Should Procurement Just Get Out Of The Way?

I recently read an article whose author stated that procurement “should just get out of the way” of stakeholders.

This is a surprise from my perspective. Articles over the past few years, and my personal experience, have shown that procurement and stakeholders need to work closer together. This article seemed to recommend the opposite.

The Idea

It may seem that, too often, procurement gets in the way of work being completed.

Procurement should provide information to the stakeholders, and ensure the procurement process is as smooth as possible. The result of a sourcing event should allow the stakeholder who requires the service/material to get what they need when they need it.

In the most recent project I worked on for vehicle parts for the Transportation Department of the company I work for, it was the stakeholder who told us what they needed. Then, it was my team and I that sought out current and new suppliers, set-up supplier workshops, and worked with the stakeholder to craft a detailed scope of work.

With the award to the now strategic supplier (the supplier who was awarded the business had been one of ten suppliers previously used), the stakeholder is able to order what they need online through the supplier’s website.

But my team and I aren’t stepping away. We are tracking supplier performance against agreed upon key performance indicators (KPIs), dealing with stakeholder/supplier issues, and conducting semi-regular benchmarking of pricing on small selections of parts to keep the supplier honest and competitive.

The Risk

The risk is that when procurement “gets out of the way” spend returns to the unmanaged state it was before. Instead of a handful of strategic suppliers, stakeholders go to whomever they see fit. The synergies and savings created by procurement are lost.

You want to avoid this situation.

So, while procurement should streamline things for their stakeholders as much as possible, procurement should never just “get out of the way”.

 

Data Is King

Today everything in business relies on data: sales, lost sales, materials in stock, efficiencies, budgets, demand, etc. It’s the exception to the rule that a business can run without at least some data as to the peaks and valleys of their sales.

This is no different for procurement. Today data is as important to an organization’s procurement and supply chain functions as it is to any other area. Data not only informs procurement about what’s going on, but is increasingly driving procurement decisions, such as how much to buy, how to enter negotiations, and even whether or not to eliminate the requirement for what is being procured.

Herein we’ll take a look at the ways data drives procurement, and how your organization can benefit from it.

Spend

How much you spend, what you spend it on, and how you spend is one of the most important data points for procurement professionals. What you will spend in the future is also important.

Why?

How much you spend gives you a number to work with, and helps the procurement professional set goals on reduction. What you spend it on can tell you if you’re spending too much for a material or service, or perhaps your organization is spending money on something it doesn’t need (ex. obsolete materials). How you spend can tell you if you spot buy, make multiple purchases resulting in paying for multiple shipments when you should consolidate them, and with how many suppliers.

Forecasting spend is important, too. What is that project in 12 months projected to cost you? Why?

Management

Gathering all of this information helps you manage that spend. Some companies can readily access this data and procurement professionals can begin tackling it. You may belong to a company like this.

Or, you may be part of a company that doesn’t have this data ready at hand. You may be the person that gives your IT department a heart attack. (It’s OK, they have health insurance.)

Managing this spend helps you and your organization make decisions on how to change certain purchasing trends, make decisions on how money will be spent, and why.

Unmanaged spend, also called Rogue Spend, accounts for roughly 29% of a company’s spend, according to The Hackett Group. If your annual spend is tens or hundreds of millions of dollars, your organization could be leaving millions or tens of millions of dollars on the table, something that directly effects the bottom line.

Getting spend under management helps you make decisions such as consolidating areas of spend and bidding out to find a single supplier that can supply it all in order to find better solutions that will help save money and avoid costs.

It can also help you begin the discussion on processes.

Process

Soft costs are hard for some people to grasp. They “technically” don’t exist, so why address them?

A perfect example is one I dealt with recently. Currently the company I work for has workers clean their own vehicles. The issue? That worker is being paid $30-$40/hour straight time to clean that vehicle. Lump on benefits, that’s roughly $45-$60/hour.

We began a project to contract vehicle washing services. Bids came back at around the $15/vehicle mark. A fraction of what it would cost for one of our workers to clean them. (The agreement is for approximately $65,000/year.) And vehicle cleaning would be done after hours, not affecting the work schedules of the workers.

The managers and supervisors we discussed this project with just shrugged their shoulders. “They’re on the payroll anyway, so why not just keep having them clean their own vehicles and not spend $65,000 a year?”

The issue is that these workers could be spending the time they are cleaning their vehicles doing their actual job. If you have ten or so workers taking time away from a job site throughout the month to power wash their vehicles, that reduces the efficiency of work done on that job and could extend the schedule of that job, even pushing it past the deadline. How much does all of that cost your company?

This could also include your procurement processes. Are there steps in your processes for purchasing, receiving, warehousing, and issuing materials? Or perhaps suppliers that provide services are late (costing you time and money) because of certain processes your organization follows such as unnecessary security checks.

Using spend data to look at your organization’s processes can help you address both hard and soft costs. The data gleaned from these calculations can help your organization become more efficient and effective.

Total Cost of Ownership

With spend managed you can begin to address Total Cost of Ownership. How is freight billed? How are shipments handled? How does the supplier bundle things? What’s the mark-up? What’s the cost of labor for the supplier to handle that product or service? What’s the cost of labor for your organization to accept that material or oversee that service? What are the manufacturing costs? What is the cost of holding inventory at the supplier’s location? What’s the cost of holding inventory at your location? Are there materials you can remove and still be effective?

All of these things, and more, go into the total cost of ownership. Tracking the total cost of ownership, perhaps through should-costing, can help you and your organization determine if you need certain materials or services, if there are features that can be removed, or if there are better ways of doing things.

Conclusion

Getting a handle on your data in procurement is as important as getting a handle on it in sales. As the procurement professional you need to be able to track how much is spent, what it’s spent on, how it’s spent, how much was spent in the past, and what your organization will spend in the future if you are to be effective in contributing to the conversation on how to change all of that for the better.

Will Amazon Be Your Sole Source Supplier?

(Image © Amazon Logistics)

The recent trend in procurement and supply chain is consolidating suppliers as much as possible. This gains the organization volume discounts for materials and services, increases the organization’s negotiating power due to the amount of spend, and it removes the administrative burden of managing and communicating. While not all companies can sole source with a single supplier, many work down to two or three in a range of categories.

But have you considered utilizing Amazon as your sole source supplier?

On October 23rd, Amazon announced new Business Prime Benefits for organizations in the U.S., Germany, and Japan. These new benefits include:

  • Spend Visibility
  • Guided Buying
  • Amazon Business American Express Card
  • Extended Terms for Pay by Invoice
  • Upgraded Shipping Options

Where many business may buy from a major distributor, Amazon is set to be that distributor and compete with companies like Genuine Parts Company (think NAPA Auto Parts) and Grainger. Customers don’t have to deal with a dozen or more different suppliers. They find what they need on and buy through Amazon, and can even set policies and limits for their organization’s buyers.

Amazon is looking to make it as easy and transparent as possible. From the Amazon Business blog:

“Amazon Business Spend Visibility allowed me to perform several functions that would otherwise have been manually performed and incredibly time consuming,” said Chris Vanderbilt, Procurement Director at Alterra Mountain Company, who owns and operates more than a dozen ski resorts across North America. For example, to identify purchases out of compliance, Chris would have to download a transaction list from their procurement card provider, request info from specific users, and spot check purchases. Now, using Amazon Business Spend Visibility, he can quickly run a category spend analysis and identify non-compliant purchases across multiple companies and users.

You can learn more about Amazon Business Prime here.

Many people know about all the different markets Amazon has entered, such as publishing, audiobooks, and cloud servers. But now Amazon isn’t just working to compete with bookstores or MRO distributors, they are also moving to compete with the likes of FedEx and UPS.

In 2016 it was reported that Amazon was quietly building its own shipping company. That escalated this year with Amazon’s announcement that it would help entrepreneurs start their own package shipping companies. For about $10,000 (and some vetting) you can start your own Amazon package delivery company with vehicles and uniforms to match, as well as Amazon technology to track your workforce and deliveries.

This move is two-fold: Amazon now has full control of its small parcel shipping, while putting it in direct competition with shipping giants FedEx and UPS.

What are the implications of all of this? Market shake-ups in MRO/tools/parts and parcel shipping. Suppliers on Amazon will be driven to be more price conscious in order for Amazon Business customers to choose their product and price over the competitor, driving down prices (unless a supplier markets more on quality).

And could it mean that one day your business or organization may use Amazon as a sole source supplier?



Moving Mountains (With No One to Move Them)

The news has been pretty good lately. Record low unemployment. U.S. economic growth is up.

But it’s not all rainbows and unicorns. Along with the trade war with China, the U.S. is facing a major driver shortage. According to Bloomberg, that shortage is as high as 296, 311 (2nd quarter of this year). New federal regulations on when time starts and the requirements for digital books have led to drivers being able to drive less, increasing the requirement for drivers to cover more time. With a shortage in drivers comes an increase in transportation costs as there is more demand than there is supply. And it’s affecting both [full] truckload and less than truckload.

It doesn’t help that Union Pacific has announced cuts of up to 475 jobs, with more cuts to come up to at least 2020 in order to more closely align its operating model with the Hunter Harrison Model (CSX). While the goal is to maintain similar service level with fewer personnel, it has yet to be seen how this will affect freight costs from railroads that are already able to charge a premium.

But business goes on – it doesn’t stop just because there’s a driver shortage or a railroad restructures.

It does create challenges. The industrial gas supplier that serves the company I work for has missed some deliveries, or lead times for some gasses are longer. They have the gasses availble, but no qualified drivers to deliver them. Attracting drivers continues to be a challenge for them.

So what’s the solution?

Some companies, such as Uber and Tesla, are working on autonomous trucks to drive freight across the U.S. In fact, Uber was running autonomous trucks in “stealth” on Arizona’s highways for a while before ramping up overt operations. While many regulations right now call for a driver behind the wheel, regulations could change that would allow a driver of an autonomous vehicle to sleep while it’s driving, or to eliminate the driver altogether.

When will some of these solutions roll out to the rest of the United States? Hopefully soon. The company I work for has quite a few lead times they’d like to shorten, and freight costs we’d like to drive down.

What can be done in the interim?

This is where the procurement and supply chain professional comes in.

  • Can materials be ordered further in advance? And in larger shipments?
  • Can more orders be consolidated into larger orders?
  • Can a supplier hold more stock at their warehouse closer to your location?
  • Does Just-In-Time not make sense right now, and does the benefit outweigh the cost of your organization holding more stock at your location?
  • Does your organization have drivers? Does it make financial sense to use them to go and get supplies from the supplier?
  • Are you able to use more materials and services that manufactured and/or readily available locally?

These are just some of the questions you and your organization will have to ask themselves.

You and your organizations still have mountains to move, regardless of the driver shortage. It’s up to you to find out how.

What solutions have you worked on in light of the driver shortage?

Tariffs and the Supply Chain

Plenty has been written on the ongoing tit-for-tat with Trump’s tariff’s on China; the news cycle can’t get enough. And in three days, tariffs take effect on $200 billion worth of imports from China should the U.S. and China be unable to come to an agreement.

I’ll let the political pundits discuss whether this is good or bad.

What I’m interested in is: How does this effect the supply chain? And I’m not just talking the prices of goods. What about logistics, supplier choices, and make or buy decisions? What’s to be done in such turbulent times? How should risk management be addressed?

Cost of Goods

With the imposition of 25% steel tariffs and 11% aluminum tariffs earlier this year, the prices of steel and aluminum have jumped upwards of 18%. While the steel companies are enjoying the profits, the rest of U.S. companies that utilize these resources, such as automobile, motorcycle, and technology (hardware) companies are seeing costs rising, some as high as 50%.

The additional 10% tariffs on $200 billion worth of goods will effect companies and consumers even more. Items on this new list include: meat, fish and seafood, fruits and nuts, beverages and vinegars, ores, slag, and ash, rubber, textiles, and machinery, just to name a few. A more comprehensive list can be found here.

I currently work in the utilities (energy) industry, and the effects of tariffs are already hitting our transformers, steel poles, vehicles, and some motors. Specifically, we recently sourced a specialized trailer that has a motor on it for pulling shipping containers (connexes, sealands) up onto it. For whatever reason these specific motors only came from China, and with the tariffs the company in China wouldn’t ship to the U.S. Our supplier had to go through a European company to source the motors from China, hiking up the price 30% compared to what we normally pay.

This brings us to our next topic. . .

Logistics

With tariffs come challenges in logistics. Products from China are going to cost more, and some companies are making decisions not to ship certain products directly to the U.S. (see my trailer example above).

It’s not just the goods purchased, but the shipping of those goods that have gone up. With tariffs comes an increase in cost of shipping those goods. Ships from other countries are held in port longer, delaying delivery, and increasing labor costs. Even the railroads in the U.S. are seeing an increase in costs due to tariffs from Mexico and Canada. When looking at total cost of ownership, companies are going to be looking at how tariffs effect shipping, and will have to make decisions based on those numbers.

Supplier Choices

Both cost of goods and logistical challenges are going to effect supplier choices by companies in the United States. For example, if Company A is going to pay the same price for steel and aluminum from China as they do in the U.S., but the steel and aluminum from China has a tariff on it, Company A is going to begin purchasing those resources from U.S. companies, or at least from companies in countries where there are no or much lower tariffs.

A simple example of this is the steel industry example given above. If I have to buy steel, I might as well buy it from a company in the U.S., despite the higher cost, because there will be no tariffs imposed on it. The same will go for many of items on the list of new tariffs being levied.

And what if the goods being shipped to the U.S. only come from China? Then companies, and their consumers, may have to live with much higher prices which include the cost of tariffs. Or. . .

Make-or-Buy

With tariffs and the costs of certain goods rising, companies may begin to revisit make-or-buy decisions.

Make-or-buy decisions are exactly what they sound like. Does the company make the product in-house, or do they buy it/outsource it from another company. With tariffs on certain goods and costs of those goods rising, some companies may be compelled to begin to produce more in-house instead of outsourcing.

This is an interesting turn of events as our current economy is a by-product of companies selling off assets they once owned to produce everything in-house. Decades ago companies like Ford used to own steel mills and smaller factories that made everything in support of producing cars. These companies then spun off or sold these assets to focus on what they were good at; in the case of Ford it was building cars, not managing the mining and refining of steel.

My opinion is that I doubt we’ll ever return to the level of “make” seen prior to the 1970’s/80’s. It just doesn’t make economic sense in most cases. (This is an unsubstantiated statement, and some economist or financial guy out there may prove me wrong, but there it is.) But more companies will have to take a hard look at how they produce their products, and make-or-buy decisions will be part of that decision making process.

Of course, a third option is companies do redesigns of their products or entire offerings so they include less or no goods coming from countries which have these tariffs imposed on them (in this case China), or stop providing the offering completely.

What To Do

Again, my focus in this article isn’t whether the tariffs are good or bad. Individuals with a greater breadth of knowledge and experience can opine on that. What I will comment on is what can be done in each of these areas. These are recommendations based on my limited (eight years) of experience.

Cost of Goods: The first thing I’d ask is, “What does it say in the agreement?” Taking steel as an example, your organization most likely locked in a price for that product which contains steel. There is also, most likely, a clause allowing a certain percentage of price increase annually, or throughout the year. I am not saying you should necessarily buckle down on that price. Your supplier is working to be tenable just like your organization. But use it as a starting point for the discussion on how the tariffs effect the price. Just because the cost of steel has gone up 18% doesn’t mean the cost of what you’re buying goes up 18%. But maybe 5% or 8% makes sense for your organization to pay while the supplier is still profitable.

Logistics: You should look at what countries you are shipping from, and what are the lead times once what your organization purchased enters the U.S. If lead times are extended, your planning for projects or product releases should also be adjusted. Are you able to source from the same company with a presence in a different country? Or is there a distributor in a different country that can provide your organization with the same product, tariff free? Can you work with your supplier in China to ship through another country, such as Vietnam? You should also work to leverage relationships with freight companies or rail road companies you work with to see how you can work together to mitigate the costs of tariffs.

Supplier Choices: Despite personal opinions on the merits or detractions of tariffs and trade wars, organizations across the U.S. have to accept the way things are (until if/when they change). Perhaps it’s time for your organization to begin to look into other suppliers within the U.S., or from countries that don’t have China-level tariffs imposed upon them. You and your organization may have to pay higher prices due to the tariffs, but it’s better to pay just higher prices instead of higher prices plus costs for tariffs. That said, you may be in a bind if what you source only comes from a company in China.

Make-or-Buy: Finally, you and your organization may have to have a serious discussion about make-or-buy (or stop providing the offering altogether). If sourcing from China and a U.S. company doesn’t make sense for your organization, perhaps it’s time to look into producing it in-house. These decisions aren’t made lightly; producing products in-house could cost millions, or tens of millions, in construction, start-up costs, and increased overhead and labor costs. But if it makes sense in the long run it can save your company money lost in higher prices, delayed shipments, and loss of market share.

Risk

A final thought: remember risk. Throughout all of the discussions you have with your organization about how to deal with the current state of affairs with tariffs, always ensure you are managing the risk to your supply chain in all of your decisions. For example, shipping through another country to get around tariffs on China may seem like a good idea at first, but what if the infrastructure and rule of law in that country are poor? Your product may disappear, or bribes to crooked officials may raise the price of your products to the point that you may have well have paid for the product with tariffs.

Think about how your organization can mitigate risks, and what to do in the worst case scenario. (Hopefully you and your organization are already doing this on a daily basis.) Can your organization help build up infrastructure in this country? Or should sourcing be shifted to a U.S. company with less risk in on-time delivery, but maybe higher risk in quality of goods that can be more easily addressed since they are just a quick drive or plane flight away?

Conclusion

Despite what you might think of them, the current tariffs aren’t going anywhere soon. But, with careful planning and risk management, you and your organization can navigate these turbulent waters and maintain your supply chain.

Procurement New Year’s Resolutions

It’s the New Year, and almost everyone has made a New Year’s Resolution; lose weight, get back to the gym, learn to play the guitar, learn a new language, talk to that girl, etc.

The problem is many of these resolutions don’t survive much past March, or even January for that matter.

In order for these resolutions to stick, we must have a plan, and make incremental changes that stick and become part of our habits.

While many of us, myself included, are working toward self-improvement goals (my fitness goals are year-round, not just tied to New Years), we should also be working on goals for our Procurement processes.

What New Year’s Procurement Resolutions should we make? Herein I detail just a few.

Communicate a Unified Vision and Gain Senior Management Support

You want to make changes the procurement area of your organization. But every time you present something and implement it no one listens and it falls through. What gives?

First, make sure the vision you have created is clearly and effectively communicated. Maybe the message is getting lost in translation to the rest of your organization. You could be using too much technical jargon, and the people you are trying to get on board are zoned out. Before you roll out changes make sure you have communicated those changes well.

Then, get senior management on board. Without the support of the right VPs and Directors your plans will be dead on arrival. Try all you might, if your senior management doesn’t support you, no one will. Communicate your vision to the SM’s of your organization, show them the data of savings and value added, and sell them on the changes you are proposing. With their backing, your procurement change initiative will go further.

Standardize Processes

Is everyone in your procurement group doing things the same way? Are purchase orders and contracts all processed with the same steps each time? Or, like many organizations, is everyone doing their own thing?

In the New Year, dedicate your organization to doing things the same way each time. Standardizing processes, as well as making checklists to follow, ensure that everything is completed right the first time in your organization’s ERP system. That way no pertinent information is left out and rework is reduced. Rework costs companies hundreds of thousands, or even millions of dollars each year. Preventing this rework with standardized processes and checks can significantly impact your organization’s bottom line.

Get Involved Earlier

Best case scenario you’re already part of your stakeholder’s annual budgetary meetings.

But what if you’re not?

In the New Year, get involved immediately. As a procurement agent in your organization you should be involved at the moment of ideation – the moment your internal customer comes up with the idea of a need. If you are involved the moment the the internal customer is ready to send out a bid package, you’re already too late.

Regular meetings with your internal customer can alleviate a lot of this and ensure that the moment a need arises, you’re immediately involved in the process.

Push Back!

There’s a right way and a wrong way in your organization.

Your internal customer is doing things the wrong way; providing incomplete scopes of work, not involving you early enough, talking to suppliers without procurement’s involvement, coaching their favorite supplier throughout the bid process.

The answer: push back.

The saying goes: the standard you walk past is the standard you accept.

The moment your internal customer does things the wrong way, you must push back. If you haven’t in the past, start now. Proper processes, and doing things the right way – and sometimes the legal way – is paramount to keeping your organization running smoothly and remaining in business.

Does the internal customer push back when you push back? Get support from your management and senior management. (See the first paragraph in this post.)

Prepare Better For Negotiations

A few notes and an “idea” of where you want to go no longer cuts it when walking into negotiations with suppliers.

What’s your target outcome for negotiations?

What’s your optimistic position (best case scenario)?

What’s your pessimistic position (worst case scenario)?

What’s your walk away criteria?

What’s you’re best alternative to a negotiated agreement (BATNA)?

How much time have you and your team dedicated to practice negotiations?

In the new year, commit yourself to improving your negotiations preparations.

Reinforce Regularly

All of these practices are great – unless your organization stops doing them. Have you or someone in your organization improved a process or changed the way you were doing things – only to have people in your organization slip back to the old, inefficient, ineffective way to doing things?

Let’s face it, generally speaking human beings hate change. It’s wired into our DNA after hundreds of thousands of years of surviving. In the modern age this translates into resisting change in the workplace where the worst threat may be a spreadsheet takes twenty seconds to load.

If you want better sourcing processes to take and hold in your organization, you and your senior management have to reiterate and reinforce these new habits over and over again. Sometimes you’ll feel sick of saying it, as you’ll be sure your colleagues will be sick of hearing it.

But reinforcing these new processes through training, oversight, and tying them to the key accountabilities in personnel annual reviews will make sure they stick for years, and your organization will continue to realize the external and internal cost savings and added value they provide.

Conclusion

I hope these few Procurement New Year’s Resolutions start helping you and your organization start on the right track, or get back on the right track, to realizing good change in your procurement area and its processes.

And if you need more help, Meybest Procurement Solutions is available with training and consultation to take your organization tot he next level.

Happy New Year!