Thursday, April 29, 2010

Preventing Surprise Supplier Surcharges

Myself and two members of my team ventured out on a supplier site visit today. We are considering moving our business for one of our strategic services to a new supplier.

The way we manage this particular service is a little unique. We use some techniques to streamline the supply chain that other companies just don't use. In other words, we shift some of the logistics that we would normally handle to the supplier.

This is this particular supplier's first time with such an arrangement, so they were nervous about pricing. "Will this arrangement end up being more labor-intensive than we think?" was a thought that was running through their mind.

In my less experienced purchasing days, I may have forced the supplier to come up with a price and stick to it. But, in those days, I would have been dealing with a supplier that later would not have the incentive to please me when I ended up in an inevitable jam, charged me a "padded" price in order to cover their imagined worst-case scenario, and/or - the worst option of all - added surcharges after they secured my business at which point it would be difficult for me to change suppliers.

As a more experienced procurement professional, I now know that the right decision is to do a pilot program with the supplier to ensure that both parties interests are addressed when it comes time to document our commitment to one another. In terms of pricing, our interest is to get a price which we can compare with benchmarks and base a long-term decision on where that price will remain firm throughout the agreed-upon period, with no surprise surcharges coming later. The supplier's interest is to make sure that the currently unknown costs are covered when those costs become clear.

A pilot program - or trial period, if you will - allows both of us to get closer to our objective.

Are you "taking it slow" to get it right? Or are you rushing into relationships that will likely involve surprise supplier surcharges?

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
Next Level Purchasing . com

Wednesday, April 28, 2010

Whitepaper Wednesday - What Is World-Class Procurement?

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. Today, I’ll be reviewing a whitepaper entitled “European CPO Executive Debates: The Path to Procurement Excellence” from CPO Agenda and Emptoris. Actually, at 60 pages, this whitepaper is a bit long for a cover-to-cover review so, in this post, I’ll be focusing on the first chapter: “What does world class procurement look like?”

This whitepaper is essentially a transcript of a roundtable discussion among dozens of European Chief Procurement Officers (CPO's). So, if you want to learn what world-class procurement is, these are the folks who are defining it with their work.

As you may expect, there was no universally accepted, one sentence definition of world-class procurement. If there was, this chapter would be very short instead of being 10 pages. That being said, there were some common threads in the CPOs' responses. Many of these revolved around the concept of contributing value to the business moreso than surpassing third-party benchmarks. Here are a few examples:

  • “World-class procurement is about making a significant and valued and measurable contribution towards your organization’s performance,” John Taylor, Global Vice President of Purchasing at Astra Zeneca.
  • “The first (view of world-class procurement) is the board level in terms of support for the procurement strategy. Where you have a best-practice procurement capability, invariably you can tie that back to executive buy-in at the CEO level,” John Collington, Group Commercial Direct at the United Kingdom’s Home Office.
  • “I would view myself and the Britvic procurement department as world class if we are clearly supporting the drive for corporate goals,” Andrew Boyd, Director of Procurement at Britvic.
  • “There are many organizations I’ve worked with where people are absolutely fascinated about how we compare with everybody else…I think if you asked anybody within Barclays what does world class look like as a customer of sourcing, they would say ‘You understand what we’re trying to do and you can tangibly evidence that you’ve helped create more value,’ rather than we’re great against XYZ company,” Jon Kirby, Chief Procurement Officer at Barclays.

Another fascinating topic discussed among these executives was the set of challenges each faced. Surprisingly, there was also a lot of commonality among these responses as several cited the ability to get customers to be unified in their support the procurement strategy as the top challenge. Here are a few examples of those responses:

  • “It’s making sure that up and down our organization we are talking with one voice. I often find that the suppliers know our company network far better than we do, and so corralling people together and talking with one voice is a big challenge,” Heather Rodgers, Head of Group Procurement and Supplier Management at Centrica.
  • “One of our challenges is moving away from 17,000 buyers in the bank to 17,000 requisitioners,” Ian Wilmot, Head of Methods, Development and Network, Group Procurement at Lloyds TSB.
  • “One (challenge) is getting communication right and getting middle management, in particular, to walk the talk. You can get the messaging right at the top table, you can get your own function to understand it, it’s the people in the middle – how do you get them to consistently adhere to what we’ve said we’re going to do,” John Taylor.
  • “I’d say the biggest transformation challenge for retailers in general is on the indirect side, where the whole dynamic is of many hundreds of stakeholders not accustomed to using or deploying great sourcing practice. So the challenge there is articulating what are we trying to get to and what does it mean for you? There is a transfer of control that underlies a lot of these changes and there’s a natural reluctance for parts of the business to give some of that up,” Michael Walsh, Head of Value Chain at Home Retail Group.

Though these first two topics saw a lot of similarity in the executives responses, the opposite occurred when asked about the value and results a world-class procurement function delivers. The four respondents to this question had quite different responses:

  • “We help our business win business from our customers,” David Gilmour, Purchasing Director at Pilkington.
  • “It’s about competitive advantage. If we can buy better than our competition, that’s probably the best measure of it,” Andy Collopy, Global Procurement Director, Fuels Marketing at BP.
  • “When I joined Barclays I asked our COO what success looked like and he said ‘No More Bad Deals,’” Jon Kirby.
  • “It’s really having the understanding and the commercial awareness to drive those discussions and know what profit margin we make out of each of those individual brands,” Andrew Boyd.

Surprisingly as well, the four respondents were very vague when asked about the most important metrics of world-class procurement:

  • “The metrics we look at are the value we get from our direct spend,” Andrew Boyd.
  • “The voice of the customer is a big one for us,” Ben Jackson, Head of Policy and Strategy at Network Rail.
  • “The span of influence of procurement across the organization’s third party spend, and then the quality of that influence…Then on the transaction process, a very simple one is the number of invoices that arrive without a purchase order,” Rob Woodstock, Lead Partner, Sourcing and Procurement Practice, UK & Ireland at Accenture.
  • “[A] measure for us is are we a net attractor for the top talent in our enterprise,” John Taylor.

These responses were a bit troubling for me to read because there was only one true metric cited – number of invoices that arrive without a purchase order – and it isn’t a metric that is exactly integrated with the corporate success so often mentioned earlier in the chapter. It makes me wonder: were these CPO’s holding out information to prevent competitors from catching up?

I think so. Great metrics are like the “profit per x” statistic that Jim Collins explained in his book “Good To Great.” I would have a hard time believing that such a distinguished panel would not have a few powerful metrics that guide their work.

As you can see, this whitepaper features a lot of great insights into what makes procurement world-class. I’ve only scratched the surface of all the fine material covered in this whitepaper. I may review some of the ensuing chapters in future editions of Whitepaper Wednesday. However, if you don’t want to wait that long to explore world-class procurement further, you can download your own copy from Emptoris’ Web site (registration required).

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Find More Good Resources For Procurement Leaders?
Check Out Our Web Site's New Whitepaper Section At
http://www.NextLevelPurchasing.com/WPcharles

Tuesday, April 27, 2010

Corporate United's SYNERGY Conference Is Next Week!

Corporate United will be kicking off its annual SYNERGY conference next week in Chicago. If you're not familiar with SYNERGY, it is a widely respected event that features some great speakers and the chance to interact with some top-notch procurement leaders.

On Wednesday May 5, I will be presenting "Five Purchasing Best Practices" - a condensed version of the Next Level Purchasing online class "14 Purchasing Best Practices." Specifically, I will be covering:
  • Utilizing A Buying Plan
  • Building Cross-Functional Commodity Teams
  • Utilizing Five Types of Proposal Analysis Strategies
  • Managing Supplier Performance
  • Conducting A Risk Assessment
But, enough about me! There are some other workshops that are perhaps even more exciting. For example, Gartner's Debbie Wilson will be presenting "Procurement Technology Deployment: The Four-Phase Journey To Best-in-Class." Also, I am hoping to catch the presentation entitled "Developing Category Management Results through Improved Market Intelligence" by Robert Handfield, PhD and comparing Dr. Handfield's approach with that of emerging expert (and fellow Pittsburgher) David Hargraves.

SYNERGY is a conference that is approved for Continuing Education Hours that may be used towards SPSM and SPSM2 recertification. A list of other procurement conferences whose CEH's are preapproved can be found here.

I hope to see you next week at SYNERGY!

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
Next Level Purchasing . com

Monday, April 26, 2010

What Purchasing Magazine's Demise Teaches About Insolvent Suppliers

I was very sad to see the announcement a little over a week ago that Purchasing Magazine was ceasing publication. Sad, but not surprised.

If you know anything about business, you know that print journalism is dying. Most newspapers haven't made money in years. More and more people simply go to the Web for their news and entertainment.

Most print publications have been trying to reinvent themselves online in the hopes of establishing a profitable business model. Purchasing Magazine had been trying to do this, too. But completing that transformation apparently didn't happen soon enough for Purchasing Magazine's parent company.

Evaluating Purchasing Magazine's demise made me realize that there are at least two different ways that companies (i.e., suppliers) approach their last days. The first way is when they desperately scale back operations and lay off employees.

This method is sometimes successful, but often results in a severe degradation of service, bad publicity, and customer loss which leads to bankruptcy. Earlier this year, I blogged about the warning signs that precede supplier bankruptcy.

Purchasing Magazine's demise was quite the opposite. They had really beefed up their online journalism, featuring lots of "Web only" content. They had launched, then subsequently improved, their PurchasingBIZconnect social network. They had retained all of their highly talented editors. They introduced a number of bloggers. There was no external sign of to-the-bone cost cutting.

But, still, they were owned by a large parent company that could simply decide to cut its losses and make the publication extinct. Months earlier, the parent company announced that it was divesting its publications. Several of them, representing approximately two thirds of total publication revenues, were sold to buyers who were going to keep those publications rolling. Purchasing wasn't one of them. Apparently, the publication was too small for the parent to bother with, so it just shut Purchasing down.

Could that happen to any of your suppliers?

You bet it could.

There are some key things to watch about your suppliers and their stability. Sure, performance can be an indicator of bad things to come. But it isn't the only indicator.

You need to evaluate the industry. Is the writing on the wall for the industry? Print publications, 35mm film, and traditional professional associations are but a few of the many industries that are steadily fading. If you are using a supplier in an eroding industry, you need to be concerned.

You also need to be aware of the ownership structure of your suppliers. Are they owned by a parent company? If so, are they a big, important part of the parent company's portfolio or just a small, expendable component like Purchasing Magazine was?

You can capture this information in an RFP and should update it annually for all suppliers. While you don't have to like a supplier closing its doors, it should never be a total surprise to you.

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
Next Level Purchasing . com

Friday, April 23, 2010

Global Sourcing Ethics Goal: Audit Better Than The National Labor Committee

Earlier this week, I came across an article alleging that Microsoft has been doing business with Chinese suppliers who have been breaking labor laws. Specifically, those suppliers were accused of failing to register workers under 18 years of age and had allegedly forced them to work excessive overtime: 280 hours in a month against a limit of 60 hours per week.

How did these violations come into the news?

It was publicized in a report written by the National Labor Committee (NLC).

The NLC is an organization whose mission is "to help defend the human rights of workers in the global economy." In fact, I think you can get a good feel for what they do by reading these excerpts from their Web site...

"Transnational corporations now roam the world to find the cheapest and most vulnerable workers. The people who stitch together our jeans and assemble our CD-players are mostly young women in Central America, Mexico, Bangladesh, China and other poor nations, many working 12 to 14-hour days for pennies an hour. The lack of accountability on the part of our U.S. corporations--now operating all over the world, and the resulting dehumanization of this new global workforce is emerging as the overwhelming moral crisis of the 21st century. The struggle for rule of law in the global economy--to ensure respect for the fundamental rights of the millions of workers producing goods for the U.S. market--has become the great new civil rights movement of our time."

The Web site goes on to brag that the NLC "successfully pressured dozens of companies - including the Gap, Kathie Lee Gifford/Wal-Mart, and the Walt Disney Company - to improve conditions in supplier plants and to respect human and worker rights."

Are your low cost country suppliers behaving in a way that would draw the attention of the NLC?

Your answer may be "No, we audit our suppliers."

What may surprise you is that Microsoft may have said the same thing.

An NLC report on the Microsoft situation assails supplier auditing practices.

In a section of the NLC report entitled "State and Corporate Factory Audits are a Complete Failure Leaving China's Workers in a Trap with no Exit," the report says:

"Consider for example, a rare local government audit of the KYE factory which happened in 2008. Though the audit was supposed to be unannounced, someone in KYE management was alerted with sufficient time to round up the hundreds of workers who were under 18 years old...The young workers were instructed to gather in the factory courtyard so they could be bused to another location, where they would wait out the state audit and then return to work.

"Corporate audits of the KYE factory by Microsoft and other high tech companies have also failed miserably over the last several years. At the KYE factory the process of preparing for monitoring visits is somewhat subtle. Management instructs the workers to 'answer the clients' questions very carefully.' They should say they never work more than 12 hours a day and overtime is less than 36 hours a month. Workers are told to respond they are 'very satisfied' when asked about working conditions, their dorms and meals. To make this sound even more 'authentic,' workers are told to 'spontaneously' mention other factories where they had worked in the past, where conditions were 'awful.' They are more 'hopeful' now that that they are working at KYE.

"We asked if factory management has to openly threaten workers to lie. The answer was no. As the workers put it: 'They don't have to as workers get it and know what is going on. Those who break ranks are fired. Workers have heard of others being fired for speaking truthfully. Among themselves, workers talk about this. They know not to tell the truth.'"

"The workers did tell us that Microsoft representatives have visited and walked through the KYE factory, always being accompanied by mid and high-level managers. On these walk-throughs, U.S. company representatives hardly ever speak to the workers."

In a sidebar, the report quotes the United Nations' top expert on corporate social responsibility as saying "We keep hearing now, from just about everywhere... Monitoring doesn't work. Just about everyone, at least off the record, will tell you that monitoring doesn't work because people cheat."

So what's the key to staying above the ethical line when sourcing globally?

Perhaps it is to set your investigation standards higher than the NLC. If you don't audit better than they do - both before and after the contract is signed - your company is at risk of a public relations nightmare. By virtually defining global sourcing as "roaming the world to find the cheapest and most vulnerable workers," it should be clear that the NLC does not exist to be your friend.

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
Next Level Purchasing . com

Thursday, April 22, 2010

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Wednesday, April 21, 2010

Whitepaper Wednesday - The Bottom Line Impact of Sourcing Skills

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I’ll be reviewing a whitepaper entitled “Reaching Sourcing Excellence, Part 3: Sourcing Skills Go Straight to the Bottom Line” from AMR Research and Ariba.

The point of this whitepaper can be summarized quite easily: the higher the skills of the sourcing team, the more profit they will generate for an organization. The whitepaper presents some interesting research findings that support this premise.

For example, the whitepaper says that “68% of companies can achieve an 85% or higher adoption rate with their sourcing technology if they offer sourcing training and a certification program during the implementation process, according to our studies. The problem is that many companies stop at technology training only, assuming their employees have the knowledge to handle the rest of the sourcing process.” This echoes a sentiment I’ve made here before: dumb purchasing managers are those who think that training is done once the employees know how to use the system.

In addition to such statistics, the whitepaper outlines a six-step process – not unlike the seven-step process we teach in the whitepaper “The Purchasing Leader’s Guide To A More Successful Team” – that the companies that achieved higher sourcing value used in order to achieve such value. Those six steps are:

1. Force-ranking employees based on skills
2. Providing complete sourcing business process training for all employees
3. Establishing continuous sourcing training and education programs
4. Establishing recruiting programs with leading supply chain schools
5. Removing employees that would not meet the vision
6. Hiring more advanced skillsets to fill the gaps

The whitepaper is full of other anecdotes that specify how training has benefitted the top performing organizations. Examples include the following excerpts:

  • “Organizations that developed five-year training programs, including certifications and advanced degree programs, and placed recent graduates into their sourcing organizations were the most adept at margin improvement and expense reduction. In fact, these organizations had multi-tier training and education programs that were structured and tracked.”
  • “Organizations like ISM and Next Level Purchasing have assisted sourcing organizations with moving their training and certification programs forward.”
  • “Delivering savings to the bottom line continues to be the measure of high-performing sourcing teams, and achieving bottom-line results requires investment in your sourcing employees…To reap your sourcing ROI, focus on employee skills and training, hiring the best individuals and as a foundation, and automating the entire sourcing business process…In today’s environment, picking up 10 to 15 cents of every dollar spent is critical to your company’s survival. Don’t leave money on the table.”

Though this whitepaper is only five pages long and I’ve given you several excerpts right here, it is actually packed – packed! – with additional information. If purchasing training is top of mind for you and you need to justify training to your management, it’s probably a good whitepaper to have. You can download your own copy from Ariba’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
Next Level Purchasing . com

Monday, April 19, 2010

Increasing The Scope of Purchasing

I hope that you have enjoyed the article "How To Increase The Scope of Purchasing."

Increasing the spend under the management of the purchasing department should be every purchasing executive's goal. Getting senior management to agree to such an expansion isn't always easy.

The points in the article give a great way to start the conversation. But you also have to be realistic about what will come next.

Yes, those points alone may get you exactly what you want. If you feel that the culture of your organization will permit this result, great.

But, in more politically-entrenched cultures, the best you can hope for is a request for more quantiable justification. And that's OK. That is a step further than you were. Just be prepared to respond accordingly.

Your response should be in the format, "The purchasing department reduced the spend on category x from y dollars to z dollars. Therefore, we believe that we can reduce the spend on category a from b dollars to c dollars by applying the same expertise."

And, don't forget...if you get the green light from management, the struggle isn't over. You still have to work some change management magic with your end users. The principle in an older article entitled "The Purchasing Manifesto" may be just the trick you need in that regard.

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
Next Level Purchasing . com

Friday, April 16, 2010

April 2010's Dedicated Purchasing Student of the Month Is...

Next Level Purchasing would like to congratulate Dave Foster, April 2010's Dedicated Purchasing Student of the Month!

Dave, a General Manager of Purchasing from Knoxville, Tennessee, USA, completed all six courses in the Senior Professional in Supply Management® Program during the month of March 2010! Dave also passed the SPSM® Certification exam in that same month! He was officially awarded the SPSM® Certification yesterday.

Dave enjoyed his learning experience and says "I particularly enjoyed the Microsoft Project module. Despite having used Project to track purchasing activities for years, I have never actually developed one from scratch."

For more information on the Dedicated Purchasing Student of the Month Program, including past winners, please visit http://www.nextlevelpurchasing.com/purchasing-student-of-the-month.html.

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
Next Level Purchasing . com

Wednesday, April 14, 2010

Whitepaper Wednesday - Restructuring A "Too Busy" Procurement Department

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be discussing a whitepaper entitled "Separating A Procurement Department Into Tactical & Strategic Teams: Is It Right For Your Organization?" from Next Level Purchasing.

If I've heard it once, I have heard it a thousand times over my nearly two decades in procurement: "We can't get things done! We have an insanely busy procurement department!"

Historically, this has always been an excuse for ineptitude. Lately, however, I have a little sympathy. Not a lot. Just a little.

Why?

Because the recent recession has decimated the employment bases of many companies. Heck, the US has been hovering around 10% unemployment for quite some time. And, if you've been watching the stock market, you know that the economy is starting to thaw and companies are getting busier.

But they aren't hiring. Which places an ever-increasing workload on those who survived the too-deep cuts of the past two years.

Yet, understaffing is not an excuse for not being able to accomplish anything strategic if your procurement department is not structured optimally. One of the alternatives for restructuring a procurement department is to separate it into two teams: a tactical team and a strategic team.

You see, one of the reasons why procurement departments do not accomplish much strategically is that their top people are pulled into tactical crises. While that may be necessary once in a while, it is certainly not the way to go over the long haul.

Many procurement departments that do make continual strategic improvements do so because they let a tactical team handle the tactical duties (even the major ones) and dedicate a strategic team to only strategic projects. This approach doesn't work for every organization. And there are ways to make this structure work and make this structure fail.

The whitepaper assails some of these common mistakes that procurement departments make when adopting this structure. It says: "[D]on’t think in terms of strategic being important and tactical being unimportant. Think in terms of strategic being long-term and tactical being short-term. And don’t commit the common organizational error of having your top talent devoted to strategic procurement and your bottom-feeders devoted to tactical procurement. "

It also goes into some detail regarding rotational programs to keep your top talent from getting displeased with a tactical assignment.

If you are a procurement leader who is struggling to get anything strategic accomplished, this whitepaper is for you. You can download it from the Next Level Purchasing Web site (registration required).

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Find More Good Resources For Procurement Leaders?
Check Out Our Web Site's New Whitepaper Section At
http://www.NextLevelPurchasing.com/WPcharles

Tuesday, April 13, 2010

Supplier Diversity KPI's: A Place To Start

The United States Small Business Administration has recently announced a new scorecard system to evaluate federal government agencies' performance in terms of adhering to their supplier diversity goals. According to fiercegovernmentit.com, the new system will grade each agency's small business procurement program as follows: an A+ for agencies that meet or exceed 120 percent of their goals, an A for those between 100 percent and 119 percent, a B for 90 to 99 percent, a C for 80 to 89 percent, a D for 70 to 79 percent and an F for less than 70 percent.

Though the "SBA negotiates individual goals for each agency," it works towards these aggregate goals for the entire federal government: 23 percent of total qualified contract dollars going to small businesses, with "additional goals of 5 percent for small disadvantaged businesses, 5 percent for women-owned businesses, 3 percent for HUBZone small businesses, and 3 percent for service-disabled veteran-owned small businesses."

If you're looking to start a supplier diversity program, these key performance indicators may be a good place to start. However, the government has more of a vested interest in the success of small businesses than a for-profit company, so the actual percentages for a for-profit company are likely to be revised way down.

In addition, a local government may wish to supplement the aforementioned classifications with a classification for local businesses. In such a case, the percentages for the other classifications would likely need to be revised downward.

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
Next Level Purchasing . com

Friday, April 09, 2010

Next Level Purchasing vs. ISM Financial Health Comparison

In the past two years more than ever, procurement professionals have realized that evaluating the financial condition of the organizations with whom they do business is vitally important. This can apply to whom you choose as your purchasing certification provider as much as it applies to whom you select as your direct materials supplier.

A few weeks back, I reported on ISM's release of their annual report for the past year. While a double-digit percentage reduction in headcount and second consecutive year of multimillion dollar losses is hard to laud under any circumstances, it is always a good idea to compare one supplier's financial performance versus that of another supplier in the same industry to get a true feel for a supplier's financial health. That way, you can rule in or rule out whether it was a bad year for the entire industry or simply a year of poor supplier performance.

With that in mind, here are statistics comparing the financial stability of Next Level Purchasing and ISM - two providers of certification for procurement professionals:

































Next Level PurchasingISM*
Revenue Growth 2007 - 200951% growth32% decline
ProfitabilityProfitable every year of existenceLost over $2 million in each of last two years
Personnel Budget Growth 2008-200921% growth30% decline
Best Known ForPurchasing training & certificationMonthly economic reports
Global RecognitionSPSM® Certification earned in 54 countriesCPSM designation earned in 16 countries



* All statistics gathered from ISM Annual Report released March 2010

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
Next Level Purchasing . com

Thursday, April 08, 2010

Why Procurement Should Shine Some Light On Room Service Expenses

In a post last week, I introduced the idea of procurement taking a look at room service as a cost savings opportunity. The idea intrigued Purchasing Magazine editor extraordinaire Dave Hannon to the point where he posted a comment asking others to share whether they've attempted to negotiate room service and how effective it has been.

Don't be surprised if no volunteers come forth, Dave. Room service charges are one of the most hidden of the hidden costs. Usually paid as a reimbursement to employees with little to no line item detail or vendor identification, room service does not lend itself to being a visible spend category at this particular moment.

Many procurement departments have celebrated the win of lowering hotel room fees in enterprise-wide contracts. Yet, as I found out the hard way, room service costs almost as much as the room. And it is easy to argue that the value of a room service meal is far less than the value of the room.

Certainly the margin for room service has to be higher than the margin of the accommodations. Consumers shop based on room price, not room service price. Room service cost has gone unchecked.

Do you think that there is "juice" there? I do.

In the whitepaper I reviewed yesterday, it was mentioned that many companies manage employee food expenses through a per diem limit placed on the employee. The thinking behind this is that all employees eat somewhere different and there is no aggregate volume to be leveraged. You won’t find many business travelers going to the local steakhouse and negotiating the menu prices on a one-off meal.

But room service is different. You are dealing with a single supplier on an enterprise-wide basis. And just like for rooms, a company that procures 10,000 night-stays for its employees should pay a lower price for room service than the individual who purchases a one-night stay.

And what I bet not many procurement people know is the tax implications of targeting room service. You see, here in the USA, 100% of certain travel expenses (airfare, hotel, ground transportation, etc.) are deducted from taxable income. In contrast, only a fraction of the cost of meals and entertainment can be deducted from taxable income.

So, when your organization spends on room service, it is not only incurring an expense, but incurring an expense without all of the tax benefits of a normal expense. Yet another reason to shine some light on what is being spent by employees out there on the road.

Cutting a per diem limit in isolation won't exactly help morale of your traveling employees. But if your organization attacks room service costs with the hotels, your employees can get the same benefits they've always had while your organization pays less.

The first -and perhaps hardest - step is gaining visibility into room service spend. If that can be done, the procurement department can go to the negotiation table with higher aspirations and can leave the table with even greater results. If not, the hotels I'm sure will be happy to charge ridiculous fees so that they can get their paws on 100% of a per diem that can't be lowered due to the lack of options.

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
Next Level Purchasing . com

Wednesday, April 07, 2010

Whitepaper Wednesday - Reducing Travel Costs

Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I'll be reviewing a whitepaper entitled "Visibility: Better Insight Leads to Better Cost Control" from Runzheimer International and CFO.com.

Now, I usually don't review whitepapers from the same source two weeks in a row. But I've made an exception in this case because this whitepaper was so good and I recently posted some thoughts on the very subject of reducing travel costs.

So, what did this whitepaper bring to the table?

Lots.

I knew it would be good when it started out with some powerful stats: "Travel and entertainment (T&E) expenditures typically represent an organization’s largest discretionary
spend, with an average annual cost of $10,039 per traveler. Organizations with a strong travel policy and aligned processes tend to be high-performing, and realize significantly lower costs that can range from 5% - 20% of annual spending.

So, multiply the number of travelers your organization has by $10,039 and then divide that number by 5. The result is your potential savings at 20%. If you work for a big company, that just might be one heck of a lot of money!

The next question is: how do you save 20%?

The whitepaper suggests three activities common to successful companies:
  • Use of benchmarking information to identify savings opportunities
  • Centralizing control
  • Tightening T&E policy and enforcing compliance through automation
The whitepaper actually gives a decent amount of detail for all of these bullet points. For example, it offers example benchmarks that you can use such as these internal ones:
  • Spending information by individual, business unit (department, division, etc.) and by trip, project, job, client or other categories appropriate to the organization
  • Current and historical cost information for frequently-visited locations and by vendor
  • Policy compliance information

...and these external benchmarks:

  • Comprehensive industry cost data for frequently-traveled locations
  • Airfares for domestic and international city pairs
  • Yield (revenue per passenger mile) and market share information for all covered
    city pairs
  • City-specific hotel costs per room night for economy, first-class and deluxe
    properties
  • Car rental daily cost information for U.S. & international cities
  • Local meal cost information

In addition to simply gathering statistics, the whitepaper recommends that companies benchmark with their peers to compare travel policies, metrics, procurement practices, and more.

The whitepaper also advocates having travel-related management be consolidated under a single department. In this section, there was a pie chart that I found quite interesting. It showed which departments typically manage travel. It illustrated that travel functions most commonly report to Accounting and Finance, with 34% of companies organizing their travel functions this way.

And can you guess which department was in second place?

Yep. Procurement with 29%! And, actually, the whitepaper addressed a lot of procurement-specific topics such as achieving economies of scale with vendors, negotiating, and more. I've always thought that travel should report to procurement and it seems that this is becoming more and more common (finally!).

Before closing with a section on automation, the whitepaper details how to improve travel compliance among employees. This section was good in that it spelled out several principles that could be applied to compliance of any procurement initiative, not just travel.

What I thought was a bit lacking in the whitepaper was that the theme of visibility seemed to be 100% focused on past spending patterns, not future ones. And, just like solely relying on spend analysis for sourcing initiatives, you have to know what you are going to buy in the years ahead, not so much what you bought in the years past. The only value in using historical spend data is to determine how it will change in the future when future plans are factored in.

Let me explain that. If you know that you are going to have 52 round-trip flights per year between Pittsburgh and Chicago, 20 round-trip flights between New York and London, and 10 flights between Los Angeles and Hong Kong, that's great. You don't need spend visibility.

But if you don't know precisely what your plans are, spend visibility can help. Then you can say, "Oh, we'll be traveling between Pittsburgh and Chicago about twice as much as the previous year; between New York and London about half as much; and we won't have any need to travel between LA and Hong Kong." The historical data simply serves as a baseline from which adjustments are made to arrive at a forecast when you consider how business will change.

Maybe a certain city pair was for a project that is now complete. You wouldn't want to blindly think that the pattern will continue. That's my sole complaint with the whitepaper's perspective on spend visibility - it makes an implicit assumption that all conditions will remain the same when, in fact, they might not.

Also, the whitepaper talks about using benchmarks to adjust per diems. Per diem adjustments are a traditional way of reducing travel costs. In my post tomorrow, I'll address how a company can augment per diem adjustments with other travel cost reduction approaches.

If your organization spends a decent amount of money on travel, it would be worthwhile for you to check out this whitepaper. You can download it from CFO.com (registration required).

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
Struggling To Find More Good Resources For Procurement Leaders?
Check Out Our Web Site's New Whitepaper Section At
http://www.NextLevelPurchasing.com/WPcharles

Monday, April 05, 2010

Do Procurement Ethics Have To Be Hazy?

I hope that you have enjoyed the article "Procurement Ethics: Use DRD & Stay Clean."

In my line of work, I often hear things like: "Oh, ethical matters are so difficult to deal with because there is a lack of clarity on what's right and what's wrong."

I agree with this statement sometimes and disagree with this statement often. Some ethical breaches are so obvious and so preventable that this statement is the only defense someone could possibly muster and almost get away with.

So let me make things clear once and for all...

1. If you make a procurement decision for your employer and that decision results in you benefitting personally (i.e., getting money or items of value), it's an unethical procurement decision.

2. If you make a procurement decision for your employer and that decision results in one or more of your family members benefitting personally, it's an unethical procurement decision.

3. If you make a procurement decision for your employer and that decision results in one or more of your friends benefitting personally, it's an unethical procurement decision.

4. If you share a supplier's "confidential" information with a competing supplier, it's unethical. The litmus test for confidentiality here is whether the first supplier would approve of you sharing that information with a competitor if the first supplier knew about it.

By benefitting personally, I don't just mean getting a commission for direct salespeople. I mean getting job stability from an employer who just got a big deal or any other type of "indirect" benefit.

So, there you have some of the most important procurement ethics distilled into a few bulletpoints. Pretty simple, right? No grey area here.

If you use the DRD technique from the article (Disclose, Recuse, Document) when someone close to you works for a current or prospective supplier, you've gone a long way towards keeping your ethical slate clean.

And good ethical behavior is a badge of honor if you want a long, successful procurement career.

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
Next Level Purchasing . com

Friday, April 02, 2010

Does Procurement Have The Appetite To Attack This Hidden Travel Cost?

In another great post on PurchasingBIZconnect, Dave Hannon reveals that NASA recently completed an investigation of some excessive conference expenses made by - be ready to be shocked - their procurement department. The expenses in question involved over $60,000 worth of snacks for 317 procurement employees over a three-day period - an alarming rate of $66 per person per day!

In the post and his comments, Dave correctly points out the inevitable problems that arise when competition is not sought for travel and meeting spend. And that got me thinking about an experience I had recently.

On a business travel engagement, my hotel room was provided for me at no cost. Food, however, was my responsibility.

No big deal, right?

Well, when you want room service, you're essentially dealing with a sole source situation. And, like most sole source situations, you pay more than a reasonable price for what you get!

In fact, I had a very simple pasta dinner one night at the hotel. This dinner, which would have cost less than $20 in a restaurant, cost nearly as much as a night in the room.

I was so shocked at the cost of the dinner for how modest it was, I had to take a picture of it.



While most larger companies do negotiate room rates with hotels, I would bet more than a few don't touch food as a line item to be discounted. And therein lies a significant component in the overall cost of travel. Remember, the cost of my pasta dish was nearly equal to the cost of a night in the room!

So, when you negotiate your next accommodations contract, try to negotiate a discount or rebate on room service. Saving 5% or more on room service may be the cherry on top of a successful travel procurement 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
Next Level Purchasing . com

Thursday, April 01, 2010

Is There Truly Transparency in Government Contracting?

Perhaps a little inspired by my post from last Friday, Jon Hansen of Procurement Insights and the PI Window on Business show on Blog Talk Radio delved into the topic of transparency in government contracting on his show last week. If you have any interest in government contracting or the differences between public and private sector purchasing, I recommend you give the show a listen. You can find it at:

http://tinyurl.com/yaszko2

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
Next Level Purchasing . com

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