Cutting costs is always good! Right?

Actually, no.

I can’t even believe we’re having this conversation, but have it, we must.

Dear Procurement Professional: Saving money is a good thing, yes. Tough economic times call for belt tightening, sure. But don’t tighten the ol’ belt so much you burst your pancreas. You get what I’m saying?

No, probably you don’t.

Let me try again.

If you focus on cost cutting only and fail to take into account the risks associated with what you are doing, then you are doomed to fail.

All it takes is one key member of your supply chain to topple over…and by topple over, I mean fail to perform, and you’ll learn just how expensive cost cutting can be.

Getting the best possible value for the deal is our job. Value has many components. A focus on price/cost to the exclusion of the rest of the business model is ridiculous.

But I’m surprised at how many sourcing professionals I talk to who measure their success (both personal and departmental) by cost savings only.

And this is apparently becoming a problem, given the strange global economic times we must endure.

Personally, I’m stunned to read this line from an article in Industry Week.

“Chief financial officers are shunning risk management in favor of cost cutting, and are failing to treat supply chain dangers seriously enough, according to a study…”

And then this: “The study finds that only 46% of financial chiefs see real integration between purchasing and finance processes, representing a major break between two departments that should be working closer than ever to combat the downturn…”

Something is broken here…no wonder we’re having such troubles. I think the ragingly great economic times of these early 2000’s made it easy for us to float above these underlying troubles. Oh no worry that we’re all acting in silos and not working towards a common good…we’re making TONS of money, right? So hey, risks? Who cares?

It’s time to care.

It’s also time for procurement professionals to be the people to lead the way. To push back. To say, “Yes, I can save you money…but…”

Also, we have to be business leaders, not just driven by the dollar. It’s easy to quantify dollars, but get smart, do your homework, benchmark the not-dollar-driven parts of the deal and show your leaders what total cost of ownership means! And opportunity costs. And process costs.

Learn to love the people who work in your risk department. They have some incredible evidence to help back up your case. And they can lend authority to your arguments.

Courage, procurement folks. Not everyone wants to hear the message, but I still continue to believe that Procurement will carry the day through these rough economic times. We just have to be a little bit smarter.

The Chicken or The Egg

Or, the obfuscation perpetrated by consulting companies.

So, the folks over at AT Kearney put together a study, ostensibly, “What Makes Procurement Leaders Different?“

Ok, good. What is the difference between a rock solid procurement organization and a weak group?

Here we go:

Leaders control more spend, and save more money.

: crickets chirping :

Oh really?

So…you are saying that…by controlling more of their company’s spend, that makes you a leader?

Or are you saying that once you are a leader, you then control more company’s spend?

Which is it? You can’t have it both ways!

There’s even a fancy graph! (because a consultant can’t write a report without one)

The article goes on to talk about collaboration, sustainability, risk management and other factors, but the chicken and egg situation is never really addressed. And I’m hung up on it.

This is another consultant driven article, sadly, that I’ll ignore. All these types of things are really sales and marketing pieces.

They say “leaders” manage 70% of a company’s spend. As a procurement manager, I’ll look at my own percentage, see that it’s well below 70%, freak out, and then hire AT Kearney at exorbitant rates to come tell me why I’m not a procurement leader.

And thus a free market was born. Fair enough.

But I’m not buying it, sorry. Cold call the next guy.

Image Management

The Procurement profession needs to hire a PR agent. I decided this after reading more and more industry articles.

For every “these economic times call for the steady hand of procurement” article I find, I am also seeing a lot of “those pencil pushers over there make us follow archaic processes and demand low cost at all costs!”

The latest in this line of thinking comes with the title:

Do Procurement And Supply Chain Folks Exist In The Same Universe?

The answer? Uh. Yes.

We’re like…cousins. We are part of the same family, share quite a bit of DNA, but in the end, are rather different breeds of cat.

Direct vs Indirect

Revenue generating vs Overhead

We both buy stuff, but we buy it differently. We both focus on buying the right thing at the right time for the right cost. What’s so hard about that?

And yet, the article’s author, Steve Banker, levels the usual charges against me and my peers:

“Driving your supply base to the brink of bankruptcy, or sometimes actually into bankruptcy, is poor risk management.”

Well…yes! I agree! I’d venture most of my fellow procurement folks would too.

“Their ultimate purpose is to demoralize supplier sales teams and reduce the supplier’s high-tech products to commodity status…”

Ok, I can’t lie…I’ve seen some procurement folks do this. Not as much lately, there is a renaissance going on in the world of procurement, but I still can’t fight this argument with too much ardor.

“A well-run supply chain, which includes your core suppliers, should have a certain degree of ‘win-win’ and team orientation associated with it.”

For many procurement guys, this philosophy is derided as simplistic and fundamentally un-businesslike.”

This is where the article got under my skin. While I’m certain that Mr. Banker’s opinion is fueled from experience, and thus rather valid, I think it takes a dim view of the business acumen and “total value” focus of most of the procurement people I know and work with.

I fundamentally believe that a supplier relationship (one beyond a few transactions a year) should be a “win-win” or…maybe a bit of a “little bit unhappy-little bit unhappy” (the best kind of contract, according to a lawyer friend, is the one where both sides leave the table a little bit unhappy).

But I also don’t think we should let a supplier, ANY supplier, off the hook.

A focus on “mustn’t upset the apple cart” at all costs is just as short sighted and rigid as “low price at all cost.”

I’m looking for some middle ground here.

And then the wrap up, oh Mr. Banker, the wrap up:

“…this difference in how supply chain and procurement people think is just too difficult to bridge.”

Really? I mean…really? Do you really mean that? Because it isn’t, actually.

Contact me offline, we’ll chat about the CPO of a Fortune 100 IT manufacturing company who has managed to work it out. You can too. I promise.

Kumbaya, brotha!

Final rant: You’re going to hear a lot more of it on these pages, but….. “Negotiation” is not a dirty word. It doesn’t mean what you do at the used car lot. It can be a “total value” not just price. Ok? We’ll talk…..

More on reverse auctions

Reverse auctions coming under fire in The London Times.

Found via ProcurementLeaders.com regarding the use of dynamic bidding by the National Health Service in the UK

Can reverse auctions put the elderly at risk?

It’s well documented here I’m no fan of reverse auctions, but I can’t help but agree with this conclusion by David Rae:

“My view is that a reverse auction is only as good as the person – or people – who is running it”

Not surprising

Or…only surprising that it took this long.

Found this link via the good folks over at Procurement Leaders.

Seems that Cypress Semiconductor, a decent sized company with very useful product, has made it a policy NOT to participate in reverse auctions.

None. Nope. Zip.

Reverse auctions, “dynamic bidding” or “e-sourcing” are all the buzz around the Procurement world.

Oh, procurement people are all a quiver about this new tool. Do a Google search for “procurement” and see how many links are about reverse auctions.

I may be curmudgeonly, but I actually cannot stand reverse auctions. I won’t do them and have not personally engaged in one in my procurement life.

To put it bluntly, I don’t believe in reverse auctions. They foster the “low cost at all costs” mentality that the Procurement world *seriously* needs to break out of.

I am a negotiator. Ok, so many people read the word “negotiator” and think THAT means low costs at all costs. It doesn’t. Not by a long shot. It means doing the best deal you can for The Company based on a variety of factors. Cost being one of them.

I have been able to close deals to the joy and satisfaction of my clients (and the supplier) that weren’t necessarily the lowest cost, but when you do the business case, you find it is a rockin’ deal.

This illustrates one main area where plenty of my fellow Procurement professionals fall down: They do not have good business sense.

You can run numbers all day long, squeeze dollars from every corner and bark about “total cost of ownership”, but there is far, far more to the “art of the deal” than that.

I talked about this a little in this post and have been thinking about it a lot.

Now is a great time for expansion of the value that procurement can add to an organization. Forcing reverse auction tools where they aren’t necessary won’t get you there. I find clients tend to be turned off by the reverse auction tool, and it makes them lose trust in procurement. This is bad.

I do believe reverse auction works for some commodities or some deals, but procurement tends to spread their tools and philosophy like peanut butter across all purchases. “If it worked for piece parts, it can work for professional services!”

There is a debate among procurement people that continues on. One side says, “buying a widget is buying a widget, it doesn’t matter…you use the same practices”. The other side says, “every commodity is different and how you approach the deal is different. The wise procurement person tailors their approach to what they are buying.”

You can guess which side is leaping about raving for the usage of e-sourcing for *everything*. (hint: the peanut butter people)

I’m actually glad to see a good-sized supplier put their foot down about the use of reverse auctions. To these suppliers, procurement may just say, “well fine, we won’t do business with you!”

But if enough valuable suppliers take the same stance, this isn’t realistic. Procurement is going to have to get smarter.

A lot smarter.