That is when considering using them in a typical sourcing process. Earlier this year, I was skimming through a market research report which detailed the current market conditions for a certain commodity. A colleague of mine had read through the same report, pinpointed a piece of information, and questioned the source. An individual who participated in developing the report replied, “It’s a rule of thumb,” as if the rule was the most trusted source ever utilized. At the time, my colleague and I both thought, “Oh, okay, it’s a rule of thumb, so this information is useful.” Fortunately, in this case, the rule of thumb was in fact correct and we uncovered actual data to support it. The moral of this ever so entertaining story is this – for the most part, rules of thumb do not serve any useful purpose in a sourcing process. To support this claim, I did some research and uncovered some rules of thumb related to purchasing. What I found was what I expected – a few statements that serve as common sense that I agree with along with assumptions that are complete nonsense.
In my opinion, a rule of thumb can be just that, my opinion. I would also classify them as either a “tested” hypothesis, an assumption drawn from experience, an estimate based on a small sample, pure common sense, or total BS. I’ve collected some rules of thumb that are listed below. Some of these I support, others I completely disagree with. I share my initial reactions to each rule and for those that I find to be so far from the truth, I offer up an alternative “rule of sourcing.” As always, we welcome any comments that agree or disagree with the following statements and my own. To browse more rules of thumb, I invite you to visit the sites I have: RulesOfThumb.org and BusinessRulesOfThumb.com.
It is important to keep in mind that rules in general can always change and we see this often in the worlds of politics and sports. The same goes for the procurement world. The economy is constantly changing and we need to be collecting real-time market intelligence in order to track these changes. In my opinion, for most of the rules I have created below, it is difficult to see these ever changing, but then again, anything is possible.
- Rule of Thumb: Choosing a Bidder: Throw out the highest and lowest bids. Average the rest and choose the one closest to the average.
Response: Tell purchasing managers to follow this rule and they will laugh in your face. First off, where is the rule of thumb that says price is all that matters? Secondly, what happens if the average bid is higher than what you are currently paying?
Rule of Sourcing: Consider all bids you receive from suppliers as potential opportunities. Before you begin your comparison, make sure you have baselined your current spend correctly. For example, all current rebates received on certain items should be accounted for as some bids may not offer any type of rebate. Also, every bid should be considered as there is always the possibility that quality will be compromised for price.
- Rule of Thumb: Knowing When to Quit Researching: You're done with your research when those you interview urge you to interview people you've already interviewed.
Response: I can understand the logic behind this one, but not when it comes to sourcing a certain commodity. Many sourcing professionals tend to rely heavily on collecting historical market data at the start of a sourcing initiative. Although this market data is extremely important, it also delays and adds additional costs to the sourcing process. Companies need to be constantly collecting real-time market data from a variety of sources and not just at the start of a sourcing initiative. Often during the course of a sourcing initiative, new product developments, alternate technologies, and shifts in spend patterns present themselves. These changes need to be consistently monitored in order to adapt accordingly. A proper market assessment may present the need to revamp a sourcing strategy or change the vendors currently being targeted.
Rule of Sourcing: Never quit researching. It should be an ongoing effort. Collaborate with organizations that manage an e-sourcing tool. These tools build a price point database as well as a supplier database. The more intelligence you have during the sourcing process, the faster the path to savings.
- Rule of Thumb: Negotiating an Agreement: When negotiating, use a deadline. Ninety percent of the agreement will come in the last 10 percent of the time allotted.
Response: For the most part, this is true. As far as percentages go, I cannot attest to that.
- Rule of Thumb: How to Get a Negotiating Advantage: In any negotiation, the party with the most choices will have a big advantage.
Response: Choices = Leverage. Done deal.
- Rule of Thumb: Asking Questions: If you ask a negative question, you will get a negative answer.
Response: This one is just common sense. When performing reference checks on potential suppliers, you need to be careful in the wording of your questions. It is best to keep the interview as objective as possible so that you retrieve the most reliable information.
Don’t get me wrong, I do think that rules of thumb come in handy from time to time. The main purpose of this blog is not to bash these rules but instead shed some light on how to use them appropriately if at all. I am fully aware that I reference rules of thumb in general, but anyone who finds themselves in purchasing should never rely on these convenient standards. The most important thing to keep in mind is to always have the facts to back up a statement. If not, a sourcing process could get out of hand.