If Only Life Were as Simple as Buying Pencils
In my last post I said I'd be writing about "Collaborative Optimization", but something else is bothering me and I would like to get some feedback from readers before I discuss the more important topic. Portfolio analysis suggests that most spend falls in the "leverage quadrant". And quite frankly, I was always most comfortable when applying leverage in supply negotiations, especially since I worked for a company whose annual spend was larger than some countries GDP.
Regardless of what was purchased I always thought about how we could get the lowest price... and of course I still think this is very important. But what I see happening with a lot of Procurement folks (and I've been guilty of this too) is that they buy everything "like a pencil". What do I mean by this? I believe many in Procurement buy technology or enabling services the same way they buy office supplies -- beating down so hard that the supplier can barely see their margin, leaving the relationship ambiguous and awkward at best.
I've had many years experience managing a globally deployed electronic sourcing platform that returned the annual investment in technology, hosting, maintenance and internal labor costs in incremental savings about every 4 working days. So did it really matter if we paid the lowest possible price for this technology? Wouldn't you also want to help ensure that your technology supplier remains financially stable? Would you really want to be the "tipping point" that makes a supplier of important procurement technology unsuccessful? And, what about contracting for consulting services that truly enable significant accelerated savings? I'm talking about returns of 10X, 20X, maybe even 30X. Does it really make sense to get "cheap" with these engagements and potentially sabotage the results?
I think some people have a difficult time separating "things needed to do the job" and "investments needed to excel and ensure future competitiveness". Now those of you who know me well might wonder how a person who is such a strong believer in electronic sourcing can make these statements. Well it's easy. Electronic sourcing is not about buying cheap, it's about getting suppliers to compete in a fair, ethical and transparent way -- a healthy dynamic that's good for buyers and suppliers alike. My point in this discussion? Certain "buys" are investments in your future ability to deliver sustainable benefit to your organization. Think carefully about these negotiations! And by the way, I recognize that many of you already operate with these adjunct priorities in mind... it's just taken a long time for me to come to this conclusion.
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This is a thought that has crossed my mind throughout my career. The principle that I have stuck to for the last several years is that no buyer forces a supplier to agree to a price that will put that supplier out of business. A supplier's proposal/acceptance of a price is voluntary. Prior to contract signing, the supplier always has two options: (a) stick to its price and refuse the unprofitable business or (b) accept the unprofitable business and hope to make it up on other deals.
So, procurement negotiators for ginormous companies need three general skills: (1) knowing how to persuade suppliers to agree to better terms, (2) estimating the impact of a supplier's decision on that supplier's overall finances, and (3) figuring out if a supplier is smart enough to know when a financial decision is a bad one.
Large buyers must carefully consider the long term impact of their sourcing decisions. I recall a situation where a large corporation/employer formed an alliance with other large corporations/employers in their city to negotiate health care benefits. This was great for cutting costs in the short run, but in the long run the city had a difficult time attracting top doctors and, as a result, experienced shortages in particular specialties. Why should a highly skilled doc work in City A for $200K/year when he/she could work in City B for $300K/year? We must always take a long term view in selecting our sourcing strategy.
But forget about price for a second. Look at the pencil analogy in the context of verbal negotiations. Think of all the wasted energy and resources spent manually strong-arming suppliers down to a point where the buyer *perceives* a good deal instead of using competition via a transparent platform to enable the suppliers to unveil their true acceptable pricing. With key conditioning messages and firm resolve, we're talking hours instead of weeks and mutually beneficial returns.