Quenching Your Company’s Thirst

on Thursday, July 31, 2008

In the heat of the summer, many people drive around with the AC cranked up and smile as they pass lemonade stands scattered around town with handmade signs and wide-eyed children standing beside them. The next time you spot one, don’t speed past those beckoning youngsters. They have become proactive with available resources, even if those resources are in the form of lemonade-flavored powder and water. Whether they possess an entrepreneurial spirit or have just simply found themselves bored or wanting some money, they are making the most out of what they have been given.

When it comes to companies, a little more effort is expected. “When life hands you lemons, make lemonade,” right? But what if you have been given a single lemon only? There won’t be enough lemonade to quench the company’s thirst. Therefore, companies, specifically Purchasing Professionals, may need to seek out solutions beyond the “lemon” they have been given, especially if higher expectations have been placed on them to generate savings with fewer resources. This is the challenge facing many companies given the current economic conditions. Companies will benefit once they become proactive and creative rather than reactive to a situation. And by creative, I don’t mean making pink lemonade. Other fruit or processes may create a more refreshing and tastier beverage and in a higher quantity. As discussed in the previous blog, “You just can’t benchmark plastics!”, the “can’t do” mindset is similar to a reactive one; and the “can do” is almost synonymous with a creative mindset.

Those companies that find themselves parched vary in size and structure. As fuel prices continue to soar, many companies who have outsourced their operations to China are now considering the option of moving production closer to end markets to avoid the burden of rising shipping costs. The newly selected distribution channels may be unable to handle such a large fluctuation in the marketplace. If so, these companies will have to keep on shippin’ rather than truckin’. Managing logistics is a difficult task, but it is an essential one, considering the price of fuel these days.

Some companies, specifically smaller ones, are taking a creative approach in order to avoid the burden of high fuel prices. Some firms have established programs for their workers to save money on gas. A compressed work week has been implemented by some firms, resulting in lower stress levels and improved lifestyles. To stress the urgency of the situation, it is rumored that some school districts are considering a four-day school week that could eventually be a possible solution for school districts to eliminate a portion of their transportation costs. Some more obvious solutions, such as car-pooling and allowing employees to work from home, have become increasingly popular. Companies are reaping more benefits than they had expected. Significant savings have been associated with these efforts. A four-day work week has also lowered electricity costs for operating office buildings.

One company found its bottom line threatened by costly reimbursements paid to its employees for visiting clients. The company is now offering its employees a generous $1500 toward the purchase or leasing of a car that is more fuel-efficient than the car they currently drive. Many companies do not want to lose their employees, and therefore, make every effort to keep them with the company while still trying to save money. Many job offers have been turned down due to the long commutes necessitated by such employments.

An article from The Wall Street Journal titled “Company Programs Help Workers Save on Gas” may provide you with solutions to your problem at hand. If you need more guidance in lowering costs, Procurement Service Providers may have the answer. These costs do not have to be exclusively associated with fuel. Equipped with market data, subject matter expertise and on-demand resources, service organizations can provide companies with something to sip on.
Share/Bookmark

You just can’t benchmark plastics!

on

“You just can’t benchmark plastics!” Eyes wide, fist shaking, veins throbbing and pugilistic posture all present, this purchasing manager insisted almost madly. He didn’t realize the irony of his insistence, his CEO present, that he couldn’t establish baseline pricing for the core material his company sold. The irony wasn’t lost on me and my CEO however. When the same manager defended his opinion based on his 27 years of “experience”, we later joked that he didn’t have 27 years of experience so much as he had repeated his first year 26 times.

Still, this procurement veteran is not alone in defending the indefensible to upper management. The expensive truth is that upper management often shares the very same view, particularly where core spends are concerned. It’s a disease born not of the absence of metrics for a purchase, but the fear of being measured by one’s performance. But let’s not be so quick to blame the purchasing manager. He has been well trained.

This manager had been, for all of his 27 years, well prepared with rhetoric by every polished salesperson to cross his threshold. Keep in mind, after all, that it’s the salesperson’s job not only to secure the order, but also to hold the profit margin. Is there any better way to protect price points than by making them a moving target? Consider that there are actually relatively few variables in this particular manager’s core purchase, among them: base material, thickness, length, width, and rigidity/flexibility. Of course one can drill down further on at least the base material and rigidity specifications, but essentially, those are the material specifications. In it essence, the price point for these purchases would appear easily measurable.

So where was the bogey? What made this purchase so exquisite and extraordinary that one could not accurately measure price points? A close examination reveals that the purchasing manager’s argument hinged solely on order quantity. He had a point. The economies of thru-put can create significant price dynamics. It stood to reason that 10 pieces of a ¼ inch thick, 3 x 5 sheet of clear Lexan, would have a significantly higher unit cost than 1,000, as would 1,000 versus 10,000. Only at the point of diminishing return should the price remain static regardless of quantity. His organization, he claimed, purchased so many variations of core materials that establishing a baseline would be an unconquerable administrative challenge.

Hysterics aside, we have to be compassionate for the bedraggled procurement manager. He’s been well trained by the enemy. His wild gesticulations and threatening posture were the result of the absence of the tools and training that would have empowered him not only to accurately measure pricing, but also to drive pricing, achieve economies of scale and pare out cost. Somewhere in his 27 years of management, he had not been introduced to the benefits of relational databases, and progressive supply chain management. Thus, he was at the pricing mercy of his supplier base. What was the end result? His employer’s company simply rode the pricing wave of the supply base and passed along the painful results to its increasingly price conscious customers.

That’s when the story becomes immediately less comical. The results of phrases such as you can’t benchmark (insert purchase here)” can be significant, not just for this year’s bottom line, but for customer retention and future growth. The risk of the “can’t do” mindset quickly evolves into the risk of being in business next year, or not.

Thus, effective procurement and supply chain management requires the “can do” mindset, and the investment in the tools, training and resources to measure, analyze, and manage spends for optimum value. There are no free lunches. Higher materials costs ultimately share space between reduced profits and the lap of the customer. Neither of which ensures long term viability. This manager’s insistence that a baseline price for a core spend could not be calculated was a disservice to both his employer and his employer’s customers. For the sake of long term survival, every organization owes itself the tools, the training and the resources to ensure they are not at the mercy of supplier rhetoric. For those organizations who haven’t yet made the investment, be advised that your competitors have.
Share/Bookmark

Do you have excess baggage?

on Wednesday, July 30, 2008

An AP article published on July 30, 2008 titled Delta To Double Baggage Fees peaked my attention in the high-season of summer vacations. Starting on Thursday, 7/31/08, ticket purchases for travel starting August 5, 2008 will have this increased fee to check a second bag on domestic flights. Mind you First Class, BusinessElite and Medallion customers (a.k.a. “preferred customers”) can still check up to three bags at NO CHARGE! This occurs all in the name of rising fuel costs. To top it all off, Delta is reviewing a decision made by several other carriers to impose a fee on a customer’s first bag checked.

Those that use to travel with numerous clothing options for each day of vacation for example, may now be faced with a tough decision when preparing for flight reservations. What about families which indulge in souvenirs as ritual when vacationing? Any carrier who is increasing fees for first, second and third bags checked will certainly be looked at more closely when travelers are planning their flights. This may combat rising fuel costs slightly for Delta but may ultimately lose patrons shopping for the better airline carrier baggage fees (i.e. Southwest does not charge for the first and second bag checked per customer). Carriers might want to take the time to perform a total cost of ownership analysis when making such changes to their policies. There may be a better solution than penalizing the travelers who do not pack light!
Share/Bookmark

Sprint Loses Early Termination Fee Case

on Tuesday, July 29, 2008

Sprint certainly is stumbling these days. They can't catch a break. Their stock has been falling, they're bleeding subscribers, and they're cutting their work force. A California judge rubbed a little more salt into the wounds. Judge Bonnie Sabraw of the Alameda County, California Superior Court ruled Sprint has to pay $73 million to old subscribers for early termination fees (ETFs) incurred.

Sprint's argument is ETFs subsidize a portion of the price of the phone. They also claim the amount collected in ETFs is much less than the amount of revenue lost as subscribers breach their service agreements and cancel service early. Consumer groups argue the fees are excessive and unfair. Recently, Verizon settled a similar case for $21 million.

Wireless providers have recently been charging ETFs on a sliding scale tied to the amount of time spent under contract. While this is more equitable, I’m glad to see Verizon settle their case and Sprint lose theirs.

If a wireless provider, or provider of any kind of service, can’t provide you with a reasonable level of service, why should you be financially forced to remain subjected to that inadequate level of service? That flies in the face of free markets. Wireless providers should be rewarded for good service, and allowed to be punished for bad service. Otherwise, where’s the incentive to provide quality service? I, like I’m sure everyone else with a cell phone, never read my entire contract with Verizon. Even if I did, I still probably wouldn’t understand it, as I don’t posses a law degree. I don’t know how they can use the “breach of contract” argument when them not providing an adequate level of service is technically a breach of contract as well. When you enter into a wireless contract, you have an expectation you’ll have reasonable service. If they can’t hold up their end, they’re not providing the service purchased.

Hopefully ETFs will eventually become a thing of the past. For the time being, this is a well-deserved win for wireless consumers.
Share/Bookmark

Financial Services – Untapped Savings

on

Many companies I visit focus their strategic sourcing efforts on direct materials, freight/logistics, and some of the obvious indirect spends (office supplies, copiers, etc.). Spend categories like Financial Services, which could include payroll processing, insurance, treasury services, collections, lockbox processing, and merchant accounts, among others, are typically the domain of the finance department. Any inquiries into the cost associated with these services is met with a response such as “the relationship is more important than the price” or “pricing is regulated by “X” and can’t be negotiated” or the more probable “I hear steel prices are going up, what are you doing about that?”.

A key misconception in this area is that the service of processing financial transactions is substantially different between suppliers. While customer service, reporting, risk assessment, and system integration will definitely distinguish a provider, back end processing is highly transactional, and is usually done by a limited amount of companies.

In this environment, most costs are fixed, and each additional transaction processed goes to a supplier’s bottom line. Supplier motivation (and thereby buyer leverage) is based on getting as many transactions through their system as possible, and the price per transaction is of little consequence. A limited knowledge of the industry and some competitive proposals could easily motivate an incumbent provider to reduce their price substantially. In my experience, I have seen prices reduced by 50-75%, with no change in provider or degradation of service.

Obviously expending political capital to get into these areas may not always make sense, but a strategic sourcing professional with a little bit of knowledge could provide substantial savings without upsetting the balance of power.

This week I found an article that gives a thorough background on merchant account processing. You can find the article here:

http://www.merchant-account-services.org/blog/new-article-merchant-accounts-101/

The site also has a blog and forum that allows users to exchange ideas and ask questions. If you’ve spent anytime researching credit card processors, you know there are a tremendous amount of terms designed to confuse buyers and keep margins high. With savings opportunities north of 50%, a little homework can go a long way.
Share/Bookmark

WiMax Will Bring Savings and Peace of Mind

on Monday, July 28, 2008

Wireless data is on its way, but it’s not here yet. Sure we have EVDO but if you have ever tried to get anything done online while commuting on a train, you know the service is crippled by packet loss, high latency, and is inherently plagued with connectivity hiccups due to its thin slice of spectrum. Third generation wireless is just enough to keep us content while on the road, nothing more. But WiMax, the next generation of wireless, means a lot more to business than conveniently snagging our email while on the road.

While we might not see smooth rollouts and fast dependable service for another year or two, it is important to begin considering how it will factor into your network. Most organizations are signing new network contracts every 36 months and reviewing them at least 12 months before signing a new contract. The timing is perfect to add WiMax to the mix for consideration in your next network rollout.

If your organization has many small, low priority locations, it might be feasible to use WiMax as the primary connection to your network. Assuming WiMax evolves into an available and dependable service, you no longer have to worry about a truck hitting a telephone pole and knocking you out of business, diversity cable and DSL cannot guarantee. You will also benefit from much less expensive pricing than ISDN, Frame Relay, or MPLS circuits and the bandwidth will likely far exceed your remote locations’ needs, better facilitating the video conferencing and training programs you have been considering but never had network capacity for. And WiMax offers true, widespread serviceability allowing you to achieve a level of standardization across all of your low priority remote locations that would be impossible with DSL or cable.

If all of your remote locations are critical, do not rule out WiMax yet. Consider it as a secondary connection should your primary circuit fail. You will gain all of the aforementioned benefits; inexpensive, last mile redundancy, and standardization across all sites, as well as the peace of mind that all of your sites will remain connected to your network guarding a major catastrophe in the area or hardware failure (which is a separate issue altogether).

As networks grow and applications require more bandwidth, it is important to look at all available infrastructure options. More and more companies are shifting from Frame Relay to MPLS, replacing ISDN lines with a broadband alternative, and are changing the way their networks are managed. Now WiMax will quickly become a staple in many networks. An expert like Source One can help you understand what is best for your organization and assist you in making these crucial decisions while coordinating between IT and purchasing, ensuring both technical and financial concerns are satisfied.

Start watching now so you are ready to take advantage of everything WiMax has to offer the next time you revise your network.
Share/Bookmark

Sourcer Beware: You could be Starting a War

on Friday, July 25, 2008

According to a recent article on the free press web publication “Toward Freedom”, Playstation manufacturer Sony Electronics is partially to blame for inciting a Congolese conflict that, at its height, involved eight nations and twenty five militias. While it may seem like a stretch, the logic is not altogether flawed.

A key component in manufacturing Sony’s Playstation, Playstation Two, and Playstation Three is the raw mineral coltan. The mineral, which is refined into tantalum to be used in many personal electronic devices, has become the Congo’s new blood diamond. As sales of the Playstation Two rose to record highs, so did the price of coltan. The war that resulted from conflicts over the black ore is now commonly referred to as the Playstation War.

Sony now claims that they have stopped sourcing their coltan from the Congo entirely. In the company’s defense, coltan changes hands many times before it is mined, refined, and delivered for use. Sometimes it can be quite difficult for a company to know exactly where their raw materials are coming from. Other times, however, companies just don’t care.

In today's gloabal marketplace there’s a fine line between due-diligence and neglect when it comes to avoiding nefarious suppliers. Oddly enough, the line seems to become thinner and thinner as a finished product becomes more and more lucrative. No matter how profitable it may seem to turn a blind eye to the origin of materials, identifying and avoiding potential procurement pitfalls will always pay dividends in the long run.
Share/Bookmark

The Paradox of Ownership

on Wednesday, July 23, 2008

Ownership is good, right? Sure it is. The more stuff you own, the more wealth you accumulate. Houses and investment portfolios should appreciate (hopefully), and your ownership in those assets makes you a wealthier individual. What about too much ownership? Ever think of that? Columbia law professor Michael Heller has. I recently heard him on American Public Media’s Marketplace talking about his new book, The Gridlock Economy.

The jest of his argument is too much ownership is bad for the economy. As the professor said in the interview, “When too many people own pieces of one thing, no one can use it. Usually, private ownership creates wealth, but too much ownership has the opposite effect; it creates gridlock. If too many owners control a single resource, cooperation breaks down, wealth disappears, everybody loses.” A comical example of this is a 1991 episode of “The Simpsons”, where Bart, Milhouse, and Martin split the cost of a comic book and fight over who gets to keep it, when, and for how long. As a result of their infighting, the comic book gets torn up by the Simpson’s dog and then gets struck by lightning.

Heller goes on to say how this is a dangerous phenomenon because it’s difficult to see. He gave a hypothetical example of a pharmaceutical company who comes up with a better drug to treat Alzheimer’s. However, the company is hampered in the process of creating the drug because they have to license dozens of patents, and any one of those patent holders can hamstring the process. The socially and economically responsible new development is now stuck as a result of ownership gridlock.

Let’s not look at this paradox as strictly commodity-based. What about ownership in corporate initiatives and projects? It applies here as well. We’ve all been told at one point or another to “take ownership” of a project, yet we tend not to look at it the same way as owning a car. Sometimes too many people have ownership of a project or process and, instead of economic gridlock, there’s political and process gridlock. This is something industrial and organizational psychologists try to address when consulting with clients. Streamlining a solid hierarchy within project teams can increase productivity, decrease project completion time, and get more use out of personnel. There is a huge loss of resources if a six month project takes seven months to complete due to too much ownership and the resulting infighting.

Now let’s apply this to your supply chain. Say you buy MRO products from five different suppliers. Those suppliers hold too much ownership in your business. As a result of them sharing your business five ways, your business is less valuable to them, and it creates more process for you for having to deal with multiple sales reps, multiple ordering procedures, multiple invoices, etc. Consolidating so fewer suppliers have ownership in your business benefits everyone by reducing gridlock.

Striving not only to reduce the amount of ownership, but also strengthen it where it should belong, will serve to streamline procurement and executive and administrative processes.
Share/Bookmark

School Supplies Costs are up, but Sales are Down

on

Several recent studies were published about back-to-school spending. According to an article at the South Bend Tribune, the national Retail Federation recently estimated that the average back-to-school supplies cost will increase from $563 in 2007 to $594 for 2008, however overall sales will decrease by an estimated 7%.

Deloitte recently conducted a study about back-to-school spending, and 71% of the respondents indicated that they will spend less this year. 90% of respondents said that they will change the way they shop for back-to-school supplies.

Retailers are reacting by offering more advertised discounts in their stores for back-to-school supplies. Expect to see more school supplies with big signs indicating discounted pricing in your local grocery markets, wholesaler clubs and discount stores.

As a purchasing agent, it may also be a good time for you to potentially stock up on some office supplies at a discounted rate. Just, keep tabs on your office supplies store rooms to see if your consumption mysteriously increases since consumers are “buying” less.
Share/Bookmark

ThomasNet.com Gets Facelift

on Monday, July 21, 2008

ThomasNet released a redesigned site this past weekend. Included in the facelift are a much better look and feel, better navigation, and more useful tools for supplier searches.

Users of the MyThomas section of the site (which is free) are now able to save their searches, compare suppliers side by side, and implement compound filtering criteria. ThomasNet has also expanded beyond their website by offering integration with iGoogle, a widget calculator (for Vista) as well as expansion into the Google Toolbar.

This has been a busy week for ThomasNet. Earlier last week, Source One announced further enhancements in the MyThomas Purchasing Tools (http://www.strategicsourceror.com/2008/07/supplier-integration-through-thomasnet.html).

To see the new site: ThomasNet
To learn about Purchasing Tools: Purchasing Tools by Source One
Share/Bookmark

I don’t want to drive 55

on Thursday, July 17, 2008

Senator John Warner of Virginia proposed earlier this month to reinstate a national speed limit with the hopes of reducing fuel consumption on a nationwide level. The suggestion implies that the nation should return to a national speed limit of 55mph.

Congress first instating the 55 mph speed limit in 1974, due to an energy shortage caused by the Arab oil embargo. At that time, studies showed that the country saved 2% of highway fuel consumption due to the national reduction in speed. That national speed limit was repealed in 1995, at a low price point of crude oil.

Proponents of the national speed limit argue that with 24 years of traffic growth, the amount of fuel we could currently save today would be significantly higher. However, we have had 24 years of significant engine development, road development, and aerodynamics development to our vehicles. I have been unable to identify any RECENT data that shows that 55mph is the way to go.

For better or worse, I drive a vehicle with a larger engine. I know that I get better gas mileage and lower RPMS driving closer to 65mph on PA highways than I do 55mph. My motorcycle’s sweet spot, in 6th gear is around 65 as well. How can the Energy Department properly conduct a study of this magnitude when we literally have thousands of different types of modern and older vehicles on the road today that needs to be studied?

How do you factor in that an average 1 hour drive now increases an additional 9 minutes, and on the return trip you are now on the highway alone for 18 minutes more per day. The congestion of everyone being on the road for longer each day can only increase the amount of fuel consumption.

Now, I am not suggestion that the idea of 55mph is completely wrong, but let individuals and corporations study it themselves. They know what types of vehicles they are driving and can accurately determine what works best for them. Everyone has heard of UPS’s reduction in left hand turns that lead to an estimated $600million in savings, so let them study what works best for their fleet, don’t mandate something across the board which may actually hurt private individuals (through lost wages from more time on the road to potential increases in fuel consumption).

To really get to the heart of the fuel consumption problem, we should not be looking at speed limits anyhow. More should be done to investigate congestion on non-highways with people sitting at traffic lights through multiple red lights, or through tollbooths that cause rapidly moving vehicles to sit in idling traffic for minutes on end to pay a $.50 toll (I am talking about you New Jersey).

I understand the need for toll roads, but let’s think of a way to increase the use of systems such as EZpass, and the removal of the traditional toll-booth. Or let’s get our traffic lights actually synchronized so you don’t sit at a light two or three times as it changes. The average 10 mile commute in my (suburban) area takes 30-40 minutes, the bulk of which is sitting at traffic lights. Adding an extra lane or studying the traffic patterns better would be the best way to reduce fuel consumption. Let me decide on my own what mile per hour speed is best for my vehicle the few times I can actually reach the speed limit.
Share/Bookmark

Supplier Integration through ThomasNet Purchasing Tools

on

This week, www.ThomasNet.com, in partnership with Source One, released further enhancements to the RFX Management portion of ThomasNet Purchasing Tools. The new enhancement provides tighter integration of the RFX Management tools provided by Source One and the supplier database of ThomasNet.

Corporate, government and military buyers rely on ThomasNet to search for and purchase everything from printed circuit boards to laboratory equipment to machinery from over 607,000 suppliers. With this latest release, the Purchasing Tools now provide the ability for those buyers to quickly identify and select preferred ThomasNet suppliers to their RFX event with just a few clicks of the mouse.

ThomasNet’s Purchasing Tools™, give the more than 3 million monthly users of www.ThomasNet.com free access to Request for Information/Proposal/Quote (RFx) and Reverse Auction Tools, making it possible for buyers that do not have purchasing software to significantly increase the speed and efficiency of their purchasing processes. The new integration of ThomasNet’s preferred suppliers list gives buyers instant access to thousands of potential new suppliers without spending countless hours identifying suppliers contact information.

The tools are available to buyers who register through the MyThomas section of the ThomasNet site, which is also free to all users.

Learn more about the free purchasing tools here.
Learn more about Source One’s Procurement Services here.
Share/Bookmark

Don’t Let Your Suppliers Write Your RFP!

on Friday, July 11, 2008

Sorry it has been a while since our last post, we are all a bit backlogged because of the recent holiday.

While catching up on the news on various blog sites, I noticed that Spend Matters is now promoting free RFP templates for procurement solutions in their sponsored links sections. Out of curiosity I reviewed the “Strategic Sourcing Management System RFP”. Basically what I found is a document that is the perfect example of one of the mistakes that procurements departments often make, letting the supplier write the RFP for you.

While I will not nit-pick this particular document (as it is a great form of marketing for those companies that sponsor it) I will draw attention to a few common things that relate to the previous post by Joe Payne.

From a “company information” standpoint, one thing we often see is that suppliers that play in the Fortune 500 space make a huge deal out of it. Therefore it is not uncommon for them to promote it and use that fact as a disqualifier for competitors that are not as heavily engaged in that space. For instance, this particular document has a section asking about how many Fortune 500 companies your bidding vendors have as customers. Though this may be meaningful to you if you are a Fortune 500, chances are you are not. Would it not be more important to find a supplier that does more business with companies more similar to your size and your culture? According to many supplier generated RFPs, the answer is no, because they expect that smaller companies will feel more important that they have solutions that bigger companies have.

Now let’s jump into the real heart of the problem, when you let suppliers actually write the specifications for the products or services that you are buying. For this example I will stay with the RFP for Strategic Sourcing Management, as it is easy for any of you to download, but we see these issues in almost every type of product or service that a company is purchasing.

The most common thing we see when a procurement person lets a supplier write the RFP for them, (which is the same as downloading one from a supplier’s “free” content) the supplier does a fantastic job of taking every single little feature, item, concept or technology of their product and formatting it so that it is a requirement for the buyer that they cannot live without. In the Strategic Sourcing RFP example, the functionality and technology sections of the document are nothing more than a feature list of Ariba’s software, crafted as statements that make buyers think they need (and will use) every last feature of the solution.
In this document there are tons of examples, such as:

· “Does the solution support HTML formatting” - HTML formatting is great, however 99+% of people have no clue how to do it, so should it really be part of your requirements list? – It also creates a whole new set of questions surrounding security, scripting, remote hosting, etc. So should it really be in this first pass RFP?

· “Does the solution allow Large Line Item events (minimum of 1,000 lots for line items) with at least 25 price or non-price attributes per line item?” -This is a good question if you are doing large line item events of over 1,000 lots with multiple price attributes. Problem is, you are probably not ever going to do that, so why does it need to be in your RFP.

· “Do you offer a hosted On Demand Environment? “ - This one is self explanatory, but the question procurement people need to ask themselves is if they want an on-demand environment or local hosting and “licensed software” don’t let the supplier tell you what is best, do your own research.

· “Classroom Training Available?” – If the answer is no, should they really have points knocked off from their evaluation? It is reasonable to assume that there are much more cost effective ways of delivering training nowadays. RFPs should be structured more to open dialog with the supplier, not to respond with yes/no answers.

I could keep listing examples here, but I think you get the point. But I also want to point out some other examples (non-tech product related) that we have seen in the past when suppliers generate RFPs for their customers:

· “Is the company ISO 9001 certified”­-Although this may apply to many buyer’s internal QC policies, it might be time to re-evaluate it as a requirement. Many companies have superior internal quality control systems and simply choose not to pay for auditing by ISO, so they should not necessarily be disqualified if they answered no to the question.

· “Type 316 SS Flange” – (or insert any other material/product here) We often encounter companies that have been purchasing a particular product from a particular vendor for many years. However, they only reason that they buy that product is because that is what the supplier originally specified for them years ago. So, buyers (and engineers) need to take the time to understand why they are buying a certain product. Maybe a different, lower cost material such as 303 or 304 would work? You will never know if your supplier is building all of your specifications for you.

· “Does your website support integration with your ERP system?” ­­- Though integration and punchouts with supplier sites can be great, does your company even use it? Will it ever? Does it add cost to the products you are buying?


I realize this post is getting a bit lengthy, and I could literally go on with 100 examples, but I need to wrap things up. The point is two fold:

· If you are a buyer looking for a new technology, product or supplier, be careful of the “free templates” that are readily available on the web, in most cases they are just a feature dump of “requirements” that whichever company created the document has in their product line. These templates do give you a great starting point so that you do not have to start a RFP from scratch, but go through each criteria very carefully and make sure it actually applies to your business, and make sure that your own requirements get in there, not just your own.

· If you are already buying from a particular supplier and do not have the specifications handy to look for alternates, look to build the specification in-house, or with outsourced assistance. Although you can and should reach out to your incumbent supplier for information, try to understand what it is you are buying, and why exactly you are buying it that way. If you let the supplier simply build the entire specification for you, you can severely limit the opportunities for cost savings from other supplies or from alternate products.

In both cases, one recommendation I have is to move away from the typical yes/no questions that you see in RFPs and move to more of an open dialog with your potential suppliers. Rather than asking dozens of questions, present a business problem or opportunity that you have and encourage the supplier to describe how they would resolve it. Building a massive structured RFP will stop suppliers from being able to come up with creative solutions to resolve your problems.
Share/Bookmark

RFP - A Tactical Solution?

on Wednesday, July 2, 2008

Strategic Sourcing professionals typically include the RFP as part of the process to effectively source materials and reduce prices. In my role I frequently review RFP documents, and have been on the receiving end of many RFP’s for strategic sourcing services. Often I find that the “one size fits all” approach to creating an RFP does not produce the best overall value or result.

For instance, I don’t know how many times I have read an RFP that asks “What are your company’s annual sales?” What does an answer to this question really tell a strategic sourcing professional? Depending on the scoring methodology, a company with $10 billion in sales that has not run a profit in 5 years and severe risk of closure could get a higher grade than a $1 billion dollar company with consistent 20% growth.

I’ve found the Yes or No approach of an RFP to have drawbacks as well. For instance, I recently saw an RFP that asked a series of Yes/No questions, including “Does your product include a Mandarin translation?” Due to the strict formatting instructions of the RFP, only Yes or No would be acceptable answers. In this case, No would be an automatic disqualification. This leaves no room for middle ground, such as “No, but the next release will include translation”.

The RFP approach should not be a substitute for understanding the market and engaging with suppliers. Often I find that upfront market research and preliminary supplier discussions will drive the questions I include in an RFP, and provide me with meaningful results I can use not only to qualify/disqualify suppliers, but to drive down pricing during the negotiation phase.

As a tactical solution, the RFP still provides backup to justify decisions made by the sourcing team, but it should never be a substitute for independent research and supplier interviews.
Share/Bookmark

Gamblers Anonymous

on

Now that you know how to identify potential points of failure, the probability of failure and the potential damage to your supply chain (see http://www.strategicsourceror.com/2008/06/how-much-are-you-betting-and-what-are.html), you can start to take action to mitigate your risk. Pull together a cross functional team of your colleagues and review your supply chain map and supplier risk scorecard. Identify as many potential points of failure as possible and rank them as to potential impact on your operations. Start to identify actions that can reduce the impact of failure or likelihood that the failure will occur and actions that can be taken if the failure does occur.

Technology can be used to provide an "early warning system". RFID tags can be used to track inventory globally. ERP systems can be configured to provide you with alerts when anticipated events don't occur within the parameters that are established. The alerts can be sent to your cell phone or email. This will allow you to identify a problem in real time give you the opportunity to deploy your risk mitigation strategy.

Adding resources to the supply chain is another method to reduce risk and prevent failure. Resource strategies may include redundant systems, storing additional inventory at key locations in the supply chain, adding people to monitor and respond to supply chain conditions and using two or more suppliers for critical supply chain products or services. The associated costs of the resources added should be compared to the probability and cost of the potential failure.

A third strategy is to increase communications with your suppliers and gain greater visibility into their supply chains. Frequent supplier risk evaluations and dynamic updating of their scorecard will help you to identify the suppliers that are "at risk" for failure. Develop a work out plan with these suppliers. If you don't see rapid improvement, look for alternative sources of supply. Swift, effective actions are needed or things will not get any better. Suppliers that perform poorly will continue to fail unless definitive actions are taken.

Once you have developed and implemented your risk mitigation strategy........ monitor, monitor, monitor. When you see a blip on your early warning system, realize that things will get worse unless you act quickly. After the disruption is averted or corrected, conduct a detailed analysis of the causes and the related impact. Make adjustments to your supply chain to reduce the likelihood that a similar disruption can happen again. Continuous improvements will ensure that your supply chain is robust and keep you from "betting the farm".
Share/Bookmark