any industry. While the whitepaper starts off discussing the economy's impact on the life sciences industry and introduces strategic procurement, the whitepaper is built around those 10 steps to lower procurement costs.

I won't steal the whitepaper's thunder and reveal all 10, but I will point out some of the more powerful tips, such as:

1. Mine Value From Segmentation: "Identify categories (or sub-categories) where there has been significant market change and where new opportunities for cost savings may exist."

3. Eliminate Sacred Cows: "Increase spend under management by obtaining a commitment from senior management to pursue 'sacred cow' categories and to manage other categories that are currently outside of procurement’s responsibility."

4. Build-in Best Practices: "With resource constraints, it’s not uncommon for an organization to still have purchasing practices in use that were created 5, 10, even 15 years ago. Thoroughly review your procurement processes to ensure they are still relevant."

7. Mitigate Supplier Risk: "Ensure that you have back-up suppliers for critical commodities; source alternate suppliers for all categories that have the potential to take on a more strategic role in your supply chain; ask for an audited bill of health; [and] seek information from third-party organizations, such as Dun & Bradstreet, that provide viability reports."

If you find these suggestions to be stimulating, you should get your hands on your own copy of the whitepaper from SciQuest'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

Tuesday, September 01, 2009

Are My Hair Stylist's Performance Measurements More Stringent Than Your Buyers'?

Last week, I went to the mall to get my "ears lowered" at the salon. While sitting in the chair, I couldn't help but notice a nearby wall with paper stars taped to it.

"What are the stars about?" I asked my hair stylist.

She proceeded to explain that they were a part of a performance measurement system that the salon had in place. Upon further inquiry, I learned that the salon had quite a few performance measurements: those that related to profitability (e.g., number of upsold services), quality (e.g., number of customer complaints and "re-do's"), and other important priorities of the salon.

These performance measurements were directly tied to compensation (including pay and number of paid vacation days) and good measurements were pre-requisites to "advancing within the company." I was quite impressed!

While I am a big proponent of performance measurement in business, I never really thought that a hair salon would have such a sophisticated measurement process.

Then I got a little irritated.

I know that there are many mid- to large-size companies that do not have any performance measurements in place for their buyers. While this made me bristle in the past, now that I see that a hair salon measures its employees so closely, it really fires me up that some people in desirable purchasing leadership roles aren't even that far along!

If your buyers' performance isn't measured as closely as my hairstylist's performance, something is wrong!

Get some measurements in place. Sooner rather than later!

If you don't, the next "trimming" that's done may be your position being cut from the org chart.

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

ShareThis