Five Key Mistakes that Hurt Negotiations

After a career working with sourcing managers, I’ve had a chance to observe great practices and others that should be avoided. These 5 tips keep coming up when I work with teams in procurement.

  1. Too Much information – Suppliers are constantly collecting information about you, your organization and your interests, all for the sake of building strategies to motivate decisions in their favor. Beware of Facebook, Instagram and other personal social media outlets that provide details about your hobbies, family and interests. I often see posts by sourcing managers, sales reps and marketing reps on Facebook and Instagram that discuss travel and negotiation activity – I do suggest that you search Facebook for your company name and representatives’ names to see what they’re thinking; just don’t post that type of information yourself! In my case, I use LinkedIn for business, avoid friending business contacts on my personal Facebook account and am mindful of what I post.
  2. Failure to truly understand supplier motivation – Most sourcing managers understand the profit motivation of suppliers, but they fail to account for cash flow, capacity, business information, global footprint, your company’s reputation, being associated with an industry leader, capacity utilization, impact on fixed cost, ease of doing business and many more reasons that your business is desirable. These factors are the keys to unlocking the supplier’s true interests in doing business with your firm. In my case referrals are a motivating factor since 80% of my business is the result of a referral.
  3. Emphasis on supplier’s gain in negotiation – We’ve all done this in our lives–trying to negotiate with a supplier on why it is to his/her advantage to meet our targets. We seek win-win and list myriad positive what-you-have-to-gain reasons for coming to agreement. My wife says “If I were only one-tenth as motivated by the benefits of healthy habits as I am by the consequences of not saving my work on the PC every 5 minutes, I’d weigh 120 pounds and run marathons.” We tend to approach suppliers with what we all gain rather than what we have to lose by not meeting the targets. We certainly want mutual benefit, but sometimes we fail to talk about what we could lose. Are you more motivated to do things meet your “win” goals than you are to do things to avoid a loss?
  4. Using power, threat and coercion when you are unprepared to take action – If you are going to use this method of persuasion, you need to follow through with your threat. If you say that the supplier is likely to lose business by failure to comply with your request, be prepared to take action. Never make a threat you can’t back up. If suppliers are truly strategic to your business, they will call you out and you could lose all credibility with the supplier. Of course, power, threat and coercion are tactics you should only use in very specific applications under very specific circumstances, right?
  5. Managing suppliers via text messaging –Text messaging works great if you need quick answers or have a simple question. If overused or abused, you become a nuisance. Nothing can replace a quick call to gain alignment on a complex issue. Unfortunately in today’s fast-pace environment we look for quick solutions. It’s easy to decline a request on an email or text message; it is a lot more difficult if you are making the request in person or on the telephone. Remember that negotiation begins long before you sit across the table.

Think about all communication and actions when working with suppliers and avoid the pitfalls and mistakes that can cost your organization dearly.

Have you ever screwed up a negotiation?

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Understanding value: to leverage or not to leverage, that is the question

Yesterday I read in a Bloomberg article by Christopher Jasper, Benjamin D Katz, and Julie Johnsson that “General Electric Co., the world’s biggest jet-engine maker, said it’s not prepared to enter a three-way race for turbine production on Boeing Co.’s planned mid-sized plane because a fragmented market wouldn’t justify the investment needed. Should Boeing opt for more than two suppliers, “we’re out,” David Joyce, head of GE’s aero-engines arm, said at the Paris Air Show, adding that his company still carries “scars” from being one of three engine providers on the Airbus SE A330 two decades ago.”

Often procurement professionals are quick to drive for cost reduction by leveraging competition among suppliers. When there’s more than one supplier, they go forward without thinking of the position of the category in the portfolio segmentation analysis. In an industry like aerospace where suppliers must deliver capacity, investment and innovation value, there is extreme risk in losing a strategic partner when procurement tries to leverage those suppliers. Yesterday Boeing revised its 20-year industry forecast to 41,030 jetliners; to send the capacity of a key supplier to a competitor could result in a costly failure to deliver.

It’s always important to assess the strategic nature of suppliers when adding competition. It’s especially important to understand the relationship and value that is received. In strategic procurement, it’s critical to assess the industry 5- 10 years into the future. If the supplier has built a strategic relationship and is delivering significant value, you could really undermine or kill the relationship by adding competition. The best rule of thumb is to maximize competition when you are confident you are dealing with a commodity.

Corporate memories are long! One client I worked with used competition incorrectly many years before and, when the industry consolidated to two suppliers, this company was stuck with a sole source (the wronged supplier would not do business with them) for 17 years until the management of the alternate supplier retired.

Do you threaten strategic suppliers with competition?

Value swapping or value creation?

Over the past two decades procurement teams have focused on price and cost reductions leading to improvement in their company’s shareholder value. We’ve done a good job perfecting our cost models and developing our skills to zero-in on should cost and have been successful using these models to strip supplier margins and lean out the supply chain. To combat the drive on price and cost, many industries have consolidated, matching capacity against demand. Are these price reduction and cost modelling efforts creating value?

We’re now in a new digital revolution; the world is changing rapidly with unlimited data, speed and computing capacity resulting in dynamic pricing models developed by bots and computers using artificial intelligence. These models can assess global capacity, demand, pricing and competition in fractions of a second. The old procurement tools need to be sharpened and greatly enhanced. The days of swapping value from supplier to customer, then back again are gone. Customers and suppliers will be required to create optimal value. Speed, velocity, shortened lifecycles, innovation, revenue generation and other value creation activity will need to be in the core skillset of the future buyer.

Savvy procurement professionals are working on value creation models and educating their corporate management teams that there’s a major shift from price reduction to value creation. One example of the principle of value creation is in homebuilding where labor is the critical resource. Homebuider Procurement must select the best crews and manage the relationship since it is critical to complete the unit on-time to get a return on capital. Another example is in industries using refractory bricks: the buyers are working with suppliers to extend the life of the bricks in furnaces to delay costly shutdowns when bricks need to be replaced.

How will you support value creation?

I’m presenting a webinar May 31, 2017 at 1:00 PM Eastern time
Webinar: Building a Strategy for Tomorrow- 10 Megatrends that will shape Procurement’s future
Registration Link: http://tiny.cc/billmichelswebinar
Please Join me!

Webinar: Building a Strategy for Tomorrow- 10 Megatrends that will shape Procurement’s future

May 31, 2017
10:00 AM in Pacific Time (US and Canada)

The changing requirements of customers and CEOs have a dramatic impact on the changes required in our profession. This webinar will assist attendees in understanding needed skillsets, trends to watch and strategies.

The fast-paced 30-minute program will cover influences and forces of change, digital disruption, the future of work, globalization, social responsibility and redefining industry. The webinar is designed for procurement leaders who are responsible for architecting the supply chain, selecting suppliers, developing talent and building successful strategies.

The presenter of this webinar is Bill Michels. Bill helps companies transform business strategies into sustainable value. He is dedicated to maintaining a reputation built on increasing business impact, shareholder value, quality, customer service and uncompromising ethics. In consulting, he has worked with some of the world’s greatest companies across a wide spectrum of industries and countries transforming procurement and the supply chain. Bill has a B.S. in Business Administration from Rochester Institute of Technology and an MBA from Baldwin Wallace University. He has CPSM, C.P.M. and FCIPS certifications.

Join me in taking a glimpse into the future, which begins now!
Click here to register or cut and paste this URL in your browser: https://zoom.us/webinar/register/ecfffb9bc1d7813b34538d7d4481ef37

How are you perceived?

Ten rules to keep you off the asshole list

Today I read Anthony Bourdain’s ‘No Asshole’ Rule: Life’s Too Short To Work With Them by Darius Foroux. The article speaks to those of us who have turned down money to work with difficult people. Bourdain recalls a story of working in a family business when his farther turned down a large assignment with a high return. The team and family were astonished and, when asked why he turned the business down, he replied because they are assholes. The reality is that Bourdain’s father classified the customer as a supplier hopper.

I, too, have chosen to not work with assholes. Sometimes it took me a while and a lot of money to learn the person was a jerk, and sometimes it was after the first meeting. Here are a few examples of my experiences.

In my corporate career, a fire extinguisher sales person visited me to extol the benefits of Halon fire protection. He pulled lighter fluid from his pocket and then lit my desk on fire–in a paper mill. Good thing for me, the Halon worked. I wanted to yell at him, but politely explained that he violated our safety protocols and would be barred from visiting again.

Early in my consulting career, I was invited to a global bank to present how our firm would build a global transformation program. We were asked for a detailed proposal so our global team spent about 100 hours getting the details right. After receiving our proposal, the bank’s VP of Procurement and Administration told us that we were the supplier of choice asked us to present our proposal to the team. We brought in 4 people from the regions where the transformation would take place to do the presentation of the roll out plan. There was limited feedback during the presentation and this episode was repeated at least three more times. At a conference, it was interesting to see that VP, who had been promoted to CPO, give a presentation on how to turn your employees into consultants. The cost of the proposals, presentations and visits to the prospective customer was over $75,000 to my company with $0 of resulting revenue. This person became notorious in the consulting world for gleaning free consulting on how to roll out programs; we were not the only suckers.

Another potential customer in the pharmaceutical industry send me a request for proposal. The choice was narrowed and I was lucky to be selected to make a presentation. The cost for the trip was about $2,000 and I was told that we were the leading contender, but the firm would do an auction, during which the auction software malfunctioned causing the auction to last about 4 hours. I was told that my firm won the auction, but a week later, the pharmaceutical firm explained that they were more comfortable with the incumbent, who had thought about it and now was willing to meet the auction price. Two months into the assignment, the supplier failed and the company asked me to help recover the program. I was not anxious to rebid the program.

After reading my book, the famous owner of several the major casinos in Las Vegas asked me to meet with his CPO. I went to the front office for the meeting and learned that the CPO’s office was in the basement of the casino. He came out and told me he was a busy man, directed me to wait, so I sat in his office for 50 minutes waiting for him to meet with me. His opening statement on his return was that he was the king of the casino business and while I had extensive experience with companies like GE, Microsoft, Birdseye and ConAgra, I was at the bottom of the food chain and would have to go to the small casinos then work my way up before I was worthy of his time. He then pulled out a drawing of a cow and asked me to break it into its parts. Having worked in the food business and consulting for two large food companies in the meat business, I could have told him what area of the cow each cut comes from, but I chose to leave that meeting and never return.

Whether you’re the seller or the buyer, being perceived as an asshole doesn’t make you a tough negotiator and certainly doesn’t deliver value for you or your company. Here are 10 rules to keep you off the asshole list.

  1. Always operate with integrity
  2. Never mislead suppliers
  3. Always outline events, timetables and your true motives
  4. Always give straight, timely feedback: good or bad
  5. Be respectful of other’s feelings and time
  6. Always be fair and firm
  7. Never exploit suppliers; the situation can reverse
  8. Be prompt for meetings and use time wisely
  9. Keep in control
  10. If you’ve been an asshole, acknowledge it and move forward

Let’s face it, we all can be assholes. I certainly can, especially when someone cuts me off on the road. I’ve learned how small the world is, so I work hard at maintaining professional relationships. Years ago, I had just accepted a position to lead procurement in a food company. Imagine how shocked I was when my new boss called one of the suppliers to gauge my relationship skills. Unfortunately, he chose a supplier that was uncompetitive in a major bid and had lost about $5,000,000 in business. I was surprised when the account manager gave me a great recommendation, explaining that he had lost a major contract, but couldn’t compete with the new offer. My new boss was happy that I could change a supplier out and still maintain the relationship. That was a big lesson: you never know who will show up and how relationships impact your career.

Do customers or suppliers think you’re an asshole?

Does risk management require supplier development?

In the past few weeks, I’ve talked with three companies with a key objective to look at on-shoring components that have been sourced in low-cost countries for several years. The directive is coming from both the executive management and a Board of Directors concerned with risk management. The difficulty in resourcing some of these components is that it’s difficult to find suppliers with the capacity, scale and know-how to support the demands of large customers, because much of the industry has moved to low-cost labor countries. In some cases, whole industries were outsourced, like the tooling and electronics industries. Each industry has its own problems returning to domestic production.

The tooling industry saw many of its skilled tradespeople leave the industry, retire and they’ve failed to drive automation and capital expenditures in the absence of customers. Tooling has been sourced in Asia for more than two decades. To reshore, sourcing professionals must locate suppliers, help them gain skilled workers or encourage automation and scale up the capacity and capability to meet their demands. This is not a simple sourcing program and will take resources, time and capital to accomplish.

The electronics industry made significant investment in Asia, developed the supply chain and workforce in Asia. It, too, will take a skilled labor force, capital investment and supplier development to return sourcing to US factories. While these are just two examples of the difficulties in reshoring, many companies are now sounding the alarm to their purchasing and supply chain teams to build risk mitigation plans based on a new reality and changing environment.

As part of any market analysis, category managers must keep refreshing the Porter’s 5 Forces and STEEP/PESTLE (social, technological, environmental, economic, legal and political factors) market analysis to stay ahead of the rapidly changing dynamics. If you haven’t looked at reshoring, let the tariff imposed on Canadian softwood lumber be a warning that on critical components you may need a new strategy to locate domestic suppliers and understand what development must be done to make them capable should the need arise.

Are you prepared to develop a supplier?

5 Concerns for Chief Procurement Officers

CEOs have significantly increased their demands on the Procurement team. They’re looking for the leader of their team to bring revenue growth, innovation, speed and increased velocity, as well as cost and value improvement. It’s apparent now that the supply chain of the future will be a linkage of integrated, connected suppliers with alignment on business goals and rewarded on value contribution.

With a distributed group of suppliers in a network, supplier selection was easy, however, as we look to the future, supplier selection will be a part of architecting a supply chain. The move to interlinked supply chains will require a great deal of effort and change. Meeting customer demands for increased value, flexibility, speed to market, innovation, development of bitcoin and block chain technology, supply and reputation risk protection, innovation and revenue become the shared responsibility of all the downstream suppliers. The need for transparency and relationship management has never been more important.

Based on the automation of the supply chain, demand for innovation and value and the continuing impact of digital disruption, the top five concerns of the CPO are:

  1. The speed at which automation, industry consolidation and customer demand for value is changing the traditional supply chain
  2. The talent needed to drive strategy and process from distributed supply chain thinking to interlinked, real-time supply chains
  3. Meeting the current need for cost improvement, while transforming the supply chain
  4. The ability to keep up with technology
  5. Getting a seat at the table to influence transformation and change

While the short-term needs for cost reduction take priority, those Chief Procurement Officers without a strategy will not survive. The future for procurement and supply chain management is bright if you have the vision and capability to meet the challenges of change.

Will you be a keeper or killer of your business as a going concern?