Day One – When Negotiations Start

A while back I began a project with a department in the company I currently work for. As we discussed the process, one of my colleagues asked me, “When will we start negotiations?”

My answer? “Day one.”

Negotiations start the moment you pick up the phone or type out an email in order to communicate with a supplier.

How?

The moment the sale rep or account manager begins talking to you, they are gauging you.

How do you communicate? Is your presentation strong timid? Are you to the point, or do you like to discuss things before getting to your point? Are you readily forthcoming with information when asked, or do you hold back?

Now you’ve communicated with them, the sales rep is going to do research on your company.

Are your financials strong? What were your sales last year? What does Glassdoor.com say you pay your employees, and what do your employees say about the company?

After that, each interaction, whether informal talking about hunting pheasants, or down to business hashing out rates and terms and conditions, are all negotiations.

In the MEYBEST Procurement Solutions: Strategic Sourcing Training, I outline at least three rounds of negotiations. These are formal rounds, scheduled in response to a sourcing event. It’s the informal, unscheduled interactions before, and even after, the RFx is complete and the agreement awarded and signed.

NOW

Start your negotiations NOW.

Investigate them NOW. Much of this can be done during need identification and gathering of facts and data. You and/or your stakeholders will already have an idea of which supplier or suppliers you want to consider for your sourcing event. Do this before you pick up the phone or send an email.

Craft your negotiations strategy NOW. It’s not going to be complete, and it won’t be the tactics and strategy you use once bids for the RFx come in. But it will set the tone for how you and your stakeholders will and will not interact with suppliers, individuals within your organization, the media (should they ever get involved), and even social media.

How many times in the past two years have negotiations been derailed due to inflammatory Tweets?

Conclusion

Whether it’s defensive (like holding information back), offensive (using information in your favor), or meant to stir up a commotion (like a number of politicians these days), crafting your negotiations strategy now, and then enacting it, will set you and your company up for success during your sourcing event and beyond.

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!

Should You Should-Cost? (The Answer is Yes)

Your supplier says they’re giving you the best deal. They promise they are saving you tons of money compared to their competitors.

But something in the back of your head tells you otherwise.

The supplier didn’t budge in negotiations during your last RFP. Nothing was gained, and the supplier said they actually had to raise prices, regardless of your business with them. They were the lower bid compared to the other bidders, but you still think that you’re not getting the best pricing.

Enter the Should-Cost Analysis

A should-cost analysis is a detailed breakdown of what a material or service should cost compared to what a supplier wants to charge for it.

Once complete, companies can compare their analysis against the bids of potential suppliers, or the pricing of a current supplier.

While there are some programs out there that enable companies to do this, a spreadsheet can generally fill this need.

Dig Into the Details

Should-costing is an in-depth process, and can take quite some time.

We will use a hammer as an example.

In order to should-cost the hammer, you will need to find out what kind of metal is used to make the hammer head. By weighing it, you can determine how much of that metal is used. Is there a rubber handle? Strip the rubber off and weigh it to determine how much rubber there is.

With these weights you can now search online for the current price of the steel and rubber, and determine the cost of the amount of material used.

Was the hammer made in the U.S.? Or China? Include the base salaries of workers in the country the product is made.

How long does it take to make one hammer? How many people are on the assembly line for the hammer? Machinery is most likely used in the process, too. Using an internet search, you can find videos on how things are made to give you a general idea of cycle times and personnel on the production line. (This “How It’s Made” video is perfect for helping you should-cost hammers: https://youtu.be/7xHVyT5oEL4)

Along with this information, corporate overhead, shipping, and any warranties will need to be factored into your should-cost analysis. Many times you can ask the supplier – in supplier workshops or in the RFP itself – the percentage of overhead they include. Or, for publicly traded companies, they include this in their annual report.

 

Putting It All Together

Once all of your information is gathered, organize it and add it up in a logical format.

How does your should-cost analysis match the supplier’s pricing? Is the supplier’s margin close, and they actually are giving you the best pricing? Or is there a large delta that you need to discuss with your supplier?

This information is excellent leverage during negotiations. Calling out suppliers on too-high pricing gives your organization a major advantage.

Note: Do not show the suppliers your should-cost analysis! Giving them an idea of the difference in terms of a percentage is enough. If they ask for it – tough! They came up with their pricing, they need to explain it to you.

To give you an idea what this looks like, here is a rough example of a should-cost analysis for a mini-excavator that I did. Again this is very rough, and doesn’t include shipping and warranty data.

Should-Cost 2

Conclusion

A should-cost analysis can be time consuming, but it is a valuable tool to your organization. With a solid should-cost analysis you and your team can gain a great deal of leverage over the suppliers you negotiation with.

Remember, this can be done with services, too. And, the more detailed the material or service analyzed, the more time it will take. But it will be time well spent!

Negotiations Don’t Stop at Contract Award

Finally! Both you and your supplier have signed a strategic agreement for the next five years. KPI’s and milestones are enshrined in the contract, and it’s a win-win for both of you. You have begun managing the contract and working with the supplier in their roll-out of materials and services to your organization.

You’re done, right?

Wrong.

With any strategic procurement agreement there is always room for improvement. While, overall, your strategic supplier may be saving you money overall, there may be parts and/or services that the supplier is still pricing high. It’s these handful of materials or services in strategic agreements that are ripe for negotiation.

For example, say you have a strategic agreement with a supplier for maintenance, repair, and operations (MRO) materials. You have over 10,000 line items in this master procurement agreement, and the supplier was the lowest total cost for 80%-85% of those materials – that’s why you awarded them the agreement. It’s that 20%-15% that can, and should, be negotiated down.

It’s up to you as the sourcing professional responsible for the agreement to regularly review chunks of the MRO materials list for pricing. Other suppliers may have offered some lower pricing on some of the materials in the bidding process, and the sourcing professional can use this information to negotiate with the awarded supplier.

The organization’s buyers are integral to this process, too, as they buy the materials everyday at the tactical level and may be able to spot materials in ones and twos that seem priced high. You can also send out RFQ’s for handfuls of materials at different intervals to see if there is better pricing. This RFQ process may be driven by a purchased dollar threshold set by the organization.

Key performance indicators are another way you can ensure the supplier is offering you the best pricing on these MRO materials. Having a KPI, or several KPIs, that focus on the supplier ensuring they are providing cost savings can help reduce pricing on materials in an already awarded agreement. Maybe a manufacturer has slashed pricing due to increased production, or there is a substitute part that is the same quality but another company produces it at a lower cost.

Once the MRO materials that are higher priced are identified, it’s up to you as the sourcing professional to bring in the supplier’s representatives and negotiate this. Generally speaking, the supplier will be open to reducing the pricing in order to retain your business and have hopes of winning the award again five years down the road.

Using these principles in other agreements, whether materials or services, will ensure you are getting the best pricing for your organization.