When it comes to running competitive events and soliciting suppliers, electronic sourcing (e-sourcing) tools can be a procurement professional’s best friend. With so many e-sourcing tools on the market, selecting the right tool can be a challenge and requires a firm definition of what your company is looking to get out of its e-sourcing tool. For example, there are a variety of tools on the market that range from relatively simple bid collection systems to fairly complex embedded solutions that extend far beyond the core sourcing process. As a general rule of thumb, the more features a tool has, the more costly the tool will be, and the more time and effort it will take to integrate the tool into your daily sourcing practices.
In today’s business world, there’s a desire to have your good suppliers stay in business. This desire often tempers how aggressive procurement professionals are when negotiating with certain suppliers.
Most suppliers could remain solvent even if they anointed your organization the one customer they no longer charge. But some suppliers’ viability could be threatened by offering their biggest customer an unprofitable price structure.
In procurement, you don’t always know if the deal you negotiate for might be fiscally unhealthy for your supplier. So, they question is: how hard should you push certain suppliers?
People are often surprised, and a little intimidated, when they learn that my research expertise is in negotiations. They remark, “but you are so personable … transparent… straightforward.” And I think, “It’s too bad that’s a surprise. . .”
This is probably because most people think of negotiators, and by extension negotiations, as showy and cut-throat, a game where one side wins and the other loses. So it’s not surprising that many people dread having to negotiate, whether for a car, a house, a new job or a business.
Ah, after summer breaks. It’s that glorious time when kids go back to school. Time for them to refocus on improving skills related to the “three R’s” of education: Reading, ‘Riting, and ‘Rithmetic.
It might also be a good time to pay attention to the reading, writing, and arithmetic involved in your procurement. Here are ideas for what you can do in each of these areas right now in this back-to-school season.
By 2020, millennials, or Generation Y, will make up over half of the global workforce. Attracting the best and brightest of this group is key to procurement’s future success, yet many of this generation still don’t know what procurement is or what it does, making it more challenging to bring those people in.
Procurement must begin to change its thinking if it wants this to change.
“Not many people go to university saying they want to be in procurement. I didn’t know anything about it when I was at university and I fell into it while I was looking for jobs. This is because of a lack of awareness,” says Martin Smith, senior manager at recruitment company Procurement Heads.
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One thing procurement has often struggled with is selling itself to the rest of the business. While the temptation is to focus on facts and figures that demonstrate value, perhaps it may be better to take a more creative approach.
Marketing teams have tended to use stories rather than statistics to help raise their profile and this technique is certainly something that procurement could adopt.
According to a study conducted by Washington University in St Louis, the human brain is more engaged when reading a story, as the human element of the situation helps people connect with the information more easily.
There is an art to storytelling and if procurement gets that right it could finally see itself gaining greater recognition from the rest of the business.
Have a beginning, middle and end
Like any good story, you need a beginning, a middle and an end. A story with no structure risks losing the audience and missing important information. The aim should be to demonstrate a problem procurement has solved or a situation where it has brought value to the business. Start with the problem (the beginning), then what the team did to overcome it (the middle) and finish with a positive outcome (the end).
Be customer focused
Whatever the story, it is essential to have the audience in mind.
For example, if you are presenting your story to a business function, like finance which is focused on numbers, then it is more appropriate for the angle of the story to centre on how procurement has impacted revenue or delivered savings. If it is marketing, the focus should be on service delivered. Begin with the customer in mind and let that shape the structure of your story.
Keep things simple and honest
There is no need to use overcomplicated language if it does not serve a purpose. Keep things simple and appropriate to the audience. Also, the best stories are the ones that are honest. Don’t be afraid to share the struggles or mistakes made; if anything these will further engage the reader.
Whether telling it to a stakeholder or internal staff member, the power of a good story is something procurement can leverage and use to prove its worth to the business.
Negotiations can be a fraught process. Both supplier and buyer tend to look for an advantage over the other. In truth, both should be looking to see if they can win together. To achieve this, procurement is increasingly looking towards different theories, most notably ‘Game theory’. In order to work, its principles need to be applied correctly.
Developed by John von Neumann and Oskar Morgenstern in the 1940s, game theory bases a predicted outcome on the interaction between two individuals’ decisions; the success of one individual’s chosen strategy or decision is dependent on the strategy or decision of the other individual and vice versa.
Although typically associated with political science and economics, there are occasions where the theory has been applied to successful negotiations within procurement. It demonstrates why two ‘rational’ individuals may not choose to cooperate effectively despite both knowing that to do so would be in their best interests.
Here are three tips for successful application of game theory to negotiations.
- Information and understanding
Game theory can help provide clarity to negotiations and ultimately help procurement achieve greater savings without the risk of alienating a supplier. How? It encourages procurement to better understand the thought process behind a supplier’s decision. Once a solution has been reached, the structure of game theory encourages procurement to look at the reasoning and then work backwards. Understanding a supplier’s mentality can inform future negotiations and potentially help build the relationship.
- Use common sense
It is not uncommon for negotiations to take the path where, although one particular outcome may be in both parties’ interests, one or both parties choose the outcome of greater self-interest. However, no one negotiation is the same and even though game theory suggests accepting a scenario that is mutually beneficial is the best course, that’s not to say that procurement should accept an offer that will bring less of an advantage to them or their business. Using common sense and applying this strategy only to appropriate situations will achieve better results.
- Prepare for the unknown
Even where the theory is applied, there is always an element of risk and uncertainty. Whether it be through market research or requests for information, proactively conducting research can help arm procurement with information useful in negotiations with stakeholders and suppliers.
If implemented well, game theory can add significant value to both the function and the business, according to TWS Partners’ Procurement redefined report, which states that the “innovative approach of applying game theoretical thinking to all aspects of procurement has a big impact – both in terms of results and with regards to the perception of the procurement function within an organisation”. After all, by shaping and influencing interactions in negotiations, game theory can generate an almost instant return on investment which procurement can share with the business to demonstrate the value it brings to the wider organisation.
Applying these theories to procurement’s strategies has the potential to be a game-changer to both the function and the business, but, importantly, to suppliers as well.
While the word innovation means different things to different organizations, companies are unanimous in agreement that, today, innovation needs to become the bedrock of the business – whether it’s a new piece of technology, a more efficient way of doing things, or simply a new approach that tackles an age-old problem.
Businesses are increasingly turning to suppliers to provide the tools to make new innovations a reality and, although several different functions interact with suppliers, it is procurement that is typically responsible for bringing them on board and integrating them into the business.
According to research from Procurement Leaders, on average, two-thirds of a company’s revenue are spent with suppliers. With such a significant proportion of cash being invested into suppliers, it makes sense to make the most of this investment by forming closer, more collaborative, working relationships with them. After all, if the end game is achieving innovation across every area of the business, the old adage ‘two heads are better than one’ means that collaboration between procurement and suppliers will help drive efficiencies and lead to better outcomes for all.
22% of CPOs intend to direct more resources towards supplier relationship management (SRM) in 2017, according to Procurement Leaders’ most recent Trend Report, highlighting the importance that CPOs are placing on improving the relationships their functions have with suppliers.
A fully engaged supply base is vital to a procurement function. It can help deliver new products that help grab market share from competitors, improve manufacturing processes or drive sustainable performance.Read More »