procure

Consulting

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Last Friday I had the amazing opportunity to do consulting in the Omaha Metro Area.

The client was a start-up gym looking to better manage their inventory of supplements (collagen peptides, protein, etc.) and workout equipment (knee sleeve, wrist wraps, etc.).

It wasn’t anything high end. No C-Suite meetings. No hundred dollar steak dinners.

Just one hour with some Bulletproof Coffee while working on spreadsheets at Whole Foods.

I built them a spreadsheet to manage their inventory, forecast their demand, determine their economic order quantity, safety stock, and order point. All the while I explained the math and basic principles behind it what I had built. In the end I offered my continued availability.

Now the gym is better prepared to deal with its increasing demand for supplements and equipment. Of course, as they grow they’ll need better software than just an excel spreadsheet.

But I got them started on the right track.

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If you’re a start-up or small business looking to improve your supply chain, shoot me an email and set up a free introductory consultation: meybestprocurement@gmail.com.

Supply Chain Flywheel

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In February Jim Collins came out with the small book “Turning the Flywheel: A Monograph to Accompany Good to Great“.

In it, Collins discusses the Flywheel concept, and how organizations like Amazon and a failing school on a military base leveraged the Flywheel concept, and made it their own to become GREAT.

I first heard about it on the Tim Ferriss Show. During the interview, Jim Collins discussed the monograph, how it applied to businesses, departments, and even our personal lives.

I shared that portion of the podcast (starting at 1:40:00 or so) with a colleague, and together we built the flywheel for our Supply Chain Division at the company I worked for.

The Supply Chain Flywheel

Here is the Flywheel we came up with.

  • Increased Stakeholder Engagement
  • Quality Scope of Work
  • Better Market Position
  • Better Market Relations
  • Reduced Total Cost of Ownership
  • Increased Stakeholder Buy-In

As described by Jim Collins, each step in the Flywheel cannot but help cause the next step.

Increased stakeholder engagement cannot help but lead to a better quality scope of work. A better quality scope of work cannot help but lead to a better market position. A better market position cannot help but create better market relations. Better market relations cannot help but reduce the total cost of ownership of the materials/services being sourced. Reduced total cost of ownership cannot help but lead to increased stakeholder buy-in. Increased stakeholder buy-in cannot help but lead to increased stakeholder engagement…

And so on, and so on, and so on.

Doom Loop

The Doom Loop, of course, is the exact opposite, and each step in the Doom Loop feeds the next.

  • Decreased Engagement
  • Poor Scope of Work
  • Poor Market Position
  • Poor Market Relations
  • Increased TCO
  • Reduced Stakeholder Buy-In

Conclusion

Supply Chain/procurement should strive to reach the flywheel described here and, of course, improve upon it. Maybe there’s an additional step your team or department needs to add. Try and develop it.

And if you do need a hand to start your flywheel, the MEYBEST Procurement Solutions: Strategic Sourcing Training is a great place to start.

Day One – When Negotiations Start

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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.

Hemp in the supply chain

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The 2018 Farm Bill was passed on December 11, 2018, and hemp was legalized after decades of prohibition under marijuana laws. It’s estimated that hemp could be a $20 billion industry by 2020.

States, such as Kansas, had already passed their own industrial hemp legislation. With country-wide legalization, the opportunities for hemp and hemp products are taking off.

CBD Oil

The first thing many people think of when they think of hemp is CBD oil. The benefits of CBD oil are well documented, from pain relief, to relief for people with epilepsy, and even helping the elderly with Alzheimer’s.

While CBD oil from marijuana has up to 20% THC, the psychoactive compound that gives people a high, hemp oil has only trace amounts of THC, too weak to be psychoactive and in many cases too low to show up on a drug screening.  People can get the health benefits of CBD oil without the prohibited drug.

Hempcrete

A fraction of the weight of concrete, hempcrete is quickly becoming widely used in construction. Though it can’t be used for foundations, hempcrete walls can reduce the weight of a building, while its insulating properties can keep buildings around 60 degrees Fahrenheit even in colder months. The reduced weight and reduced utility requirements can save both the builder and the tenant a lot of money.

Hemp Fiber

Hemp fiber can be used for clothing. Hemp clothing is more breathable and even anti-microbial. But it’s the cost that makes it attractive. Hemp fiber is cheaper to cultivate and harvest than cotton or wool, and cheaper to produce than synthetic fibers while also having the benefit of not having the negative byproducts of synthetics.

Nutrition

Hemp seeds are known to be an excellent source of nutrition. They are full of protein, unsaturated fats, fiber, and several vitamins and minerals. Since hemp is so easy to grow, it makes it a ready and prevalent food source in a market where meat prices can fluctuate.

Paper

Hemp can also be used to make paper. This isn’t just an argument over the environment and deforestation, it’s also a matter of economies of scale. 1 acre of hemp can produce as much paper as 4-10 acres of trees in a 20 year period and hemp only takes 4 months to grow while trees take decades. Hemp paper is also stronger than paper made from trees since it has higher cellulose content.

The Supply Chain

I’ve talked a lot about the benefits of hemp in general in this post. The question is: how does it benefit your supply chain?

In my opinion, the answer is clear.

  • Lower cost of growth, harvest, and production
  • Greater sustainability over a long period of time
  • Reduced weight of materials
    • Lower fuel costs in transportation
  • Reduced risk due to reliability of the crop
    • Can reduce risks of tariffs on some products from outside the U.S.

The Supply Chain Questions You Must Ask

With these benefits, you and your organization have to ask yourself some questions:

  • How can we integrate hemp into our offerings?
  • What suppliers do we pursue?
  • How do we get involved in the supply chain at the source – the farmer?
  • When and how do we push our suppliers to integrate hemp into their offerings?

The future is looking bright for hemp in the supply chain.




 

Data Is King

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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.

Procurement New Year’s Resolutions

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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)

Christopher Meyer 1 Comment

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!

Standardization In Processes to Reduce Costs

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Go to any department in your organization. How consistent are the ways people are doing things? How consistent are the results in that department? Is everyone on the same page, each person executing their job by a set of processes? Or is everyone doing their job their own way?

If your company is like the company I work for, standardized processes are a near-term goal – or in some cases a far off dream. Each person in a department has their own way to do work, and feels their way is best. Their way has worked thus far, why change it?

Standardizing processes is key to streamlining a department, and in procurement it can mean money saved that directly affects the bottom line.

Purchase Orders

Purchase orders are a primary issue when working to standardize. Some procurement agents process purchase orders one way, some another way. Some buyers have a checklist they follow each time, while other buyers just run the PO through the ERP system and send it to the supplier without another thought.

Standardizing purchase order processing should include, at minimum, the following:

  • Check pricing against negotiated numbers.
  • Consolidate duplicate line items.
  • Confirm material need dates.
  • Confirm shipping method and carrier.
  • Receive order acknowledgement from the supplier.
  • Update expected/promised delivery date from supplier in the ERP, and notify the stakeholder.

Just these simple standardized steps can ensure consistent outcomes each time. Consistent outcomes mean dollars saved internally in time worked on purchase orders and externally in keeping supplier pricing of materials and freight consistent with pre-negotiated prices.

Contracts

Contracts may be more complex than purchase orders, but standardization can be achieved in the process. The procurement specialists that are responsible for RFPs and contracts should have a checklist of everything they need to do, from the moment they receive the RFP/contract from their stakeholder, up to award. This checklist may even include contract management.

Templates are another way to standardize RFPs and contracts. While stakeholder specifications and requirements may differ, the organization should have a single template for procurement specialists to follow with standard information that each RFP and contract must include, such as RFP timeline, milestones, and evaluation criteria. The organization may have two or three checklists and templates for different RFP/contract situations, but each should follow a standardized, enforced process.

Conclusion

Standardization has many benefits, and in an organization’s procurement processes it translates into savings that directly affect the bottom line.

In fact, the German Institute for Standardization, DIN, recently published a report on how standardization positively effects companies. In the report, they found that not only did standardization give companies competitive advantages, but also lowered transaction costs and had positive effects on the buying power of the companies surveyed.

Now is the time to begin process standardization in your procurement organization.