The Supplier Stall Game

As a consultant that helps companies reduce their cost of goods, I find that many suppliers try to avoid me. That’s understandable – some of consultants out there don’t do what they say or say what they do, or even try to consider the suppliers requirements/business needs. Most suppliers have war stories about bad experiences with these types of consultants. I like to think that my company is an exception to that “bad consultant” rule, and feedback I get from suppliers at the end of an engagement normally confirms it.

That said, some suppliers have taken avoiding consultants to an extreme and incorporated avoidance into their standard business processes. I suspect many even train salespeople on the “avoidance process”, because within the same organization I see different salespeople using the same tactics over and over again.

I would like to give examples of two suppliers that utilize this practice and note the similarities and differences in their approach. The first, Supplier A, is a well known small parcel shipper, and the second, Supplier B, is one of the major domestic office supplies distributors.

Supplier A has been in the stall business for years. When a consultant initially contacts the sales rep as an agent for a mutual customer, Supplier A will do their best to avoid the request for meetings and information for as long as possible, sometimes up to a month. The goal here is to see if this is a serious process or a fishing expedition.

When the supplier finally realizes the consultant is not going away, their next step is to put an NDA in place. The NDA is a fair way for Supplier A to protect their interests, and I take no issue with it. However, getting a copy of the NDA can normally take over a month, with numerous requests just for Supplier A to send the file, and excuses such as “we just made changes and I need an updated version from legal” or “I haven’t been in my office this week to get the file off of my computer”.

The next step is getting the NDA signed. The NDA that Supplier A sends over will leave gaps in certain sections, including the term of the NDA and the purpose of the NDA. These sections are left for the customer to fill out. Once you add and send the changes back, they need to go to Supplier A legal for approval. The process of getting approval for changes made in sections that Supplier A purposefully left blank can easily add two weeks to the process.

Finally, an NDA is signed. It may take an additional 3-4 weeks to coordinate meetings and get the reports we are asking for. Fair enough, but at this point Supplier A will actually honor their commitment and work with the consultant. Not so for the new player to the stall game, Supplier B.

Supplier B is relatively new to stalling (in my experience) but I believe they are following some examples from Supplier A in how they run their “patterns”. The process of getting the supplier engaged will again take several weeks, and the NDA process several more. A notable difference here is that in most cases, the supplier will refuse any direct contact with the consultant, and instead traffic all information through the customer. Keep in mind the customer has typically hired a consultant because they don’t have the time. Supplier B’s goals here are clear – keeping the customer as the middle man will either slow down the process or frustrate the customer enough to simply give up. It also opens up the envelope for all types of misunderstanding that happen when two parties that need to work together have a “gatekeeper” passing the information back and forth.

The biggest difference between Supplier A and Supplier B, however, is what happens after the NDA is signed. As I mentioned, at this point Supplier A will normally engage. Not so with Supplier B - they will continue to stall to whatever extent they can. Information will still be passed through the middle man, and timeline commitments go unmet. The relationship, which becomes increasingly adversarial, only improves when elevated above the primary sales contact within Supplier B’s organization.

All the tactics used by Supplier A and Supplier B can be effective in holding off the inevitable – a true evaluation of their total value offering to the customer. However I have never seen stalling successfully end an engagement, which is the true goal of the approach.

Here are a few things for suppliers utilizing the stall strategy to keep in mind.

First, if you pride yourself on customer service, you need to find a more creative solution than stalling to use when dealing with consultants. In many cases I have seen the stall tactic put that supplier in an unfavorable light with the customer, and in the final analysis, loyalty is lost.

Second, you might not be seeing the forest for the trees. Suppliers can go through great lengths to protect existing business while ignoring the opportunity for growth that a consultant’s involvement brings. Sure, you might have 50% of the customers business, but if 50% more is available you have a lot to gain (I did that math in my head). Not only that, but a consultant typically has many other customers and similar projects that they can bring a supplier into, depending on how this first interaction goes.

Third, while the supplier was probably brought in by purchasing, administration, or some other department, the consultant is typically brought in at the C-Level. The consultant has visibility within the organization and political capital that many suppliers can’t compete with. Does it really make sense to piss them off?

Finally, just as not all suppliers are created equally, not all consultants are created equally. Before you take the stall approach do some research. Have other sales people within your organization worked with this consultant before? What has their experience been? This may be your opportunity to get the exposure you were looking for within the customer organization, and an advocate to improve the business relationship. Not all consultants’ value long term sustainability and good customer/supplier relationships, but some do. It may be a challenge, but in the long run you might have more to gain than you have to lose.

Fireworks or Workers Fired

That was the mentality of the mayor of Lowell, Massachusetts, who cancelled the city’s fireworks display as a result of an $18 million budget gap and 48 layoffs this year. The New York Times explained that the city’s show would have cost about $45,000, equivalent to one full-time job. “If we hadn’t cut off the fireworks, we would have had to lay off 49,” said Bernard Lynch, Lowell’s city manager. Lowell had a lot of company this year as many cities and communities struggled to find room for the boom in their budgets.

Shows that depended solely on money from sponsors were cancelled simply because sponsors pulled their support. The money was just not there. Numerous other cancellations were a matter of respect for workers that have been laid off. Many communities could not rationalize the need for fireworks while putting its residents out of work.

Many other cities and towns, however, still found ways to make their shows go on.
In many cases this summer when communities had cancelled their shows, residents or local sponsors stepped in to donate the money needed. Several cities always try to top last year’s display, but that was not possible for some this summer. Just having some sort of show was worth it. By cutting back the length of a show and having fireworks linger in the sky longer, residents could still enjoy the displays and probably not notice the difference in length. Neighborhood associations also took the initiative to provide their own displays if their cities did not.

Several communities who provided 4th of July events were preparing for bigger crowds as towns close by cancelled their events. One show in Seattle was cancelled because its sponsor said there was too much competition from neighboring towns, and the sponsor did not want to invest the money. The sponsor instead donated the money to a cause that will last more than twenty minutes or so – a local charity that feeds the hungry.

Julie Heckman, the executive director of the American Pyrotechnics Association (APA), the leading trade association of the fireworks industry, makes a good point in saying, “with travel and tourism on the decline due to the economy, ‘home town celebrations have never been more important to bring communities together, give them hope, and restore optimism.’”

I agree with Heckman for the most part. I went without fireworks this year not because of my town’s tight budget, but rather its bad weather. Sure, it was disappointing because fireworks displays are a great tradition, but there are worse things than going without a show on the 4th. A fireworks display is an expensive luxury. A huge chunk of the expense is allocated to the cost of police and firefighter support to ensure safety during a show. Two very unfortunate accidents over this year’s holiday, totaling five deaths, prove the importance of such safety measures.

Overall, the fireworks display industry has not really suffered this year. Sure, some adjustments were made to meet the needs of consumers, but the demand for fireworks still endures and always will. Even though some cities cancelled their shows, the loss has been somewhat balanced out by the increase in fireworks shows at events like MLB games. Also, it is possible that more backyard fireworks were purchased this year as a result of communities cancelling their shows. According to the APA, backyard fireworks have more than doubled since 2000. In 2007, usage was up to 238 million pounds compared to 2000’s 102 million pounds.

There’s a time to save and a time to spend, and decision makers are held responsible. They must always keep in mind that there is the chance that a spending decision could end up being a dud.

Payment Terms and Supply Chain Risk

I was somewhat surprised over the last few quarters as buyers went to their supply base, normally at the request of the Finance Department, to extend standard payment terms from 30 days to 60 days. I was even more surprised at how quickly that request changed from 60 to 90, and eventually 120. So what comes after 120? Frequently, a Chapter 11 filing. But Chapter 11 isn’t always an issue limited to the customer – in a lot of cases, the supplier that accepts these terms will be filing as well.

The problem is, in most industries extended payment terms are unsustainable, at (almost) any price. Add dried up credit markets into the equation, and what you are dealing with is a supply chain recipe for disaster. Of course there are industries where 120 day payment terms are acceptable, or even the norm, but in a standard distribution relationship this is not the case.

Suppliers that are hurting will take on business at extended terms – they need it on the books. But viable suppliers - companies that truly understand their cost of doing business and how cash flow risk affects their bottom line - won’t accept the change. They would rather walk away from business than take the hit to cash flow and profitability. Over the last few months, I have found that the way suppliers respond to these requests have been great indicators of their financial strength.

So what does this mean for your supply chain?

First off, if you need to extend terms with distributors, it probably means your company is having cash flow issues. But in the long run, extending terms is like putting a band-aid on a gaping wound. It’s not going to fix the core problem – your sales dried up and you don’t have the cash to pay the bills.

If it has to be done, there are several approaches you can take, but the worst scenario is when Finance issues a universal mandate – all suppliers must accept 90 day terms. The one size fits all approach is going to put suppliers on the defensive and some will drop you as a customer all together.

Figure out which suppliers have the shortest terms and the highest bottom line impact in terms of spend. Present the request to them as a temporary change – and be sure to put a time limit on it. If they are still reluctant, try to substitute extending terms by using a p-card. The supplier gets paid in a timely fashion and you get another 30 days of cash flow (if you set it up right).

If you are in the position of requesting extended terms and your supplier won’t agree to them (even with a substantial markup of price), there is still reason to be thankful – this supplier will probably still be around next year.

Changes in attitude, Changes In Latitude

Studies show that the job=career equation is no longer a sound proposition. Most workers will change jobs numerous times in their life; as often as every seven to ten years on the average. For procurement professionals, that rule of thumb will mean retraining, retooling and often relocation. For as long as most of us can remember, those facts meant new companies, new processes, new tools and often new home towns.

Add, new cultures, new countries and new continents to that list. Perhaps the best example of dynamic shifts that will create new jobs in foreign markets is the emergence of Tata motors of India. Tata is now marketing what they tout as the world’s most inexpensive car. At just over $2,000 dollars (100,000 rupees) the Tata Nano, comes in at about ¼ of the cost of our least expensive American model. Here’s the great news, Tata is developing a better equipped, safer model for US distribution. Or will that be US manufacture?

One can only guess. But here’s what we do know, as global markets expanded and stretched across borders, procurement teams followed suit. Thus, it’s reasonable to think that as lesser developed countries break into domestic manufacturing, those manufacturers will scramble to fill the “expertise” void in procurement. It’s also sensible to think that some of the disenfranchised of our domestic work force may be traveling to foreign lands for their next paycheck, or raise.

And who knows, maybe they’ll come back home when those foreign manufacturers open up shop in Anytown, USA.

Some Food for Thought

It’s better to be safe than sorry. That is at least the mindset of the Chairman of the U.S. House of Representatives Energy and Commerce Committee, Henry Waxman (D-California), and his sidekick, John Dingell (D-Michigan). These two individuals are currently at the forefront of The Food Safety Enhancement Act of 2009. The purpose of this legislation is to establish a more efficient food safety plan and enforce safety standards in all food production facilities. The efforts associated with the bill’s primary goal are increasing the amount of inspections performed at facilities, maintaining records for traceability of contaminated foods, focusing on the importation of safe foods, and enforcing regulation in the form of penalties if violations of standards occur.

In the Energy and Commerce Committee’s publication Energy and Commerce Leaders Release Food Safety Enhancement Act of 2009 Draft, Rep. Waxman stated, “The current state of our food safety system is dangerous not just for the American public, but also for the food industry itself. This bill recognizes that the hallmark of strong food safety legislation must be a shared responsibility for food safety oversight between FDA and industry. This legislation will go a long way toward restoring Americans' confidence in our food supply.”

After drafting the bill, to gain support of the Republicans, the Democrats agreed to a few changes. An annual registration fee for all food production facilities to be paid to the FDA was originally $1,000. This fee was cut in half and a cap was also established for those companies with over 350 locations to pay a maximum annual fee of $175,000. According to the Wall Street Journal, the bill is requiring 378,000 food facilities, including 223,000 overseas to pay the fee.

The FDA commissioner, Dr. Margaret Hamburg(er), insists that the fees will not be ample resources for the agency to carry out its new responsibilities. According to a NY Times article covering the same story, the bill would require more frequent inspections to be performed at least once every four years and for those facilities at high risk of being contaminated will be inspected every 18 months. This responsibility is where most of the FDA’s resources will be allocated.

Some argue that this legislation was weakened by negotiations. Another modification of the bill was to the requirement of an intensive record-keeping system. The FDA must first delve deeper and explore the best method for food manufacturers to maintain records and the costs and benefits related to the tedious process. There goes another chunk of the agency’s resources.

Almost two weeks ago, the House Energy and Commerce Committee approved the legislation and it will hopefully be a big step towards revamping the food industry’s image. Consumers have lost a great deal of confidence in our nation’s food system due to the amount of recent cases in the U.S. related to food-borne illnesses. The spread of salmonella in peanuts this past year has provided a greater push for this legislation.

The FDA currently has limited resources and by its actions, or should I say reactions, has shown that it has difficulty preventing the release of contaminated food to consumers. The main challenge the agency faces is trying to trace the contaminated food back to its source. Figuring out the root of the problem is a timely process. Hopefully, the detailed records of facilities will enable the FDA to transition itself from a reactive agency to a proactive one.

This bill would also provide more authority to the FDA. The agency will be able to order food recalls, require companies to follow all of the food safety standards, and hold companies responsible if a contaminated food product is linked back to them. Private laboratories will also be required to provide reports of any signs of bacteria or other causes of contaminated foods in facilities. With all this new power, the FDA should think about changing its name to the FPA (Food Police Agency).

Many companies are off the hook for now, as the bill does not address meat and poultry production facilities. These are overlooked by the U.S. Department of Agriculture. This exemption may not be for very long as there have been discussions of creating a single agency to consolidate all regulation in the food safety system. One agency in control of all food produced and distributed in the United States would be ideal. It’s similar to having one consolidated invoice for your telecommunications spend. It just makes sense.

No vote has been scheduled to take place for this bill yet, and similar talks have not yet been fully discussed in the Senate. Let’s hope this bill will enable the FDA to better detect a food-borne illness before it is released and accessible to consumers. Some individuals think the new requirements set forth by this legislation will not strengthen the food safety system but rather just create more burdensome, costly tasks for food producers. We must weigh our options – expensive recalls and hospitalized consumers or stronger regulation and restored confidence in the nation’s food supply chain. I think this move is a positive step towards a safer food supply chain. Our nation’s health is the main concern, and actions are needed to protect it. This bill is way overdue.

Space-Based Solar Power Plant – Wait…What?

I’ll bet you never thought you would hear the word “space” and “solar power” in the same context! You read it right folks, the May 2009 issue of Electrical Wholesaling mentioned that PG&E, California’s utility, has worked out a deal for the world’s first space-based solar power plant.

What sounds even more sci-fi is just how they plan to harvest solar power in space and be able to use it on earth. Solar panels in the earth’s orbit will convert power to radio frequency to transmit to Fresno County’s receiving station. Radio frequency! Then it will be converted to electricity and linked into PG&E’s grid. You can find more information on this project on PG&E’s blog site, http://www.next100.com/.

Back down on earth, this EW issue also noted Florida Power & Light plans to build the world’s largest solar photovoltaic power plant at the 17,000-acre city of Babcock Ranch, FL. The city will also integrate a smart grid system to aid residents and businesses in controlling their energy consumption. Maybe they will take notes on Spain’s solar power tower which “leads the world in grid-connected solar photovoltaic capacity” as said by the Renewable Energy Policy Network for the 21st Century (REN21).

2009 Supply & Demand Chain Executive 100

Yesterday, Supply and Demand Chain Executive magazine announced their eighth annual "Supply and Demand Chain Executive 100". This annual listing identifies the top innovative supply and demand chain vendors.

This year the magazine focused the criteria for its "100" feature on economic recovery. Source One (the sponsor of this blog) is proud to have been listed for the fourth consecutive year.

Read about it: Source One Awarded Supply & Demand Chain 100 in 2009.