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Risky Business-Building a Procurement Strategic Plan for 2019

It is difficult to build a strategic plan in most years, but looking forward to 2019/2020 there is a great deal of uncertainty. With the threat of trade wars, tariffs, rising prices, labor shortages, and disruptive innovation, many sourcing professionals are tossing the dice and hoping for the best. Some industries like construction, automotive, electronics and appliances are looking great through the end of 2018, but are seeing a slowing of orders and consumer demand for 2019.

Many of the experienced sourcing professionals can read the tea leaves and see suppliers pushing to turn the long-term buyer’s market to a seller’s market by an onslaught of requests for price increases citing everything from tariffs, labor and healthcare to justify the increased pricing. The successful elimination of avoidable price increases requires both a proactive and reactive approach to cost containment. The worst thing you can do is take an ad hoc approach or fail to create a plan of action. If you fail to plan, you plan to fail.

In the process described below, steps 1 through 3 are the preemptive phase and steps 4 through 9 are the reactive phase of the price increase staircase.

Preemptive cost containment
The Preemptive phase of a supplier price increase is designed to shape and change supplier expectations so they do not to attempt to raise the price to your company.

Step 1: Predict your exposure
Understand the marketplace in which you are operating. What are the potential drivers of a supplier’s request for an increase, and when will they drive the supplier to request the price increase? Ideally, you will have done a cost analysis, breaking apart the supplier’s cost to understand the cost drivers of material, labor, overhead and profit. If you are unable to do a full cost analysis, you may have done a price analysis. You and your company will be in the best position to challenge the increase.

Step 2: Ward off potential requests
Requesting a forecast of future price movements from a supplier to inform the organization’s budgeting process can be damaging. This allows suppliers to groom the organization to expect a certain level of increase and you to be pleased when the supplier asks for less. Supply management professionals must turn the tables and groom suppliers to accept the principles of continuous improvement and expect reduced costs and prices. The first agenda item for every supplier meeting should be cost and value improvement. The astute supply management professional will always reply to a “Dear Valued Customer” price increase letter with a firm return letter conditioning against the increase.

Make the process of requesting an increase “difficult,” requiring the sales representative to work hard. Demand three months’ notice, in writing, of all increase requests and insist that the invoices are accompanied by a detailed statement of the actions the supplier has taken to reduce or eliminate the need for an increase. Similarly, a rigorous internal approval system will deter supply management professionals from accepting increases without challenge because of time pressure or the desire for a quiet life. Such a program of deterrence should put the supplier on alert that price increases require approvals and that the supplier must genuinely face margin erosion for a price increase to be considered.

Step 3: Anticipate and block the increase
The supply management professional must be armed with a forecast and planned activities to pre-empt requests. Investigate alternative materials, specifications, and suppliers. In highly competitive supply chains and supply markets, it may be possible to prepare the issue of an RFI, RFQ, RFP or auction immediately before the forecasted request arriving. Gather data about suppliers that are planning increases. Have their volumes gone up (over recovery of overheads), have they built a new facility (improved productivity)? Is there a rationale for demanding a reduction ahead of their request? Offer an extension to the current contract if prices remain stable. Whatever strategy you employ, don’t sit and wait for the price request to hit your desk.

Reactive cost containment
After the supplier has sent notification of a price increase, you should take the following actions.

Step 4: Respond
It is appropriate to quickly react negatively to a supplier’s announcement of a price increase; however, delaying a personal meeting to discuss the increased pricing is a good tactic. It is essential to emphasize that cost and value improvement, not price escalation, is company policy. In the communication to the supplier:

  • Refer to the principles under which the relationship was founded (and operates)
  • Offer to work together to identify the cause and work jointly to remove and contain future increases
  • Assure that you have continuous improvement clauses in all of your agreements
  • Provide contract language indicating that all price increases require justification with factual data supporting any requests
  • Specify notice periods of 90+ days
  • Use longer payment terms to your advantage

Step 5: Oppose
If the supplier persists, base your responses upon objective data drawn from research of the cost drivers. In competitive markets, you should use the leverage from supplier rationalization and item rationalization in the competitive market.

Use the information gathered for developing preemptive action to support your view that no increase is needed. Let the supplier try to “break” your analysis rather than justify rationally for the rise. In this way, you control the agenda and are likely to reveal more information about the supplier’s cost base that would be exposed otherwise. Any costs within the supplier’s absolute control require a rigorous challenge. It is also critical to challenge that labor increases with an offset by productivity and automation.

Step 6: Corroborate
Use external sources to validate the factors claimed to contribute to the increase. If material costs are involved, sources such as CIPS-Supply Management reports can be used to confirm the movements claimed. Be aware that changes in yield/waste (continuous improvement) will be a crucial part of such validation activity. It is not sufficient to say that material Y has gone up by 5 percent; you should question whether materials have changed, reduced, light-weighted or substituted.

Step 7: Eliminate or minimize
If some level of increase appears unavoidable, then look for offsetting additional value from the supplier. Postponing the implementation of the increase by six months will halve its fiscal year impact and may “buy” valuable time to develop further tactics to avoid its effects. Other options are to lengthen payment terms, set up consignment stocks or increase year-end rebates. The sales representative will, in all likelihood, be measured only on the increase in headline prices achieved, so offsetting tactics can prove very productive.

By this stage, the supplier should understand that any negotiation is going to be difficult and underpinned by facts and data. If you are operating with a single source, it may be worthwhile introducing a cost variation clause, to provide a set of principles that govern cost and price movement.

Make it clear that any movement negotiated will remain in force until costs dictate a change, up or down, rather than for a specified period (such as 12 months). In a competitive market, however, you may wish to agree to fixed prices for a period as a buffer from anticipated cost increases. Always negotiate increased value if you are forced to accept a price increase. You can negotiate innovation, higher safety stocks, free storage, drop trailers, more top-grade materials quality improvements, and any other value component available to offset the price increase.

The critical message to drive home to suppliers is that price increase requests will not be considered merely because a specified period has elapsed. Break the cycle of annual demands for a price increase.

Step 8: Keep track and record
While price increases are not good news, they are important news. Price increases should be reported as part of supply management performance, as should cost containment achieved throughout active resistance. Such cost containment (the difference between formal requests and what was agreed) involves significant resource and yet is often invisible in management reports. If containment goes unreported, the actual contribution of supply management to a business will never be fully appreciated.

While there is no guarantee that inflation will show its ugly head, it is always best to be prepared and have a strategy when it does. There is little doubt that Savvy Sourcing Professionals will include the proactive and reactive approaches in the strategic planning process along with plans to rationalize SKU’s and suppliers if the economic conditions change.

What’s your plan?

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Emotional Intelligence and Curiosity–two things to look for when recruiting procurement professionals

Over the years I have been involved in recruiting campaigns for all levels of procurement. It is interesting that candidates and employers only focus on the tactical and strategic fundamentals of world class procurement. While understanding the fundamentals is desired, they can be easily taught to an intelligent person willing to learn. Recently I was meeting with a group of sourcing and procurement leaders and all agreed that two qualities stand far above the others, but are often ignored.

Savvy Procurement leaders know that curiosity and emotional intelligence are the two qualities that make a difference between success and failure in recruiting the best people in procurement. Curiosity is critical when evaluating suppliers, relationships, manufacturing processes, service provider performance, inventories, supply markets, economics and everything that makes the procurement job dynamic. If a procurement professional does not dig into the process, cost, global supply markets and everything about what they are buying, they will be of limited value in driving strategic solutions to every day procurement problems. It is the curiosity that drives out-of-the-box thinking to create innovation and new solutions to old problems.

Emotional Intelligence is hard to describe. It is something inside each one of us that manages how we navigate social complexities, manage behavior and make decisions leading to positive results. Experts have analyzed the things that drive emotional intelligence.

Self-Awareness
Self-awareness can be described as understanding and perceiving your emotions with a constant awareness of your reaction to situations. It is critical that anyone involved in sourcing and procurement understand how they are perceived by their organization and suppliers.

Social Competence
This can best be described as understanding your own social awareness and relationship skills and sensing others mood, behavior and motives. This is critical if the procurement professional is to be successful. Relationship skills, trustworthiness, collaboration and behavior will all impact the quality of relationships built in the course of business.

Adaptability
Procurement is a dynamic profession, where many changes in the economy, manufacturing processes, supply network, company politics can cause frustration. It’s essential that procurement and sourcing professionals remain flexible and adaptable as things can change daily and, in some cases, hourly. If people get too attached to particular processes and suppliers and fail to be adaptable, it could be a disaster to the company and their career.

Self-Control
Understanding emotions and being in control, no matter how volatile the situation, is critical to managing procurement and sourcing activities. If people can maintain emotional control, they are more likely to maintain clear thinking and meet the challenges before them.

I think that many recruiters and procurement leaders are seriously missing the mark if they look for technical procurement and business skills without considering emotional intelligence and curiosity as key components of the recruiting process. It’s my experience that these skills will be tough to bring out in a 30 minute interview. They require a well-planned assessment center, designed with a case study approach, social interactions and tough planned interviews designed to assess the candidate.

How will you look for EI and Curiosity in your candidate selection?

How procurement leaders can enhance executive presence

10 suggestions for developing presence

The recognition that procurement and supply chain management are strategic to the success of businesses puts us in the spotlight with senior management. While technical and commercial skills help procurement professionals drive significant revenue and value from supply chain, executive presence helps them get their own seat at the table.

A few weeks ago, while teaching a class in the automotive industry, I asked the participants to look at the company’s procurement cost savings goal and the value contribution that was expected in the current fiscal year. Then I asked them to look at the company’s margin percentage and identify what level of incremental sales would be needed to make a similar contribution to the company’s profit margin. Like many cases when I ask this question, the response was that sales would have to achieve several billion dollars in incremental sales to achieve the same impact. This is why procurement professionals are being asked to:

  • Deliver real value
  • Collaborate internally and externally
  • Build implementable strategies that continue to deliver value year on year
  • Influence and inspire stakeholders
  • Change styles and appeal to executives in complex matrix organization structures
  • Adopt styles that meet the business needs of stakeholders in a global framework
  • Move away from speaking procurement and tighten up messages for an executive audience
  • Understand and develop political skills for the boardroom

With this in mind, I conducted an informal survey among some of the CEOs and CFOs about the readiness of their senior procurement staff to move into leadership roles that lead to running the company in the future. To my amazement, their response was that many of their teams lack executive presence and influencing skills.

It is essential to find champions, mentors and stakeholder support in any business. When dealing with complex organizations and difficult strategies, gaining alignment of the businesses will assure success. No one survives with a death by PowerPoint style in a Twitter world. Building frameworks that detail opportunities, benefits, cost and risk are the language of business.

Here are 10 suggestions that will help you enhance your executive presence:

  1. Connect with your audience and know their pain points
  2. Present your proposal with a TED-like talk
  3. Hone the message for your executive audience
  4. Speak with commitment, passion and energy
  5. Don’t stick to one method of persuasion; adjust your style to the audience
  6. Focus on active listening and engagement
  7. Be confident
  8. Use facts and data
  9. Anticipate what questions will be asked in advance
  10. Look the part

Mastering these skills will increase confidence that you have the capability for key leadership roles. But, don’t forget you must earn trust by saying what you’ll do, then doing what you say.

Technical competence gets attention, but executive presence gets the seat at the table.

A change is in the wind; time to check the battens

They say it comes in like a lion and March 2018 is no exception. President Trump announced he will apply across-the-board tariffs or import taxes on steel and aluminum. Trump argues that the measures are necessary to protect U.S. national security. Generally, the consensus is the impact of this will be increased prices for consumers of steel and aluminum. While the full impact has not yet been analyzed by many companies while they await the final ruling, category managers for steel, should be building an analysis of capacity, securing domestic supplies and reviewing all contracts to minimize the immediate effect of this action.

Wages are on the rise and the Federal Reserve is conditioning us that interest rates will be rising as the economy heats up. This situation translates to price increases from suppliers who have funded extended payment terms while money was virtually free. Are you prepared?

Many suppliers have an inventory position on steel, so it’s prudent to conduct an analysis of inventory carrying cost vs a 25% increase due to tariffs. This would require a rapid action, should the analysis validate a decision for increased inventory.

When it comes to cost containment, it’s critical to constantly update category portfolios, monitor cost inputs and proactively condition suppliers against raising prices. Savvy category managers keep cost profiles up to date and have data readily available to challenge the price increases to ensure that if increases are warranted, they are pass-through and not an opportunity for suppliers to increase margins.

Many category managers have not lived through a time where sellers have power in the market place. I believe that time is around the corner.

Dust off the cost containment tool kit and prepare for the changing winds.

Are you prepared if the advisory is raised to a warning to batten down the hatches?

The cost of soft skills

I read an article that reminded me of an incident that is worth sharing. I was working in a very large food company and as a consultant and we recommended a new organization structure for procurement. We had evaluated a purchasing director who was talented, respected by his team and technically very good. As I approached the CEO and recommended the employee for the promotion, he objected and responded, “no way”. We discussed the employee and he agreed that my observation of his skills was correct. Then the CEO commented that the employee gave an awful presentation in front of his team and lost credibility. He was concerned that the senior staff would be disappointed with the appointment. The decision was made to recruit from outside the company.

Sometimes you only have one chance to make a first impression. Many of us are not comfortable making presentation or speaking in front of large crowds. While this is a soft skill it is essential for success in a career in procurement or supply chain. The ability to logically present a business case, influence and persuade others could help you to either elevate or sink your career. When conducting training classes, I often encourage all participants to take the leadership role and make presentations for the team. I’m always surprised that many people are comfortable taking a back seat when it comes to presentations. I’ve had people outright refuse to participate. Once a participant told me, “I don’t do presentations.” Unfortunately that was said in front of an HR and Management representatives auditing the class. I don’t think they survived the incident. The class room and meetings with peers are perfect places to perfect this critical skill.

The moral of this story is that everyone needs to take inventory of the soft skills and develop them. Business presentations are a critical skill, don’t neglect it.

Will the soft skills enhance or sink your career?

New Year–New Challenge

As I reflect on 2017, I’m grateful that I’ve had a great year and have met some wonderful people. This year, I’ve worked in the food, aerospace, coatings, chemical, automotive, integrated circuit, engineering/construction, homebuilding, elevator and packaging industries and enjoy the continued learning and insight. My domestic travel was enough to keep top elite status on two airlines, but global travel was down a bit although still I travelled several times to Europe, Asia and Mexico and managed to fly one to my dogs to shows. Lucky for me he fits in a carrier under the seat and is also a seasoned traveler; he was born in Spain and his first flight was trans-Atlantic when he was a puppy. That’s my dog and me in the photo at a show in Wichita last Spring.

I got to see many friends and colleagues this year. It’s always a great experience to see people you’ve taught in classes and mentored in their careers achieving very senior leadership roles in the procurement profession. The profession has been great to me and I feel an obligation to give back to the many professionals and practitioners I’ve have met along the way.

I am looking ahead to 2018 with great enthusiasm and energy as I begin my new role as Vice President, Americas for CIPS (the Chartered Institute of Procurement & Supply) to help meet the increasing demand from corporate clients across the US. This will be an exciting chance for me to support the entire procurement profession with new opportunities to enhance their careers and performance excellence.

I will still support my clients with advanced programs and tools previously unavailable in the US. Thanks to everyone who supported me in 2017, I wish everyone a happy, healthy and prosperous new year!

And I hope my dog and his handler have a successful show career in 2018.

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?