Creating the right focus for your procurement team


10 priorities for procurement

Customer demands are continuing to increase and accelerate. Today, customers expect same or next day delivery of products purchased online and, especially for technology, they expect a constant stream of products that are faster, with more features and longer battery life. This means organizations have had to increase investment in infrastructure, R & D, supply chain, distribution, logistics and, especially, services. So why do so many procurement organizations still have a main focus on driving supplier price? In a My Purchasing Center interview with Chris Sawchuk earlier this year, reduce price and avoid cost was the number 1 procurement objective for 2016 in a Hackett study, but elevate procurement to trusted advisor was close behind. The problem, is that procurement operating budgets were only expected to grow 1.1% this year, leaving little funding for procurement initiatives, even those considered high priority.

Let’s look at headline news about the Samsung Galaxy Note 7’s battery and how procurement’s focus on price and cost could be relevant. Look up make vs. buy and you’ll see most decision trees have 2 main questions (is the capability in-house and is there an intellectual property risk) and a formula for calculating the “cost of make” vs. the “cost of buy.” What might the outcome of inhouse/outsource testing be if procurement’s priorities and focus were more on the attributes of becoming a trusted advisor? In 2013, Deloitte released a perspective Charting the Course – Why procurement must transform by 2020. One paragraph in that report really stuck with me:

“On many levels, “make vs. buy” influence is the ultimate test of procurement’s influence and capability because it relies on being the benchmark and market information clearinghouse, and therefore, the nexus point for all sides of the company in joint decisions. Moreover, it involves looking beyond unit cost, asking questions like “how does a ‘buy’ impact the ultimate end customer?” Further, does this step transfer risk, or actually increase it for the business?  Procurement can play a part in generating the right set of questions up-front as well as coming up with creative solutions on the back-end.”

I believe influence and becoming a trusted advisor can be achieved by focusing on value, especially, through strategic relationships with suppliers.

What should procurement be focused on today to gain trust and influence?

  1. Total value delivery
  2. Innovation capture
  3. Improved agility
  4. Supplier alignment with the company’s business objectives
  5. Alignment with the customer demand
  6. Continuous improvement
  7. Driving supplier performance
  8. Integrating business systems with suppliers
  9. Building the short term, medium and long term strategy for the supply chain
  10. Building key performance metrics and quantifying value capture and delivery

As I continue to assess the current state of procurement departments across the world, I am still astonished at the number of companies that place a high priority on non-value adding transactional activity, have a lack of long term planning and focus most activities on driving price rather than reduction of true cost. There is a need to increase flexibility as product life cycles shorten and customer demands increase. The priorities of increasing productivity, efficiency and eliminating cost and waste sometimes give way to short term thinking and high transactional activity. Management should no longer accept the excuse we are too busy working on price and cost reduction to do anything else. Developing creative options and gaining trust and influence throughout the business require focus on true, value-adding priorities.

Are you wearing blinders that keep you focused solely on price and cost?

Reality Check: The Contingent Workforce is Here to Stay


Are you an employee or a free agent? In May 2008 at ISM’s 93th Annual Conference in St. Louis, I heard Daniel Pink speak about the “Changing World of Work”. When Pink’s “Free Agent Nation” was released in 2001, there were independent free agents, especially in consulting roles, but the number in comparison to the total workforce was small. While many doubted the disruption of the contingent workforce in 2001 and even in 2008, there’s no doubt of its impact today in everything from how we travel by car to the workforce at Fortune 500 companies.

When you think about it for procurement, it makes sense that an independent agent with experience and knowledge in a category of spend can quickly assess the supply market, benchmark price and cost, develop a strategy, negotiate an agreement and then move on to the next assignment. This leaves the supplier relationship mangers to execute the contract and manage the relationship for the term of the agreement. This year, particularly, the contingent workforce has been a hot topic in procurement media and research. I recommend reading and listening to Ardent Partners research and Contingent Workforce Weekly podcasts, Art of Procurement’s podcasts on the contingent workforce and SpendMatters research and upcoming “GE Digital on the Future of Work” webinar to gain insight on where we are and where we need to be to optimize the “free agent nation.”

For CPOs, the contingent workforce will play an increasing role. While the budget for contract labor will increase, but companies will be released from the burden of taxes, healthcare and insurance costs, and other full-time employee costs. The key to success is to capture expertise in the short term, then have the contractor move on. The CPO can manage more strategic priorities with the right balance of FTEs and contingent workers.

It’s important to understand that the ways we work are constantly changing and evolving. With artificial intelligence (AI) and the internet of things (IoT), it’s apparent that some of the work humans currently do will be replaced through business system integration across the supply chain. We’ve certainly evolved from the days when Eleanor Roosevelt said “We have reached a point today where labor-saving devices are good only when they do not throw the worker out of his job.” Now the work and the labor force has changed – we can see the way forward to work more strategically and drive innovation.

I am structuring my company’s organization to reflect the value and opportunities available using contingent workers. What about you?

Was Daniel Pink right?

Price is a policy and cost is a fact!


5 Ways Companies Set Price

This is a credo that I have followed since the early 1990s, so this headline in the Wall Street Journal “House Committee Taps Mylan for More Information on EpiPen Price Figures” caught my attention. Suppliers price their products in many ways and it is important for buyers to understand the pricing method as well as develop a should cost model to understand the supplier’s likely margin.

Some of the key methods used to price product are:

  1. What the market will bear – In markets where there is little or no competition, companies can employ a pricing strategy that optimizes profits. This pricing strategy is developed to achieve the maximum price point that will be supported by customers. The supplier justifies this as a way to quickly recoup high R&D or capital costs. Unfortunately, once recovered, the pricing model remains in place until competition is introduced.
  2. Pricing in line with competition – Suppliers typically use market and competition to set pricing levels. While competition works to set pricing levels, savvy purchasers know that in some industries a few of players can work to balance capacity and demand. Industries where there is significant competition use this pricing model.
  3. Value Pricing – This pricing method is typically used in the services industry and is based on the perceived value of the service to the service being offered.
  4. Market penetration pricing – This method artificially sets pricing levels at the lowest profit level possible to build volume and capture market share. In some cases, the supplier may use marginal pricing which reduces the fixed cost burden of the product to stimulate volume. While penetration price is attractive, it is a very short term pricing method.
  5. Cost based pricing – This methodology calculates the cost and adds a sufficient margin to the product. The reality is that only about 25% of the companies use this method.

The key to sourcing success is to be able to understand the manufacturing process or service being sourced, visit the supplier location and synthesize the cost. This is a process where the sourcing professional builds a should cost model by estimating the inputs of the goods or service being procured. Capturing the materials, labor and overhead costs provide a framework to challenge supplier pricing models. I have worked with sourcing teams who have seen as much as 180% margins and others that have validated supplier losses on their products.

It’s essential that every sourcing professional have cost analysis and cost modeling as a core skill set. Without this skill, the individual is working in the dark. I really like presenting the cost model and challenging supplier price. If I am wrong, suppliers will correct me. It is easier to present the cost model and force the supplier to negotiate it up than it is to take the supplier’s price and try to negotiate the price down.

Will you be working with a fact base on pricing?

Does your organization optimize the effectiveness of its talent development program?


It’s a sad fact that many organizations devote on a large portion of their annual budget to developing their teams, but rarely get the desired results. Often organizations don’t take the time to develop key metrics to measure the change in skillsets, behavior or impact of the training.

While procurement and supply chain training provides best practices and new tools, many organizations fail to embed the learning through a linkage to the business process. Unfortunately, over time, the learning is lost as people return to their daily routines and old processes.

5 things companies can do to improve the effectiveness of their development program:

  1. Create linkage between training tools and business processes
  2. Build metrics and checkpoints to assure that tools are embedded and used
  3. Align all development programs to the industry and company using case studies and real life examples
  4. Build programs on a fundamental and advanced level that add value to participants
  5. Measure and report ROI resulting from the training

Today employees are in an environment where they are multitasking, highly distracted and working in matrix organizations with multiple masters. They resent spending time in a training environment that provides limited value.

To be successful, training must be meaningful, provide tools and value linked to a process that will deliver results and a high ROI.

How effective is your company’s training?

Driving Supplier Diversity- Numbers game or serious business?


Why your program is ineffective

In my career I have been astounded by the corporate mandates to increase supplier diversity that occur without a strategy or plan. Corporate directives are typically to find minority suppliers and get the numbers up. The process buyers frequently use to do this is simple: cast the net, bring in diverse suppliers and get them on-boarded so they can be counted to allow their companies to compete for government work. The big conflict arises when the other directive given to procurement is to drive maximum cost and value improvement. When this happens, the diversity program usually does not include supplier development and many of the diverse suppliers are unable to compete on price with larger, well capitalized businesses (that will eventually replace them). Every year the process is repeated: cast out the net, bring in new suppliers and replace the suppliers that are unable to compete on price.

What can be done to stop this cycle? The only way the supplier diversity process can work is to attract diverse suppliers, develop them and build strong relationships that will endure over time. To do that, a company must be committed to work with the diverse suppliers, understand their business and assist them in building a growth plan for your business. This may include long-term contracting for finance purposes and forgoing the benefits of long payment terms for these suppliers.

Supplier relationship management is essential for all strategic suppliers, but it is critical if you want to succeed with a stable diversity program. Many of these firms are disadvantaged to begin with, based on access to growth capital, talent and networks. When we add reduction of margin through price reductions and terms extensions, they have little to no chance to remain as suppliers. One diverse client that I worked with was forced to use customer directed priced materials at fixed labor rates and a fixed overhead rate with a net margin of 2%. This supplier lost the business to low cost country suppliers who reduced the cost an additional 1%. This diverse supplier never had a chance–given capital he could have automated several operations, providing the OEM a 5% reduction and increased his margin 2%.

If your firm does not have:

  1. Budget for diversity development
  2. Strategy and process for attracting and on-boarding diverse suppliers
  3. Formal supplier relationship management process
  4. Fast payment terms
  5. Timelines for growing diversity programs and its suppliers

You may be paying lip service to supplier diversity.

Review your strategy, budget for developing suppliers and recognize:

“Suppliers are only as good as we let them be.”
David Johnson, Campbell Soup

Supplier Conference—Success or Failure? It’s all in the planning


5 tips to maximize value from supplier conferences

Do you hold supplier conferences? Did they deliver value or not? I’ve participated in many supplier conferences in my procurement and consulting career. When done well, the buying company and the supplier commit to collaboration to innovate, improve value, drive out cost and improve productivity. When done poorly, suppliers walk away viewing your firm a nuisance and commit to finding a replacement customer who is more collaborative and offers better opportunities.

The days of bringing in suppliers as a group to demand lower prices, offering nothing in return, should be long gone. Hard core tactical approaches leave a poor impression and fail to deliver any value. I wish I could say we’re all smarter than that today, but there are many procurement practitioners from Millennials through Baby Boomers who pass along advice like “always get at least three quotes, let the supplier know you’re getting quotes and will go with the lowest to get competitive pricing” and “tell the supplier that you want a very high quantity, once you get the price, ask them how much for a lower quantity and say you’re getting it cheaper from their competitor.” Sadly, many managers still see suppliers as a source of incremental profit. Among the mistakes companies make at supplier conferences are:

  • Ask for cost improvement ideas, but lack the capability to test, follow up and provide feedback to suppliers
  • Make demands on sole-source, strategic suppliers when they have no leverage
  • Fail to include suppliers in the messaging as a valuable stakeholder
  • Make commitments with no follow-through

The most effective supplier conference I’ve ever participated in was with a retail company who ran the event like a shareholder meeting. The CEO provided the state of the business and the forward strategy. The CFO made a case for while the company is profitable, the profit is significantly less than in prior years. (The company was recovering from a bankruptcy and supplier engagement and support was a critical factor.) Marketing displayed the new products and fashion trends. Procurement presented the need for innovation and cost savings with a plan to work with each supplier that included a follow-up process. The suppliers were energized, focused and, over the next year, delivered on agreed goals to increase value delivery. Unfortunately, this is the exception to the way most supplier conferences are conducted.

5 Tips for Maximizing Value from Supplier Conferences

  1. Define the cost, innovation and value requirements during the event planning
  2. Include a company Sr. Management and a business overview
  3. Create 2 events
    1. One for tactical/leverage suppliers
    2. One for more strategic suppliers
  4. Assure that your firm can handle suggestions and have a quick feedback mechanism
  5. Follow up with every supplier to assure compliance

If done well, the meetings are well-planned and create an inclusive, collaborative environment that will drive your firm to be a customer of choice.

If done poorly, your firm will likely be considered a nuisance and targeted for replacement when a better opportunity comes along.

Which customer are you—core or nuisance?

Food safety in the news again – Purchasing failure or regulatory failure?


Two food headlines disappointed me the past two weeks; the first to grab my attention was “The Food and Drug Administration and the Centers of Disease Control and Prevention (CDC) and state and local officials are investigating an outbreak of Hepatitis A illnesses linked to raw scallops from the Philippines.” The second was “an outbreak of Hepatitis A caused by the imported frozen strawberries from Egypt has sickened 55 people in six states, the US Centers for Disease Control and Prevention said on Wednesday.”

In an interview with in 2013 and in an article in Food Safety magazine in 2014, I explained that not every container coming in to the US is inspected by the regulatory authorities. This means all food processors need to self-regulate their products. It is essential that the procurement team map and audit the supply chain on a frequent basis. As someone who has purchased seafood, it was necessary to visit the region, inspect the boats and factories. It was not uncommon to see modern stainless steel processing facilities with good manufacturing processes and sanitation protocol. It was also not uncommon to see old, rusty processing facilities with no protocol. It’s the same with the way the fish are handled on the boats. The unfortunate news is that not every buyer visits suppliers and limited audits occur.

In my consulting life, I have worked with many companies to build strategies for buying fruits, including frozen strawberries. The strawberry origins were Mexico and California. My advice was to visit the crop as it was growing and to be on hand when their products are being processed. In many cases the procurement team and their technical support intervened to assure the quality is achieved.

Too often low cost country sourced food materials provide attractive pricing, but they come with a big risk. It is never a good idea to source through third parties without building a map of the supply chain, auditing the supply chain and visiting the suppliers first hand. Many companies, unfortunately, will not fund such programs.

Since many food products are imported without regulatory checks, it’s up to the companies and procurement teams to self-regulate. The risks are many: reputation risk, creating illness and potential criminal charges if the company is known to have endangered lives.

Is it worth the risk?