1. What Exactly Is Procurement? And What is Purchasing?

For his entire career my Father worked in the field of Procurement. But the job titles that he
had during his career alternatively included either the word Procurement or the word
Purchasing. I seem to recall that one of his business cards included both words.

When I was young I thought I had a somewhat clearer understanding of what my Dad’s
Purchasing job was. His job involved buying, negotiating, contracts, overseas travel,
sourcing, suppliers, parts, services, managing, supplier qualification, product qualification,
terms and conditions, quality issues and delivery problems.

But was that Procurement or was it Purchasing?

Procurement sounded like a somewhat loftier and more sophisticated word than Purchasing
but by the same token it also seemed like they were synonymous and interchangeable
terms.

What exactly is Procurement? And what is Purchasing?

To help us understand what is meant by these words let’s first consider the generally held
definitions.

Procurement
According to Procurify, “Procurement involves the process of selecting vendors,
establishing payment terms, strategic vetting, selection, the negotiation of contracts and
actual purchasing of goods. It is concerned with acquiring (procuring) all of the goods,
services, and work that is vital to an organization. Procurement is, essentially, the
overarching or umbrella term within which purchasing can be found.”
https://blog.procurify.com/2014/02/07/what-is-thedifference-between-procurement-and-
purchasing/

Supply Chain Opz defines Procurement as follows:

“Procurement refers to the participation in the development of requirements and their
specifications; managing value analysis activities; conducting supply market research;
managing supplier negotiations; conducting traditional buying activities;
administeringpurchase contracts; managing supplier quality; buying inbound
transportation” – from Purchasing and Materials Management Text and Cases by Donald
Dobler
https://www.supplychainopz.com/2013/06/what-isprocurement.html

And PurchasingInsight.com considers that “Procurement is the overarching function that

describes the activities and processes to acquire goods and services. Importantly, and
distinct from “purchasing”, procurement involves the activities involved in establishing
fundamental requirements, sourcing activities such as market research and vendor
evaluation and negotiation of contracts. It can also include the purchasing activities
required to order and receive goods.
http://purchasinginsight.com/resources/what-is/definitionof-procurement-procurement-vs-
purchasing/

Purchasing
Procurify considers that “Purchasing is a subset of procurement. Purchasing generally
refers simply to buying goods or services. Purchasing often includes receiving and payment
as well. Within the overarching Procure-To-Pay Cycle, the steps specifically related to
purchasing are:
Purchase Order Acknowledgement, Advance Shipment Notice, Goods Receipt, Invoice
Recording, 3 Way Match, Payment to Supplier”
https://blog.procurify.com/2014/02/07/what-is-thedifference-between-procurement-and-
purchasing/

Supply Chain Opz characterizes Purchasing as such:

“Purchasing refers to the process by which a company contracts with third parties to obtain
goods and services required to fulfill its business objectives in the most timely and cost-
effective manner”
https://www.supplychainopz.com/2013/06/what-isprocurement.html

Now ProcurementInsight.com states that “Purchasing refers to the process of ordering and
receiving goods and services. It is a subset of the wider procurement process. Generally,
purchasing refers to the process involved in ordering goods such as request, approval,
creation of a purchase order record (a Purchase Order or P.O.) and the receipting of goods.”
http://purchasinginsight.com/resources/what-is/definitionof-procurement-procurement-vs-
purchasing/

Procurement versus Purchasing

In general the distinction made between Procurement andPurchasing can be somewhat
subjective and certainly situational.

Many make the point that they are interchangeable terms and can be used one for the other.
To them it is merely a matter of semantics.

This is often the case for smaller companies. There are not enough people, or the
organization is not large enough, to make any distinction. Whoever works in Procurement,
or Purchasing, has to do anything and everything necessary to get the job done. In a small
company employees must be jacks-of-all-trades.

Still others tend to define Procurement as being indicative of more strategic planning and
longer term activities. Conversely they view Purchasing as being illustrative of more day to
day, transactional activities. This seems to be the prevailing view when you consider the
definitions that are often used.
The Purchasing function executes the activities enabled by the completion of the
Procurement activities. When Procurement negotiates a contract for instance they will
have first found a supplier, developed that relationship, audited and qualified the supplier,
conducted a quotation process, then awarded the business to that supplier. Purchasing can
then place Purchase Orders against thatcontract, track vendor performance, and deal with
daily issues related to delivery, quality, and anything else that comes up.

In an extremely large Corporation it is likely that the division of responsibilities will follow
the delineation made above as to what is one or the other. Because there are so many
people involved the division of labour will fall along the lines of what are considered more
strategic and more transactional activities. And because of the amount of work involved in
a large company there is room for people who have specialized skills to be employed and
developed.

We should also ponder the experiences of those within different industries, different
cultures, and different parts of the world. These considerations may similarly cause both
terms to be considered interchangeable or distinct. If you are involved in Procurement
consulting for instance then you are covering all aspects of Procurement and Purchasing.

The Impact of Technology – A Definition Dilemma?

Not only can the size of a company, or geography, or culture all have a bearing on the
meaning of one term or the other, but a big factor to be considered is the impact of
technology.

Advances in Artificial Intelligence, Advanced Analytics, Bot technology and End to End
Digital Supply Chain Connectivity will have a profound impact on this business area. First
of all many of these advancements are meant to optimize and automate the transactional
part of the process, often associated with Purchasing. Purchase order management and
performance tracking are all within the scope of these technologies.

But defining and deploying the application of these technologies to transactional

Purchasing activities requires strategic thinking and strategic planning within Purchasing.
Purchasing must perform strategic activities in order to adopt technology to the
advancement of Purchasing transactional activities.
Strict adherence to definitions of Procurement being strategic and Purchasing being
transactional is inconsistent with the reality that future deployment of technology requires
Purchasing to act strategically as well.
Conclusion

My Dad was clearly involved in all activities associated with Procurement and with
Purchasing, and in both strategic and transactional activities. He was truly great at his job
and like so many people who work in this area he loved what he did. At the end of the day I
don’t think he worried about what itwas called.
For those who are in the field I think it is important to get as broad experience as you can.
Take the time to do “Purchasing” jobs. Get involved in “Procurement” jobs. It is an
exciting field and the future possibilities for growth, development, networking,
international exposure, and technology are fantastic!

2. Hey Procurement! It’s Time to SELL!

The Procurement, or Purchasing, function is considered by many to be a necessary but non-
strategic part of any organization. But there is a profoundly significant Procurement value
chain.

Study after study shows that this is a common view held amongst Executives and peer
functions alike.

This is not to say that they believe Procurement doesn’t play a role, but rather that they
don’t view Procurement as playing a critical role beyond cutting costs and finding
suppliers.

Well here’s some news. Procurement is strategic!

Instead of waiting for others to realize that now is the time for Procurement professionals to
make their value and contribution known.
Now is the time for Procurement to SELL!

As discussed in our article What is Procurement’s Place in the Value Chain? Procurement
was historically considered acsecondary activity within an organization. It’s role was to
acquire goods and/or services as designated and required by more primary functions within
the organization.

This has been a long standing view of Procurement and in many cases is how many still
view Procurement today.
People think of Procurement (inclusive of Purchasing) as the group that will find suppliers
(often with the sole objective of cutting costs), negotiate deals, place purchase orders, and
deal with supplier issues. And invariably they think of Procurement as the group to go to in
order to squeeze more costs out of suppliers over and over again.
This is reflected in our Procurement Report Card article in which “83% of executives
surveyed say that their Procurement function is not entirely strategic –
meaning they don’t think it’s crucial to business leadership, and that it isn’t a key input
when making high-level strategic decisions.”
Ouch!

The survey quoted in this article continues to state that “only 28% of executives surveyed
viewed Procurement as a core aspect of their strategy. More than half (51%) of the
executives do not consider their Procurement operating models to be effective as they stand
today.”
Is this perception of Procurement because this is how people have always felt about
Procurement, because this is how Procurement people actually behave, or some
combination of both?
For those who view Procurement as just the group that conducts RFQs (Requests for
Quotation), places transactional purchase orders to buy things that others have directed, and
negotiates mundane contracts then Procurement is seen as a minor part of an organization.
But for those who see, and experience,
Procurement as a primary function with critical insights into marketplace and competitive
dynamics, the power to dramatically influence the financial and operating performance of a
company, the ability to define and drive environmental, governmental and industry
practices, and the intelligence to strategically manage complex global Supply Chain
networks, then Procurement is a powerful force to be reckoned with.

The Procurement Value Chain Continuum

If your Procurement organization is doing so much more than just getting the lowest cost
and processing purchase orders if no one else knows about all of this extra value then it
doesn’t much matter.
While Procurement professionals are experts at BUYING things, they now need to focus
on SELLING, or rather marketing, their own contributions, capabilities and value!
Now I would never advocate selling something that isn’t real. Selling vapourware is
unethical and inappropriate. So if your Procurement team is truly a transactional based
organization today then your focus needs to be on getting it out of the dark ages and into
modern times.
The starting point is defining where you Procurement team is on the Procurement Value
Chain continuum.
Procurement 101

At this basic level your team performs the traditional Procurement functions of finding
suppliers, getting quotes, negotiating prices and terms, putting contracts in place, placing
purchase orders, and managing day to day issues. It tends to be a more reactive
organization focussed on managing day to day tasks and fires.
Advanced Procurement

In addition to Procurement 101 your organization has more meaningful programs in place.
These may include a Supplier relationship management program, benchmarking, employee
training and development programs, forecasting and planning capabilities, spend
aggregation and controls, process improvement activities, cash cycle measurement and
management efforts, and so on.
Strategic Procurement

A Strategic Procurement organization does everything stated above and much more. They
have a wealth of intelligence related to what is going on in the marketplace, with suppliers
and competitors, and in the economy in general. They have an end to end view of the
Supply Chain. And they are intimately aware of, and shaping, the strategic direction of the
company.
Strategic Procurement is focussed on how to drive innovation and unique capabilities to
meet end Customer and stakeholder needs and requirements. They are able to deploy
advanced analytics and Big Data, using the collective information set that only
Procurement has, and use it to inform and advance the Executive level discussion about
company direction and strategy.
Procurement has unique access to the world beyond your organization more than any other
part of your company.

Procurement reaches companies and industries all over the world. It has access to, and the
ability to manage, the resources of all of these external companies to meet both tactical and
strategic needs. Procurement has command and control.
In short, Strategic Procurement is focussed on providing a higher level of value.

 101: buying
Advance: plan, forecast, long – term
Strategic: buying, plan, forecast, long – term, partnership, technology, innovation
(Manufacturing, Retail)

Procurement bảo gồm Sourcing + purchasing + , plan, forecast, long – term, partnership,
technology, innovation
SM _ 0 _....

Procurement gắn bó mật thiết với vận hành (operational)

Từ khóa: Big Data, Data Analysis
Perceptions Prevail

Any Procurement organization needs to honestly, and objectively, determine where they lie
on the Procurement Value Chain Continuum outlined above. They need to do this from two
perspectives:
1. How does the Procurement organization view itself on the Procurement Value
Chain Continuum?
2. How does the rest of the organization view Procurement on the Procurement Value
Chain Continuum?
These two distinctions are critical. Your Procurement team may be doing a lot of things in
the “Advanced Procurement” and “Strategic Procurement” stages for instance even though
these are not visible, or understood, outside of Procurement.
If your Procurement team is truly only at the “Procurement

101” level then you need to develop a strategy to advance your organization. That is, and
should be, your primary focus for the purposes of our discussion here.
However if your Procurement team is in the Advanced and/or Strategic phases but
Executives and other functions view Procurement as only providing value at the
“Procurement 101” level then there is clearly a disconnect between their perception and
your reality.
The saying “Perception is Reality” is true.

So your next step is to change that perception. You need to SELL what Procurement is
actually doing.
Procurement People It’s Time to Sell Yourselves!

I know that Procurement people are typically trained to Buy, and to do it well. But in
addition to that skill Procurement needs to Sell. Procurement must sell itself.
Buying and Selling skills are not altogether different. They both involve two parties sitting
across from each other trying to effect the exchange of goods and/or services.
A truly intelligent Procurement professional understands the psyche of the salesperson,
what makes them tick, and how they need to be managed. As such the Procurement
professional is able to put themselves in the shoes of the

salesperson and leverage that perspective in how they do their jobs.

The same skill applies to selling Procurement. It is both sales and marketing. Procurement
must be great at communicating and marketing the value that the organization brings
beyond the traditional transactional view of Procurement.
As stated in Time to Look into the Future of Procurement “Procurement professionals need
to get savvy. Their professional credentials will be measured by their ability to influence,
persuade, and provide vision. Their mindset must be strategic, global, collaborative, and,
above all, commercial.”

“Today procurement professionals are under considerable pressure to deliver value-adding

business performance, and it is no longer enough to build a supply management capability
that is efficient, demand-driven, or even transparent. Procurement must offer the
organisation something that is value adding”
How to SELL Procurement
Like most anything else Selling Procurement requires a deliberate Communications and
Marketing strategy. This strategy needs to include elements of:

 Relationship development with all functions/stakeholders

 Regular and structured Communications outside of Procurement
 Visible alignment with company vision Proactivity
 Leading and not just doing what you are told Demonstrating unique value by
analyzing, interpreting, and presenting competitive/market information and
dynamics which no one sees better than Procurement Massive, centralized
information control at Procurement’s fingertips
 Plans to drive revenue growth, innovation and unique capabilities
 Contributing value meaningful to customer and stakeholders
  A plan to stop being viewed as just a cost reduction organization
 Elements of leading initiatives such as environmental controls, standards,
compliance, policies, practices and sustainability

In 7 Trending Business Practices Disrupting Procurement we see a new focus on

“Responsible Sourcing, Total Value Ownership (TVO), Request for Solution (RFS),
Supplier Enabled Innovation (SEI), the Circular Economy, Digitalization and Young
Talent.”

Conclusion

It all starts with leadership. This begins with the CPO (or your head of Supply Chain or
Procurement).
In The Future of the Chief Procurement Officer … Is Already Here “CPOs must be
technologically informed and savvy, building a team that is digitally aware and
transformative, and they must be great communicators, at all levels.”
As we consider how to increase the value, and view, of Procurement, in Could the CPO be
Replaced by the Chief Value Officer? we compare the differences between the current role
of a CPO versus the potential role of a Chief Value Officer.
It may seem basic, but just changing a title from Chief Procurement Officer to Chief Value
Officer could be a huge signal that Procurement has evolved from that simple transactional
view of the past.
In summary Procurement must:

1. Lay out a platform for creating more value

2. Create and deliver that value
3. Market and Sell the greater value and contribution that the Procurement team is
providing
Keep Buying Procurement!

But now it’s time to start Selling!

3. Supplier Collaboration is a Win-Win Strategy!

Suppliers are an intrinsic part of the Supply Chain. It does not matter what business you are
in, what products you make, distribute and sell, or what part of the world you are in. And it
doesn’t matter where in the Supply Chain you are. You can not accomplish anything
without collaboration with your Suppliers.
Yet I have seen, like many of you, Suppliers treated in many different ways. No matter
what the circumstances are poor treatment of Suppliers is never appropriate. Given that
Customers fundamentally need their Suppliers to be successful why do people treat them
badly? And how do we ensure there is a healthy and productive relationship between
Suppliers and Customers?
Working together with your Suppliers is always a formula for success!

Supplier Collaboration
Earlier in my career I was responsible for running the Manufacturing and Supply Chain
operations for a particular operating Division. The Division was struggling financially (as
well as operationally). The management team was brainstorming actions we could take to
improve our financial performance.

When it came to discussing the cost of materials the conversation began with someone
suggesting we just beat up our Suppliers to get them to lower their costs. Someone else
suggested that there was a Facilitator we could work with who was in the business of
getting Customers and Suppliers to work together. This collaboration involved finding
ways to constructively lower costs (or improve service or whatever the objective was). We
chose the latter approach.

That sounded like a more reasoned approach so we engaged the Facilitator. We then
proceeded with planning a day long Supplier Collaboration event with attendance from our
Top 25 Suppliers.
We started the event by updating everyone on the current state of the business, explaining
our objectives and defining the problem and challenge. Specifically we told them about the
amount of improvement we needed. We spent a lot of time here. It was not just one-way
communication. We encouraged a dialogue. When people understand your problems and
your objectives you equip them with the information they need to figure out how they can
help you.

Later we had the Suppliers do some brainstorming activity based on what we discussed.
Then we had them articulate what their ideas were in front of the entire group. The intent
was to help promote some out-of-the-box thinking with everyone else. There was some
apparent awkwardness as there were Suppliers in the room who competed with each other.
You could easily tell that some were being cautious. That was ok because the real work
would begin afterward.
By the end of the day we had a list of a few dozen ideas on where Suppliers could help us
in our objectives. In some cases the Suppliers could make these changes unilaterally. In
some cases we would need to relax our specifications or expectations. And in still more
cases we would need to work alongside the Suppliers to make the necessary changes
together.
All of this would require ongoing work over the coming days, weeks and months.
The Supplier Perspective

From a Supplier perspective the feedback was consistent. They had never before been
asked to participate with us in such a manner. The typical interaction before was over a
negotiating table.
Depending on who from our side was negotiating it could be a friendly, professional
conversation or on the other extreme it could be someone pounding on the table demanding
cost reductions.
This new approach was more inclusive and constructive. First of all the communication and
information sharing was unprecedented. We made the Suppliers feel like they were a part
of our team and not just a third-party selling us goods at arm’s length. With no hidden
agenda we proceeded to share our circumstance with all of the Suppliers. As a result they
embraced this information and became immediately invested in helping us.
By openly sharing our challenges we invited them into our problems as an equal player, not
just as a third-party. This had the effect of making them want to help us. The negotiating
table approach merely served to created a divide (the table) between us. This new
collaborative approach got them thinking as well.

Collaboration also enabled us to transcend the historically transactional nature of our

Supplier relationships. Before we would tell Suppliers what we expected with respect to
cost reductions and other terms. We may have also provided these expectations to their
competitors. They would all respond. And based on that we would award business.
In the Collaborative model we made it clear that we still expected Suppliers to be
competitive, and to demonstrate this. We could not afford for them not to be competitive.
But by inviting them in to our inner circle through the Collaboration effort we created the
opportunity to deliver results far beyond what could ever be achieved across a negotiating
table.

Implicit just in the invitation to participate itself, let alone the entire Collaboration project,
was the message that we were extending our hand to our Suppliers. We truly did want to
build a level of relationship and trust which would enable our mutual success.

Conclusion
Within a few weeks we started to see improvements in costs from our Suppliers. Again
some of this came through improvements made solely by the Supplier, perhaps with us
relaxing some of our expectations or specifications. In other cases we worked hand in hand
with our Suppliers as we needed to test out the changes in the products we made. Once
approved and qualified we were able to incorporate new parts which were much more
effective in form, fit, function and cost.

While we were able to readily track the tangible improvements we made along with our
Suppliers it was most rewarding to see a change in the nature of our Supplier relationships.
The Collaboration effort had become a defining moment for us, beyond which our Supplier
relationships made step-function improvements.

We awarded and recognized our Suppliers for their contributions. And relationships
continued to build and strengthen for years to come. None of that would have been
accomplished with a traditional negotiating approach.

Collaboration is a winning strategy for you and for your Suppliers.

 4. When the Elephant in the Room is Your Supplier!
Procurement (and Purchasing) Job Interview Questions & Answers

Unless your company is amongst the very largest companies in the world then chances are
your Procurement team will, at some point, be dealing with Suppliers that are larger than
your company. They are the Elephant in the room.
In a function such as Procurement where negotiating is a central part of the role, leverage is
a critical element in those negotiations. And in many cases size translates to leverage.
So how do you negotiate with a Supplier that is larger than your company and has greater
perceived leverage?
How do you negotiate when your Supplier is the Elephant in the room?
What Makes Your Supplier An Elephant?

Regardless of what industry you are in or where you are in the world you likely have
Suppliers that are larger than your

company. By “large” we primarily mean revenue but it could also include market
capitalization, geographic reach, cash flow, growth rate or employee base.
It is also worth noting that the unique nature of the products (or services) that your Supplier
provides could also make them “large”. They are the Elephant in the room. For instance if
they provide custom components or materials that only they are able to provide then you
have no other choice but to use that Supplier. They are your sole source and you have no
alternative but to buy from that Supplier.
If the materials or commodities that your Supplier provides are on allocation due to some
constraint in raw materials, capacity, or some other reason, then your Supplier has the
upper hand. It’s a simple matter of supply and demand. If demand exceeds supply then
your Supplier is in a position to decide who they want to sell their products to.
In the Outsourcing industry it is also notable that while you are buying goods from these
Suppliers it is your Customer who made the sourcing selection decision. If you are an
Outsourcing manufacturing or procurement operation you experience this all of the time.
And because your Customer made the sourcing decision your Supplier often recognizes
your Customer and not your company. This makes them much more difficult to deal with
when it comes to negotiations.
And let’s not forget Ego. I’ve seen many Suppliers grow rapidly and enjoy wild success.
Their company, brand, and products are hot and in high demand. But in far too many cases
that translates to those companies believing they are the greatest thing since sliced bread.
Their perceived superiority (which is usually not long lived) informs their approach to
negotiating with customers.

How Do You Eat An Elephant? One Bite At A Time!

Given that you will have to deal with these Elephant in the room Suppliers at some point it
is important to recognize them and develop strategies and techniques for handling them and
ensuring that your negotiations are successful.
Without a strategy or plan of attack these Suppliers will most certainly trample over you
and everything else in their path, believing that they will get their way without any
problems.

Here are some of the techniques we believe are appropriate for dealing with Elephant
Suppliers:

Build the Relationship!

Having a strong, positive relationship is absolutely essential. A great relationship will get
your through, and over, a lot of problems. A poor relationship will only aggravate and
deepen any problems.
People like doing business with people they know.

Spending the time to meet with Suppliers after work hours for dinner or to meet at the bar,
for instance, can be a great chance to build personal, but professional, relationships. It can
give you, and the Supplier, a chance to know each other and establish a bond. People like
doing business with people they know. While it can be a large investment of your time it
will usually pay off in the long run.
This may also necessitate developing relationships with people other than the
Sales/Account folks that your Supplier is putting in front of you. If you are finding these
people unreasonable then developing relationships with others higher up the line in your
Supplier’s organization may lead you to people who are more reasonable (or not) or with a
more positive influence.

Don’t Be Intimidated

Depending on who you are dealing with Suppliers will sense that any sign of weakness on
your part further strengthens

their position. Especially when the Elephant in the room is your supplier.
If you are lacking in confidence, being unduly deferential, or showing signs of nervousness
or poor body language your Suppliers will seize on that.
Just because the logo on your Supplier’s business card may be more famous or more
popular than your company’s logo does not mean that they are smarter.
Your expertise and experience are what will carry the day. Be self assured and be
confident.

Be Prepared

Do your homework in every respect before entering negotiations with an Elephant

Supplier.
You should understand every aspect of your requirements, your Supplier’s situation,
benchmarks, industry trends, and more. You should have detailed analyses on hand
whether that be for pricing, product characteristics, or terms and conditions.
This should also include learning as much as possible about the Supplier, their competitors,
their business pressures, internal Supplier organization lines and relationships.

Your Supplier contacts also have their own objectives. If you can understand what those
objectives are you may be able to create a way to help your Suppliers achieve their
objectives, which will in turn help you.

Focus on Facts, Performance and Objectivity

When dealing with any Supplier, but certainly an Elephant Supplier, it is always best to be
objective and focus on facts and performance in any conversation.
Staying away from subjective blustering and bravado on behalf of the Elephant supplier
can be accomplished by focusing on irrefutable facts.
What is their delivery performance? What is their product quality? How are they doing
relative to any competitors or benchmarks?
Presenting that data/information to a Supplier can help them see and understand facts, and
ideally disarm them from their perceived preeminent position. This is particularly powerful
if their operating performance is not as stellar as their ego would have them believe.
Focus on facts! Be objective!

Look for Alternatives!

In my experience these Elephant Suppliers come and go. Any company that is on top today
will be struggling tomorrow, and vice versa. It is only a matter of time.
But in the interim it is critical to continually look for alternatives. Even if your Supplier is
sole sourced there may come a time when some other company has developed materials
that can be used as substitutes. There is almost always someone else coming around the
corner.
This is consistent with being prepared. And if you do have your ear to the ground as to
alternatives your ability to properly inform your Suppliers of this can possible help
strengthen your relationship, and trust, with them. But if they don’t accept your help they
are undermining their position in the future.
Elephant in the Room Conclusion

You are likely to need to deal with Elephant Suppliers, that is Suppliers that are larger than
your company, at some point if you are in Procurement. It is inevitable.
It is actually a tremendous opportunity for Procurement professionals. When your
Procurement team has the upper hand with Suppliers the job is somewhat easier and
doesn’t stretch your skills.
But when you are dealing with Suppliers who have greater
leverage then it is a real test of your ability to use your expertise and techniques to create
win-win outcomes with these larger suppliers.

5. Commodity (or Category) Management – What is your Buying Strategy?

What’s the Difference Between Commodity Management and Category Management?

The cost of the raw materials and components is often the single largest expense. Despite
the magnitude of this cost however there is a wide range of focus put on managing this
expenditure from proactive and strategic to reactive and tactical. This is all managed by
either Commodity Management or Category Management.
In some cases there is a great level of planning applied before a single purchase order is
placed. In other cases buying decisions are made subjectively and with very little focus.
Further the experience in those buying these goods can vary significantly as well.
Supply Chain is about much more than just negotiating lower materials costs. A well
constructed Procurement Strategy will raise the value of the Supply Chain to your
company.

How do you manage your materials spend? Are you executing a Buying Strategy or are you
just blindly placing purchase orders ?
What is “Commodity Management”?
First I’d like to establish some clarity around the title for this blog post in which we use the
phrase “Commodity Management”. Commodity Management is meant to encompass all of
the strategic activities and responsibilities that go in to the process of buying raw materials.
“Commodity Management” may also be referred to as Category Management, Strategic
Procurement or Merchant Management for instance. I use the term Commodity
Management to represent the strategic procurement of materials regardless of what specific
industry or company vernacular you may use.
Commodity Management includes responsibility for Supplier sourcing, relationship
management, industry and market analysis, quotations, terms and conditions, negotiation
strategy, and business awards. This also includes strategies regarding the movement of
materials, inventory, cash cycle management, and understanding and setting trends and
direction. And this also includes detailed understanding and strategic planning for the sub-
components, sub- suppliers, and the end-to-end supply chain.

Commodity Management does not include the tactical aspects of placing purchase orders
and managing the day- to-day interaction with suppliers. While the Commodity Manager is
there to provide support their focus is more on the strategic management of the Supply
Chain.
I have met with hundreds of suppliers over the years. I recall one meeting in particular
meeting with an Executive at one of our suppliers. When we introduced ourselves as
“Commodity Management” the Executive took exception to his goods being referred to as
“Commodities”.
He was very proud of the products that his company provided and he took the term
“Commodity” to demean the uniqueness and significance of the
product he was selling. To be clear I do not use the term “Commodity” to in any way
diminish the importance of any product or goods that are being sold and supplied.

What is a Commodity Management Strategy?

I’ve participated in the purchase of billions of dollars for materials and components used in
the manufacture and processing of products. There are very clearly raw materials that have
a high dollar value and those that have a very low dollar value. Items such as
microprocessors for instance cost a lot whereas labels and stickers can cost very little.
But without a specific strategy for labels and stickers or nuts and bolts, just as you would
have for microprocessors, you will find that the negative impact of poor quality, production
or delivery of a label or screw will equally damage your brand, your customers and your
company.
So it is very important to have a well researched, articulated and vetted strategy for every
group of materials and commodities that you purchase.
First and foremost you need a Commodity Management team that can create the strategies
for the specific Commodities that each individual manages. If some of your Commodity
Managers are not experienced in developing a strategy it is their Management’s
responsibility to help them out.
While it is always good to allow for some creativity in the development of a Commodity
strategy there are clearly some key elements that must be included, in great levels of detail:

1. Spend levels – current and forecasted

2. Market share – the percentage of the total market that your spend represents; are
you are major or minor buyer of this particular commodity?
3. Customer requirements – current and projected
4. Suppliers – current supplier base, potential supplier base
5. Terms and Conditions and Service levels- current and desired/required
6. Competitive factors/differentiators – unique capabilities and requirements of this
commodity
7. Inventory levels – days of supply, rapid replenishment capabilities,
upside/downside flexibility levels
8. Risk Factors – supply availability, technology maturity, quality, supplier financial
viability
9. Strategic objectives – in support of unique business and customer requirements
10. Relationship strength/strategy – level of contact and relationship strength with your
suppliers and customers
11. Environmental/Green strategies
12. Diversity in sourcing
13. Total cost of ownership (TCO)
14. Negotiation strategy/process

There are many more elements that could be included in such a list. They key message here
is that Procurement is more than just the process of placing a purchase order.
Your Commodity Management team should have an explicit, well thought out strategy
which defines the direction for all activities required that eventually results in the
placement of a purchase order.
Ratify your Strategy
It is insufficient to just ask your Commodity Management team to develop their strategies
and then forget about it. Management should review every strategy to provide constructive
input, ensure that the strategy aligns with the organizational objectives, and to support the
personal development of your Commodity Managers.
The Commodity Strategies should also be shared outside of the Supply Chain organization.
Your Executive team should understand these strategies. Your Customer teams should
understand these strategies. And your peer organizations such as Operations, who are often
the internal customers of the Supply Chain, should also understand and ratify these
strategies.
Conclusion
Supply Chain Management and Procurement are much more than just the organizations
that negotiate lower costs on materials. There are a large number of factors that need to be
considered, planned for, and strategized on so as to

create a leading, powerful Commodity Management Strategy.

Without Commodity Strategies you are undervaluing the contribution of Supply Chain to
your organization and to your success. Further the lack of these strategies opens you up to
greater chances of failure, falling behind your competition, and negatively impacting the
financial performance and growth of your company.
Be smart! Develop Commodity Strategies for all of the raw materials and components that
you buy!

#Procurement #Strategy #SupplyChain #SCM #Purchasing

6. Indirect Procurement – It’s Time to Rise and Shine!
Indirect procurement of goods and services can be one of the largest areas of expenditure in
any company. And the operational impact that the provision of Indirect goods and services
can have on a company can be significant, either positively or negatively.
Yet the lack of attention and focus that Indirect Procurement is often given is inconsistent
with the true importance of this area. Indirect Procurement takes a back seat to Direct
Procurement unfortunately.
But it is time for Indirect Procurement to stand up and be counted!

The Importance of Indirect Procurement!

Indirect Procurement is referred to by many different names. It might be called Non-
Production Procurement or MRO for instance. The very labels applied to these names

(ie. “Indirect” or “Non”-Production) implies some lesser level of importance. But nothing
could be further from the truth.
The procurement of Indirect goods and services encompasses virtually every aspect of your
company. The scope of Indirect Procurement includes areas such as I/T, Capital
expenditures, Freight and Logistics, Facilities, Marketing, Legal and Human Resources,
Outsourcing contracts, Marketing, Utilities, Consumables, Temporary Labour, and Travel.
Failure to negotiate good contractual rates and terms and conditions across these areas can
have a tremendous and immediate impact on a company’s financial and operating
performance. Further failure Indirect goods and services suppliers to deliver on their
promise can bring a company to its knees. And failure to put in the necessary controls to
manage the entire procurement, governance, and supplier management process can
jeopardize a company’s ability to remain viable.
The ability to negotiate great rates and terms can make a significant improvement to a
company’s profitability and cash flow. It can provide a source of competitive
differentiation. And it can enable improved productivity in both direct and indirect
functions.

Indirect Procurement is critically important in any company.

So why is it an area that receives less focus and attention?

Who’s Responsible for Indirect Procurement?

One of the prevailing issues with this area is the result of its inherent complexity and
massive breadth.
Having expertise in every single one of these areas is almost always unrealistic for an
individual or a small team covering all of these areas. The Procurement Professional brings
expertise in the processes of supplier sourcing, quotation, negotiation, supplier selection,
terms and conditions management, performance management and supplier relationship
management. But they can be challenged to be subject matter experts in each of these
numerous areas.
Additionally the number of Indirect goods and services suppliers can easily number in the
hundreds and thousands. Furthermore they can be spread all over the world, many of these
suppliers being local and indigenous to the country or area that they are serving. Even in
large companies it is difficult to have fully global coverage in the Indirect Procurement
area.
The dynamic that this situation often creates then is one of contention between the
Functional areas and the Procurement team as to who is responsible for managing Indirect
goods and services.
The Functional leaders are clearly the Subject Matter Experts. The I/T team clearly
understands I/T better than Procurement, or anyone else, ever will. The Logistics team
clearly understands Freight and Transportation better than anyone else. And so on and so
on for every Indirect goods and services area.
And if you run an organization of geographically dispersed facilities, whether they be
Offices, Manufacturing sites, or Distribution Centres, you will know your local market
better than anyone else. You understand the culture, the contacts, the language and the local
practices and regulations.
But these Functional leaders and Local operators likewise have no experience or expertise
in proper Procurement practices, skills, techniques and tools. The Procurement Profession
is a calling just like any other. There is a level of skill, expertise and experience involved in

Procurement that is best known by Procurement experts. And Indirect Procurement in and
of itself is a very specific area of skill.
There are certainly exceptions to those notes above. There are Functional leaders who have
worked in Procurement.
And there are Procurement individuals who have worked in the Functional areas. That is a
great combination of skills but it is not as common as it should be, or could be.
Another factor for consideration is the size of your company. Large, global companies are
more likely able to finance a sizeable Indirect Procurement team with experts in each
Functional area, making this team very formidable. However medium to small-sized
companies don’t often have the ability to hire such an experienced team. Their Indirect
Procurement staffing levels are usually outnumbered by the amount of activity that has to
be done and as such they often have no choice but to concede control to the Functional
areas.
Given the complexity of every company, its organization, its size, its geography, its areas
of competency, and its resources there is no single answer as to how to organize an Indirect
Procurement capability.
But at some level in your company someone has that responsibility. If it can be managed
centrally and globally that is great. If not then some hybrid, matrix-managed

organization structure for Indirect Procurement is better than no structure at all.

Conclusion
No matter what situation your company is in it is critical to treat the procurement of
Indirect goods and services strategically and methodically. There must be oversight to
ensure that the best possible deployment of resources and processes is in place.
If profit is important to your company then a concerted focus on Indirect Procurement can
often deliver low to high single digit percentage cost reductions, if not higher. All of this
goes right to your bottom line. And if you are looking for cash flow or productivity
improvements look no further than your Indirect Procurement team.
And if keeping the lights on and keeping the computers up and running is important to your
company then the importance of Indirect Procurement needs to be recognized.
There is a phenomenal amount of skill and expertise involved in Indirect Procurement.
Let’s give it the respect it deserves!

7. Procurement Don’t go to the Dark Side!

Early in my career I worked in a department that was responsible for the design,testing,
sourcing and procurement of packaging materials. It was a great experience and
introduction to so many aspects of the Supply Chain.
But one day one of my peers was fired. He was responsible for negotiating with the
packaging suppliers. As it turns out he was taking kickbacks. When that was discovered
and verified he was summarily dismissed. He went over to the dark side.
I never got the precise details but I don’t believe he could have got more than a few
thousand dollars for his illicit efforts. More importantly he got a black mark on his resume,
and in his life, that he could never erase.
That was my first lesson on the do’s and don’t of Supplier Relationships.
Proper and positive Supplier relationships are absolutely critical for running a successful
Supply Chain and a successful business. However Supplier relationships must be
conducted professionally in every way.
It is never worth compromising your morals, ethics, integrity, or your future in dealing with
Suppliers. I believe for most people that is just simply understood. But I guess for some
that temptation is too large.
Over the ensuing years I had direct dealings with Suppliers at every turn. I knew that all
Supplier relationships had to be managed with the
utmost integrity. There was zero room for illegal or questionable behaviour of any kind. It
wasn’t even a passing thought.

Do you have a Supplier Management Policy?

Many companies have outlined explicit policies to ensure that those who deal with
Suppliers know precisely what is and what is not acceptable behaviour. These often include
rules regarding the receipt of gifts, the treatment of confidential information, a code of
conduct, fair and ethical quotation and negotiation processes, declaration of conflicts of
interest, diversity, personal benefits, and illegal/unethical behaviour.
In dealing with Suppliers it is often the case that either you have travelled to meet them or
the Supplier has travelled to meet you. There is usually a meeting wherein the issues at
hand are discussed. And on occasion there may be a dinner with the Supplier after work.
I have always viewed these Supplier dinners as a great opportunity to learn more about the
people you are dealing with so as to strengthen the professional relationship. As with all of
your professional relationships it can be easier to resolve issues and get things done with
people who you have met and that you have some level of relationship with.
The Supplier obviously wants more of your business. But there is clearly a line that should
not be crossed. At no point should you personally promise more business to a Supplier
unless your team has done the fair and proper analysis to ensure that the Supplier had
objectively earned and merited getting more business in a fair and open manner. And this
analysis always had to be strong enough to withstand the scrutiny of a third-party audit.

In dealing with Suppliers you should avoid, and report, any situation in which the Supplier
is trying to gain more business in exchange for some kind of personal favour. In fact you
should report this situation to the Executives within your Supplier’s organization and your
company should most likely cease doing business with that Supplier. There must be zero
tolerance for any illicit behaviour.
Always provide full disclosure to your management team of any conflicts of interest, any
potential conflicts of interest, and any inappropriate behaviours from your Suppliers. If you
are in doubt then approach your Management and discuss the matter. Do not leave out any
details. Full disclosure is essential.
The Dark Side in Conclusion
If your company does not have a policy for dealing with Suppliers you need to create one.
There are many resources available on the Internet to help you. Your Legal team and your
Human Resources team must be involved and the resultant policy must withstand any
challenge from within or outside your organization.
If you do have a policy governing your Supplier relationships you must ensure that this is
understood by every single employee. Provide training and education classes as well on a
period basis. Further every employee must periodically sign off that they have read and
understood the policy.
There is no circumstance in which it is worth gambling with your future or your company’s
future by doing business inappropriately with any supplier.
Stay on the straight and narrow! And don’t go over to the Dark Side!
8. Spend Aggregation Obstacle Course for Procurement!

The theory is simple! If you can increase spend levels through centralized spend
aggregation across entities then you increase your leverage in negotiations. This leverage
should translate to lower costs and better terms and conditions. But there is a spend
aggregation obstacle course to be overcome first.

‘’Phòng ban Spending làm tổng, mua cho các business unit khác’’
Giảm số lượng supplier ít nhất có thể, tuy nhiên sẽ bị phụ thuộc
Đáp ứng vận hành doanh nghiệp khó

These entities may be different departments or facilities within your own company. They
may be different companies under common ownership. They may be disparate companies
within an industry. Or they may be unrelated companies spanning many industries.

The benefits seem clear. So why is there so much resistance when it comes to trying to
aggregate spend across these entities?

When you run a central Procurement organization you are trying to get the best deal for
your company. The best deal includes lower prices for the goods or services you are
buying. It also includes better terms and conditions. But to be able to get these benefits you
need the formal and informal authority to negotiate against all of that spend.

However there can be a lot of obstacles put in your way. There may be rogue buying in
your company. Some departments or remote facilities may want to keep managing
negotiations on their own. If your company is either acquiring another company or
being acquired this issue may arise. And Group Purchasing Organizations (GPOs) are
specifically designed to deliver benefits from Spend Aggregation. Yet they are a
completely separate entity.
Procurement people are proud professionals. And they often don’t trust that someone can
negotiate better than they can even if their spend levels are lower.
Before we can address these landmines and hurdles we need to understand what they are.
So what are the issues on the Spend Aggregation Obstacle Course?

Everyone is an Expert

One of the key issues in having areas give your Procurement team spend control is
expertise. Everyone believes they are an expert and that they can get a better deal. This is a
prevalent issue particular in common areas such as business travel. Everyone believes that
they have a better website or a better contact.

Lack of Trust

People can be very protective about their department or operation or company. And rightly
so. So when someone outside of that organization comes in and states that they will be now
negotiating on their behalf, people can be distrustful. The Procurement team needs to take
measures

to show that they understand and are accountable to the local teams. Without proper
communication distrust will remain.

Loss of Control

People like to control their spend. And they don’t easily give up that control. Especially if
that spend has been managed locally for a long period of time. It may be a perceived loss of
relationships with suppliers. It may be a perceived loss of control over that which impacts
their financial results or service levels. In any case this is a large concern for many entities.

Job Loss

This may or may not be the case. If spend aggregation is done as a part of an effort to
streamline the procurement organization there may be job redundancies. Certainly if
someone faces the prospect of losing their job they may not be open to turning over spend
control.

Lack of Skill

As mentioned previously Procurement people are very proud. They are often career
professionals. And there is a tremendous amount of skill and experience required in
Procurement. If someone from a central corporate organization explains that they are going
to take control then local Procurement people are going to want to know that they have the
skills to back it up.
Benefits?

Naturally it should follow that with spend aggregation there should be the opportunity to
lower costs and improve terms. However there are also other factors that come in to play in
getting better results. Being bigger is not always best. I have seen many cases where
smaller companies can get better rates on some type of good or service.
Negotiating skill and relationships can play a big part. And local knowledge can make a
huge difference.

Loss of Margin

I’ve visited many companies trying to sell a spend aggregation capability. The premise is
simply that if the company turns over their spend control you will deliver savings greater
than anything they have ever accomplished. And this is backed up by detailed analysis.
Often however these companies don’t see the greater savings they will get. They get
consumed by the amount of margin you are going to make. And many companies won’t
proceed because they believe they can somehow now get that greater savings without you.
(But they never do.)

Core Competency

Depending on your organization Procurement may be a core competency. Procurement is

always a critically important role. But if you are in a Software company for instance,
chances are your core competency is programming not procurement. Some organizations
may believe this is a core competency which can create an obstacle to proceeding with an
outsourced spend aggregation solution.

Change

It may go without saying but often people don’t like change. It doesn’t matter what it is.
When the prospect of spend aggregation is offered up it is a departure from the way things
have always been done. Without a proper Change Management program this can often be
the greatest obstacle of all.

The Spend Aggregation Obstacle Course

Spend Aggregation has tremendous potential. Intuitively the rewards should be enormous.
However there are many real and perceived obstacles to making it successful.
Whether they are landmines to be avoided or hurdles to be overcome, these obstacles must
be addressed for any

Spend Aggregation initiative to succeed. You must navigate the spend aggregation obstacle
course.
9. Strategic Supplier Relationship Management – Do’s and Don’ts

Supplier Relationships – Don’t go over to the Dark Side!

Shortly after I joined the Commodity/Category Management Procurement organization I

was invited to attend the annual Strategic Supplier Awards event. It was all about Strategic
Supplier Relationship management.
There were Executives from dozens of Suppliers in attendance. The event concluded with
award recognition given to Suppliers based on their scoring and standing as being of
Strategic value to the company.
Prior to joining the Procurement team I had neither understood nor appreciated the
importance of Supplier Relationship management. But having seen how motivated and
inspired these Suppliers were I started to understand.
But in the weeks, months and years to come I also became much more informed about the
good and bad aspects of Supplier Relationship Management.

From company to company I came to develop a list of Strategic Supplier Relationship

Management “Do’s” and “Don’ts”.
Supplier Relationship Management Approaches

From one company to the next, from one industry to the next, and certainly from one
individual to the next, Suppliers are viewed and managed differently.
At its most basic level Suppliers are considered transactional. Companies find suppliers,
negotiate prices and terms, place purchase orders and Suppliers fill those orders. That’s it.
There is no effort put into developing relationships or partnerships of any kind when
Suppliers are considered transactional. There is a fundamental lack of respect and value.
The next level of Supplier relationship is more considered. Suppliers may be called
Preferred or Tactical.
At this level Suppliers are more highly valued. The basic capabilities and operating
conditions have been established. There is more effort put into the relationship by
Customers.
Amongst a number of providers of a particular set of goods or services Preferred suppliers
are typically given preferential awards of business. They still have to be competitive and
demonstrate that they can deliver, but they have earned a right to be considered
preferentially based on past performance and capabilities.
The top end of the Supplier Relationship management spectrum is reserved for Strategic
Suppliers.
Strategic Suppliers are the best of the best.
Relationships are established and strong at all levels of both organizations.
The Strategic Supplier
contributes in a meaningful and visible way to the value of the Customer. And the
Customer contributes in a similarly meaningful way to the success of the Strategic
Supplier.
There is a level of collaboration, synchronization, and mutual strategic development and
execution that positively advances the interests of both parties.
In any Supplier Relationship Management schema suppliers can move up or down the
scale. New suppliers want to become Preferred/Tactical. Preferred/Tactical suppliers want
to become Strategic. And Strategic suppliers want to stay on top of the mountain.
But in any genuine process Suppliers can go the other way too. Suppliers can fall back
down the scale and ultimately cease doing business with each other altogether.
The core objective of any Strategic Supplier Relationship Management program should be
to promote the success of Customers and Suppliers.
But to make this effective there are a series of “Do’s” and “Don’ts” that must be
considered.

DO’s

The elements that must be present in an effective Supplier Relationship Management

program are:

 Have a formal, visible process to progress suppliers through your relationship

management continuum … Transactional, Preferred/Tactical, Strategic
 Every Supplier should have a Relationship owner (eg. A
Commodity/Category/Sourcing Manager designated along with an Executive
sponsor)
 There should be a Communications strategy and relationship development roadmap
for every single Preferred and Strategic supplier
 Your team should have a thorough understanding of the supplier organization
 There must be a clear set of standardized metrics and a scorecarding system which
will measure and track supplier and relationship performance
 A governance process needs to be in place to ensure the relationship and
performance are managed proactively
 Relationships must be genuine and not contrived You should expect suppliers to
contribute to and advance your company strategy and your company performance
 You should expect to contribute to and advance your suppliers performance
 Suppliers must be electronically connected (eg. end to end connectivity) with your
systems
 You should recognize suppliers visibly

DON’Ts

For a Supplier Relationship Management program to be effective there are also lessons to
be learned and things to avoid. At its extreme a poor program can result in catastrophic
results.

Don’t go over to the Dark Side! You must maintain your integrity, distance, objectivity.
There is a lot of business up for grabs and some may be tempted by bribes and undo
preferential treatment.

Don’t make a supplier strategic for false reasons. Any lack of integrity in supplier selection
will undermine the view of your Supplier Relationship program both within and outside
your company.
Don’t allow strategic suppliers to remain there forever. Longevity isn’t a birthright.
Strategic suppliers must constantly demonstrate that they are always earning their place at
this level
Don’t be afraid to hold strategic suppliers to account and to remove them if necessary.
Virtually no supplier is irreplaceable.
Don’t expect this to be a one sided relationship where you only get the benefits. If you
want them to contribute to your success you must contribute to their success.
Don’t abuse the relationship. Having a solid relationship will always help you get through
difficult situations. But if you over-use, or ignore the relationship you will compromise its
future.
Don’t ignore the relationship. You must regularly communicate and pay it attention.
Don’t let your strategic suppliers to take advantage of you. They still have to pay their bills
and deliver quality products/services.
Don’t ignore new prospects because of existing strategic suppliers. There is always some
new up and coming supplier on the horizon.

Conclusion

If your Strategic Supplier Relationship management program is well managed then people
inside your company will see its value. Additionally, and more importantly suppliers will
aggressively and actively work to advance in your program to achieve Strategic status.
But if your program is not well managed people will see through it and it will fail. And this
will ultimately compromise the success of your company.
The “Do’s” and “Don’ts” we’ve outlined here are designed to help you refine and shape
your program.

Copyright © Mortson Enterprises Inc. All Rights Reserved.

#suppliermanagement #procurement #purchasing

10. What’s the Difference Between Commodity Management
and Category Management?

Commodity (or Category) Management – What is your Buying Strategy?

For a considerable portion of my career I have worked in the Manufacturing and

Logistics/Distribution Industries. In these industries a segment of the Procurement
organization is called Commodity Management, not Category Management.
However when I entered the Retail industry the group largely responsible for Procurement,
amongst other things, was called Category Management.
At its core each group was procuring goods. But while there were shared responsibilities
there were also key differences.
So what is the difference between Commodity Management and Category Management?
Commodity Management

In my Manufacturing experience the Procurement function was essentially split between

Commodity Management (or Strategic Sourcing) and Tactical Buying.
The Tactical Buying teams performed all of the day to day Procurement activities. They
would place, change, and manage purchase orders. They would call suppliers to deal with
specific delivery and quality matters.
The Commodity Management team was more strategic.

First of all they were organized by “Commodity”. That is each Commodity Manager would
be responsible for a certain commodity (eg. cables, plastics, semiconductors, etc). And the
Commodity Management team clearly reported into the Supply Chain organization.
The Commodity Manager would be responsible for the entire strategy for buying their
respective Commodity. They would be responsible for Supplier selection, negotiations,
terms and conditions, sourcing decisions, competitiveness,

The Buying teams were basically the execution engine working with the suppliers and
terms that had been strategically defined by the Commodity Management (or Strategic
Sourcing) team.
The Commodity Managers were typically career Supply Chain and Procurement people.
There were certainly exceptions as they were considered to be running small businesses
with respect to the considerable amount of spend that they controlled.
Category Management

When I entered the Retail industry I brought along my concept of Procurement and
Commodity Management.
I quickly learned that Retail defined and managed Procurement in a much different fashion.
And it was organized much differently.
In Retail they use the term “Category Management”.
Depending on the type of Retail company you have the categories will differ but the
concept is the same. In a Grocery

business the categories could be Produce, Dairy, or Canned Goods for instance. In a
General store environment categories could include Women’s clothing, Automotive goods,
Hardware, and more.
The organizational alignment of the Category Management team was much different.
Category Managers reported into the Merchant organization, not Supply Chain.
Responsibilities for Category Managers also extended far beyond that of the Commodity
Management group I was used to.
Category Managers were also responsible for Sales and Marketing of the Categories that
they managed. They also had input into Merchandising and Promotions.
They managed the entire processes of Strategic Sourcing AND Tactical Buying.
Unlike the Commodity Managers who were largely
the Category Managers were largely Sales, Marketing and Merchant experts.
Similarities and Differences

Without exception both Commodity Managers and Category Managers were performing
Strategic Sourcing activities.
They both searched for, selected and qualified suppliers.

They performed all negotiations and managed all contracts. And they were both responsible
for how their suppliers performed in all respects.
Beyond that Strategic Sourcing responsibility there were key differences. The Category
Managers were clearly responsible for Product selection and Sales and Marketing, which
Commodity Managers were not.
Category Managers would be required to report on Sales performance at
supplier and product selection decisions. Commodity Managers would be buying the
products and materials

Category Management was unequivocally aligned with the Chief Merchant. The Logistics
and Distribution organizations were aligned with Supply Chain. Commodity Management
on the other hand was aligned with Supply Chain and the Chief Procurement Officer.
Consistent with these differences, in both organization and responsibility, the skills and
experience of these groups varied as well.
Category Managers were more likely to be Sales and Marketing experts. The task of
visiting suppliers and negotiating was, while important, secondary and not the prime
expertise of Commodity Managers.

The Commodity Managers on the other hand were primarily Procurement experts. They
were negotiating experts with business management skills and aptitudes.
Conclusion

Depending on your industry you may be familiar with the term Category Management or
Commodity Management. Or you may consider these phrases to be synonymous.
In my experience there are both similarities and differences between these two terms with
respect to responsibilities, organization, expertise, aptitude, and capabilities.
In either case both of these roles are phenomenal positions with respect to learning and
managing a business. Their contributions are incredible and will make or break the success
of any company in any industry.
I. What is the difference between procurement, sourcing, supply management,
purchasing and supply chain management?

Procurement: process of identifying, shortlisting, selecting, and acquiring suitable goods

and services or works from a third party vendor through direct purchase, competitive
bidding, or tendering process, while ensuring timely delivery in the right quality and
quantity. (More strategic)
Purchasing: is a subset of procurement, it's about acquiring goods and services that
organization requires, it's a smaller subset of this and it requires things like ordering,
expediting, receiving, and fulfilling payment. (More tactical)
Sourcing: is it going to be a stage that comes before any major purchases are made and be
considered a subsection of the procurement department
What is supply management?
Supply chain management
Supply chain management

Conclusion
 Procurement and Strategic sourcing definition
 Procurement is usually a subset of Supply chain management, but there are
exceptions
 Always ask the individual what they mean
II. The importance of procurement
Procurement activities
 Supplier identification and selection
 Buying
 Negotiation and contracting
 Supply market research
 Supplier measurement and improvement
  Purchasing systems development
Why procurement is important
 Delivering value and savings
 Building strong relationships and driving innovation
 Improving quality and reputation
 Reducing time-to-market
Increasing value and savings
 Suppliers have substantial impact on a firm’s total cost
 Many product features originate from suppliers
 In manufacturing, purchased content can be more than 50% of the revenue
 Avoiding costs through early involvement in product design stage
Building strong relationships and driving innovation
 Traditional approach: bargain hard for price reductions
 New approach: conduct joint cost reduction with suppliers
 Both buyer and supplier must benefit
 Suppliers can contribute innovative ideas
Improving quality and reputation
 Buyer focuses on core competencies and outsource on core activities and materials
 The importance of risk management
 Need for ability to track materials back up through supplier’s supply chain
 Supplier quality product quality
Reducing time-to-market
 Include suppliers early in product design process to take advantage of their
expertise
 Early supplier involvement can lead to an average of 20% improvement on material
costs, material quality, and product development times
Contributing to competitive advantage
 Growing recognition of procurement’s contribution to firm’s profitability
 Continue to see Procurement responsibilities grow to include such things as P2P -
procure to pay, BP – business partner), Mergers & Acquisitions
 Formal recognition of Certifications such as CPSM (Certified professional in
supply management)

Procurement’s role key take-aways

 Delivering value and savings
 Build strong supplier relationships and driving innovation
 Improving quality and reputation
 Reducing time-to-market

III. Procurement process

1. Forecast and/or Plan requirement
 Beginning of purchasing cycle
 Sources of need:
o Annual or biannual planning process
o New product development process
o Operational needs
 Sometimes, actual needs are difficult to define clearly
2. Needs clarification: Requisitioning
 Purchase requisitions and/ or statements of work
 Forecasts and customer orders (e.g from MRP – Material requirements planning)
 Purchase requisition elements:
o Description of required material or service
o Quantity required
o Estimated unit cost
o Operating account to be charged
o Date of requisition
o Date required
o Authorized signature
3. Supplier identification and selection
 Existing supplier
o Familiarity and track record
o List of preferred suppliers
 New supplier
o Need to identify potential supplier
o Need to evaluate and qualify
 Bidding vs. negotiation
 RFQ – request for quote, RFX, RFP – request for proposal
  Statement of work, specifications, blueprints
 Supplier evaluation
4. Purchase Order
 Contract. Drafted after supplier evaluation and selection is completed
 Legally-binding document (i,.e., Purchase order or Formal contract)
o Care in defining terms and conditions
o Standard legal language (i.e., “boilerplate)
o Offer and acceptance
 Visibility throughout the company

 Quantity
 Material specification
 Quality requirements
 Price
 Delivery date
 Method of delivery
 Shop-to address
 P.O. number
 Order due date
 Name and address of buyer
5. Receiving process

Receipt and inspection

 Electronic vs. paper documents
o Acknowledgement and receipt
 Material packing slip
o Details the contents of shipment
 Bill of lading
o Transfers ownership and possession
 Receiving discrepancy report
o Shortages and overages back to procurement dep.
6. Invoice settlement and payment
 3-way match required to pay invoice
o P.O.
o Invoice
o Receiving report
 Electronic funds transfer (EFT)
 Mostly done electronically today
 Information used to Analyze Actual Requirements ERP system

IV. Direct vs. Indirect Material & Services

QUICK QUESTIONS!
 What is the difference between Direct materials and Indirect materials and services?
 Can you give some examples of each?

Direct vs. Indirect purchases

Direct purchases
 Raw and Packaging materials
 Semi-finished products and components
 Finished products
Indirect purchases
 Maintenance, repair, and operating (MRO) items
 Production support item
 Services
 Capital equipment
 Transportation and third-party logistics providers
 Advertising and Promotion
 Etc.
Example - Magnitude of total expenditure $6.4B – consumer products company

Example – Indirect expenditures only

Directs vs. Indirects key take-aways
 Directs in most companies are fairly mature
 Although Indirects has its own challenges, it remains a huge opportunity for the
firm:
o Requires Top management support
o Superior internal stakeholder alignment
o Spend analytics/Information is key
V. Why do you want to have a good relationship with your
stakeholders/internal customers?
Ten steps to better stakeholder management
1. Understand your stakeholder’s requirements and use their terminology. Don’t use
procurement speak
2. Profile your stakeholder
3. Align procurement activity to their business needs
4. Add value by demonstrating deep knowledge of their categories, suppliers and markets,
and use that conversation to how to create that value
5. Start small, establish credibility and achieve quick wins
6. Focus on face-to-face engagements where possible
7. Consider co-locating and having procurement people sitting within stakeholder teams
8. Be careful not to be a policy enforcer-be an enabler
9. Use of cross functional teams
10. Consider using a cross functional steering committee

1. Understand your stakeholder’s requirements and use their terminology. Don’t use
procurement speak
 Do your homework before talking with the stakeholder
 Over time, you must become the Expert
 Don’t start your conversation on reducing price/costs
  Start with relationships saving come later

2. Profile your stakeholder

 Split your stakeholders into Tiers-make a conscience decisions who is important
and how much time you should spend with them
 Understand that stakeholders are wired very differently
3. Align procurement activity to their business needs
 Understand what their business objectives are (probably won’t be reducing costs)
 What can you bring to support their business needs?
 What can you offer?
4. Add value by demonstrating deep knowledge of their categories, suppliers and markets,
and use that conversation to how to create that value
 Show your stakeholder that you have deep knowledge of their category, suppliers
and markets
 Use those conversations to showcase that value
 Educate them on the market

Which spend by commodity/category to go after first?

5. Start small, establish credibility and achieve quick wins

 Pick a category that you can be successful
 Always give credit to the stakeholders, not procurement

6. Focus on face-to-face engagements where possible

 Communications is absolutely critical key to success
 Opt for face-to-face, over email, phone, text
 Engage them in supplier meetings

7. Consider co-locating and having procurement people sitting within stakeholder teams
 Be part of their team
 Cam be very powerful, but must have the right individual
8. Be careful not to be a policy enforcer-be an enabler
 The procurement/corporate policies are important, but more important to create
value for the stakeholder/firm

9. Use of cross functional teams

 For large cross department categories, consider using cross functional teams
 Creates buy-in from stakeholders
10. Consider using a cross functional steering committee
 Senior management, cross functional team led by COO or Equal

Internal stakeholder management key take-aways

 Internal stakeholder management is the key to your success and getting the best
value for your company
 Indirect materials and services are much more difficult than direct materials – hence
the importance of Internal stakeholder management is more critical

Hệ thống SAP (gồm ERP, CRM – customer relationship management)

Tool Bitrix24 (ERP, CRM free)

Step What? Why Deliverable Tools/ Frame work

1. Profile category - List hàng List + Category
- Mua gì
- Từ mua đc gì thì
group nó vào
 Nhanh, không sót,
giảm số lượng
supplier
2. Sourcing strategy Đặc điểm của item Ra được hướng đi Kraljic
(mỗi loại hàng trong appoarch Five force
category)
Từ đó đối xử với
supplier ntn
3. Supplier profile List supplier ( Cũ, SWOT
mới, tiềm năng) Score card (1)
Chấm điểm, xếp hạng
4. Select competitive Chọn:
suppliers and negotiate Competitive selection
(bid)
Or supplier
development
(negotiate)
Or cả 2
5. Làm 4: gửi RFP, Final selection
FRQ, lời mời thầu
6. Implement Làm hợp đồng, xử lý
 hợp đồng, đưa vào
executive, report
7. Continuous Theo dõi và supplier Score card (2)
improvement relationship
managament
OK or K.O

CHAPTER 3: STRATEGIC SOURCING

Why do we want to strategically source?
What is strategic sourcing?
Strategic sourcing refers to the process of identifying the spend profile of an
organization and its supplier base to ensure their business requirements are aligned
with the suppliers
Strategic sourcing vs. Tactical sourcing
Strategic sourcing
 developing a proactive, holistic,and continuous evaluation and re-evaluation
 aims to achieve the lowest Total Cost of Ownership (TCO)
 minimal supply chain risk
 suppliers as crucial value partners
 strategic sourcing leverages spend
 analysis, supplier evaluation, supplier relationship management, and detailed
market research
 long term
Tactical sourcing
 lowest possible cost
 doesn’t necessitate large investments in advanced technological platforms and
personnel skillsets.
 short term
Strategic sourcing – create Shareholder value
 Increase revenues
o raise prices
o increase volume
 Decrease costs
o reduced cost of employees (downsize)
o reduced cost of process and waste
o reduced cost of goods and services
Major activities
 Use information from your stakeholders
 Define sourcing category
 Identify category characteristics
 Perform market analysis and explore category Evolution
Deliverables
 Complete category profile

1. Profile the category (Example-printed materials)

 What's in and out of the category (talk with all the stakeholders)
 Analyze spent-total company
 Assess the overall industry Dynamics
 Who are the suppliers that you use now in your company and you suppliers that you
might want to use
 Is there any technology-driven solutions to help the category
2. Develop category sourcing strategy
Major activities
 Understand buying power and category criticality to position the sourcing category
 Determined sourcing approach to maximize the savings/ value opportunity
Deliverables: Provide initial sourcing approach
5-Forces methodology

3. Generate supplier profile

Major activities:
 Identify existing supplier base
 Identify potential suppliers
 Established supplier minimum requirements
  Established supplier selection criteria
 Develop quantitative supplier evaluation system
Deliverables
 List of potential suppliers
 Suppliers election criteria

Initial supplier evaluation

4. Choose competitive selection or supplier development

Major activities
 Define alternative strategies
 Select implementation path
Deliverables
 Decision statistic implementation path (competitive selection or supplier
development)
 Choose/ Define strategy going forward (e.g Printed materials)
 Competitive bidding or negotiation on both
 Leveraging technology to obtain quotation
 Incorporate some new suppliers in the mix (better quality/ bigger presses/ faster
turn around)

5. Select competitive suppliers and negotiate

Major activities
 Identify a preliminary solicitation/ negotiation plan
 Develop and distribute the proposal (RFP, RFQ, e-auction)
 Receive and evaluate proposals
 Develop negotiation strategy
 Hold negotiations
Deliverables (báo cáo, KPI, ý tưởng, sp cầm tay,.. kết quả)
 Proposal
 Proposal responses and negotiation
 Final supplier selection
Select competitive suppliers and negotiate (e.g. printed materials)
 Send out, receive and evaluate RFQs (decided to not to use e-auction) competitive
bidding
 Final negotiation and supplier selection
 Agreed on using ePrint tool to increase efficiency and quality
6. Implement
Major activities
 Developed implementation plan/ finalize contract
 Develop savings/ value measurement and tracking process
 Execute implementation plan/ contract
Deliverables
 Implementation plan/ contract
 Cost-savings/ value tracking reports
Example:
 Issued a 3-year contract to 4 suppliers with annual reviews
 All suppliers agreed to use an e-print solutions
 Finalized performance tracking based on price, quality, delivery and turn around
time
 SAVING WERE 40%!
7. Continuous improvement
Major activities
 Supplier relationship management
 Tracking supplier performance
 Post award audit and compliance
 Contract management and administration
 Cost-savings/ value tracking
Deliverables
 Contract driven performance reports/ supplier rating system
 Cost-savings/ Value reports
 Contract and compliance reviews
Tracking supplier performance example

Key take-aways
 The purpose of a strategic sourcing strategy is to create value to the firm
 The important thing about the process is that you have a process and just stick to it
 Remember, it is important not only to procurement category leaders, but also your
stakeholders

CHAPTER 4. Supplier management

Select and evaluation process
Evaluation and selection decision (1)
 During new product development
 Performing market tests
 Buying new equipment
 During outsourcing analyses
 Expanding into new markets or product lines
 Receiving internal user requisitions
Evaluation and selection decision (2)
 Due to poor existing supplier performance
 Consolidating volumes
 At end of existing contract
 Conducting a RFQ or reverse auction
 When current suppliers have insufficient capacity
 Reducing size of supply base
Determine sourcing strategy
 Single vs. multiple sourcing
 Short term vs. long term contracts
 Need for design support
 Full-service vs. non-full-service suppliers
 Domestic vs. foreign suppliers
 Collaboration vs. arm’s length relationship
Sources of information
 Current suppliers
 Preferred suppliers
 Sales representatives
 Information databases
 Experience
 Trade journals
 Trade directories
 Trade shows
 Second-party or indirect information
 Internal sources
 Internet searches
Limit suppliers in selection pool
 Financial risk analysis
o Ex: 10Ks or Dun & Bradstreet reports
 Evaluation of supplier performance
o For existing suppliers
 Evaluation of supplier-provided information
o Preliminary surveys (entry qualifiers)
o RFIs, RFPs, or RFQs
Determine method of supplier evaluation and selection
 Evaluation from supplier-provided information
 Supplier visits
 Use of preferred suppliers
 External or third-party information
o Example-international suppliers
Key supplier evaluation criteria
 Primary criteria
o Cost or price, quality, and delivery
 Total quality performance, systems, and philosophy
 Management & Employee capabilities
 Financial condition
 Process and technological capability
 Information system capability
 Cost structure – more than quote
 Total cost perspective
o Direct labor costs
o Indirect labor costs
o Material costs
o Manufacturing or process operating costs
o General overhead costs
 Caveat
o Supplier may not fully understand its own costs or may considered its’ costs
proprietary

Total quality performance, systems, and philosophy

 Management commitment
 Use of SPC techniques
 Level of defects
 Safety, training, and facilities
 Equipment maintenance
 Use of MBNQA and ISO 9000:2008 criteria

Management capability
 What is organization’s vision?
 Has management committed to TQM (Total Quality Management) and continuous
improvement?
 How high is management turnover?
 What are professional and educational backgrounds of key managers?
 Is management customer focused?
 Is organization making necessary capital investments?
Employee capabilities
 Degree of commitment to quality and continuous improvement
 Overall skills and abilities
 Employee-management relations
 Frequency of work stoppages
 Worker flexibility
 Employee morale
How would you check out the supplier’s financial situation?
Financial stability
 Often used as screening process in initial selection phase
 Risks of financially weak supplier
o Supplier will go out of business
o Insufficient resources to invest in improved plant and equipment
o Supplier may become too financially dependent on buyer
o May be indicator of other problems
 Pick a third party together that would evaluate and give the highlights of supplier’s
financial situation
Interpreting financial ratio
Liquidity Ratios Interpretation

Current ratio = Current Should be > 1.0, but look at

assetsCurrent liabilities industry averages

Quick ratio = (Cash + At least 0.8 if supplier sells on

Receivanles)Current liabilities credit

Interpreting Low means cash flow problems

financial ratio
Activity Ratios Interpretation (compare to
industry average)

Inventory turnover = Low means slow inventory or

COGSInventory possible cash flow problems

Fixed asset turnover = Too low means supplier may be

SalesTotal assets inefficient using its fixed assets

Total asset turnover = SalesTotal Too low means supplier may be

assets inefficient using its total assets
 Days sales outstanding = Too high hurts cash flow
Receivable x 365Sales
Too low shows restrictive credit
policy

Profitability Ratios Interpretation (compare to

industry average)

Net profit margin = Profit after Represents after-tax return

taxesSales

Return on assets = Profit after Represents the return earned on

Financial ratios taxesTotal assets what a company owns

Return on equity = Profit after Represents return on

taxesEquity shareholders’ investment

Debt Ratios Interpretation (compare to

industry average)

Debt-to-equity = Total > 3 means highly leveraged

liabilitiesEquity

Current debt-to-equity = Current Too high means supplier may be

liabilities Equity unable to pays its bills

Interest coverage = Pretax Should be > 3

income + interestInterest
Low may mean difficulty in paying
creditors

Process and technological capability

 Level of technology, design, methods, and equipment used to manufacture products
or deliver services
o Current vs. future capabilities
o Review capital expenditure plans
 Resources committed to R&D
 Supplier design capabilities
 Electronic data exchange between 2 businesses:
o CAD – Computer Aided design
o RFID – ratio frequency identification
 o ASN – advance shipping notification
o EFT

E-commerce capability
 Web-based B2B vs. EDI systems
 Does supplier have CAD capability?
 Does supplier use bar coding or RFID?
 Can the Supplier implement SMI?
 Can supplier provide ASNs or accept EFT transfers?
Developing a supplier evaluation and selection survey
 Survey should be:
o Comprehensive and include important performance categories
o As objective as possible
o Include items and measurement scales that are reliable
o Flexible
o Mathematically straightforward and simple to understand
Building a supplier evaluation system
 Quality systems
 Managing capabilities
 Financial costs
 Delivery
 Technological
 Information systems
 teamwork

Identifying and qualifying suppliers – key take-aways

 Supplier evaluation and selection is one of the most important decisions and
procurement- procurement owns the process and usually the decision
  Determine what your supplier evaluation criteria is - what is important
 A balance supplier evaluation and selection survey/process can help and create Buy
in
Contract management
Types of contracts
 Fixed-priced contract
o Firm fixed price
o Fixed-price contract with escalation
o Fixed-price contract with incentives
 Cost-based contracts
o Cost plus incentive fee
o Time and materials contract
o Cost plus fixed-fee contract
Firm fixed price
 Most basic contract to a mechanism
 Price stated does not change
o regardless of environmental changes
 Can be obtained using
o price quotation
o supplier response to RFQ
o negotiation
 Simplest and easiest contract
 Supplier Bears Financial Risk in rising market
 Buyer assumes Financial Risk in declining Market
 Supplier may add contingency fee if uncertainty is high
 Important for buyer to understand underlying market conditions
Fixed-price with escalation
 Used for longer-term contracts
o Where costs are likely to increase over time
 Escalation Clauses allow either price increase or decrease of base price
 Should be tied to Independent, well-established, published third-party index
Fixed-price with incentives
 Terms and conditions allow cost-savings sharing with supplier
o predetermined rate of sharing often 50/50
 Typically utilized under conditions of high unit cost and relatively long Lead times
Cost-based contracts
 Used when there is high risk of supplier contingency fee that would be included in
fixed-price contract
 Lower risk of economy loss for supplier
o Economic risk is transferred from supplier to buyer
 But can result in much lower cost to buyer
 Need to include terms and conditions that require supplier to carefully monitor and
 control costs
 Parties must agree on allowable costs
 Generally applicable when goods and/or services are expensive, complex, or
important to buyer and there is high degree of uncertainty
Cost plus incentive fee
 Similar to fixed price plus incentive except incentive is based on changes in
allowable costs
 May include cost-savings sharing at predetermined rate
 Appropriate when parties are confident of initial Target cost estimates
Time and materials
 Generally used in plant and equipment maintenance agreements
o Costs cannot be determined prior to actual repair
o Based on agreed-upon hourly labor rate plus overhead and profit percentage
 Requires “not to exceed” amount
 Little buyer control over estimated maximum price
Cost plus fixed-fee
 Supplier received reimbursement for all allowable costs up to predetermined level
plus fixed fee
 Fixed fee represents percentage of targeted cost
 Supplier is guaranteed minimum level of profit above its costs
 Little motivation to control costs
 Should include cost productivity

CHAPTER 5: PROCUREMENT NEGOTIATION

I. Negotiation process
II. Develop a plan
III. In the negotiation
IV. Post negotiation

I. Negotiation process
What is a Negotiation?
 Process of formal communication, either face-to-face or via electronic means,
where two or more people come together to seek mutual agreement about issue or
issues
 Involves management of time, and information between individuals and
organizations who are interdependent
 Relationships between people, not just organizations
 Persuasion
 Negotiation skills can be honed and practiced
 Supports implementation of procurement management strategies and plan
Determine if negotiation or bidding is required (or we can do both)
 Is bid process inadequate?
  Are many non-price issues involved?
 Is contract large?
 Are technical requirements complex?
 Does contract involve plan and equipment?
When to negotiate
 Identification of allowable costs
 Delivery schedules and lead times
 Expected product and service quality levels
 Performance metrics and how information is gathered
 Technological support and assistance
 Contract volumes
 Special packaging
 Liability for loss and damage
 Payment terms and currency issues
 Progress payment schedules
 Transportation mode selection
 Carrier selection
 Filing freight claims
 Warranties and replacements
 Capacity commitments
 Material Lead time
 Penalty Clauses
 Performance incentives
 Contract length
 Contract renewal mechanism
 Protection of proprietary information
 Ownership of intellectual property
 Resources related to developing closer relationships
 Improvement requirements
 Quality, delivery lead time, costs, responsiveness
 Contract dispute resolution mechanisms
 Spare parts
 After-sale service
 Operator or maintenance training
 Access to technology
Planning for the Negotiation
 Better planning better outcomes
 Use of Technology communication tools vs. face-to-face negotiations
o face-to-face can be expensive and have time-consuming travel
 Leverage the use of online RFQs before negotiation
o quick turnaround on changes
 o allows simultaneous negotiation with multiple suppliers
Negotiation process key takeaways
 You need to decide when and what to negotiate
 Negotiation can be time-consuming process
 Negotiation planning is the most important part of the process (70% of your time
should be spent here)
II. Develop a plan
Develop specific objectives
 Objective: aspiration or Vision to work toward in future
 Typical objectives:
o Fair and reasonable price
o Contract quantities
o Require a delivery lead-times
o Improved supplier quality
 Not all objectives are equally important
o Need to prioritize: must have, would like to have
 Serves as basis for concession strategy

If you are developing our objectives, what criteria is important

 S – Specific
 M – Measurable
 A – Achievable
 R – Realistic
 T - Time
Common terms used in negotiation
 MDO – Most Desirable Outcome
 LAA – Least Acceptable Alternative
 BATNA – Best Alternative To a Negotiated Agreement

MDO and LLA from buyer and supplier

Bargaining zone example

BATNA
 Bottom line or reservation point
 BATNA should never be revealed to other party
 All settlements should be judged in light of our other viable Alternatives existing at
time of the agreement
Analyze each party’s strengths and weaknesses
 Understand the research and experience
o Personality
o Negotiation style
o Education and experience
o History assess
 Relative strengths and weaknesses (ex: in your due diligence)
o each negotiation experience is unique
Gather relevant information
 Previous experience with all the party
 What war areas of disagreement?
 Is there anything about previous protocols that should be changed?
 What is the relative power between parties?
 Who has most to lose? To gain?
Practice the negotiation
 Applies to complex in formal negotiations that are:
o Large dollar amount
o Long span of time
o Crucial to success of organization
 Mock or simulated negotiation
o Helps raise awareness of unanticipated questions and issues
o Important in team negotiations
o Role play other party to develop empathy
Develop a plan key take-aways
 70% of your time should be spend on planning
 Develop specific objectives, establish MDOs, LAAs, and make sure you have a
BATNA
 For large/ important negotiations, particularly if you are using a large team, it is
critical to run a “Mock” negotiation
III. In negotiating
Things that happen while negotiating
 Positions vs. Interests
 Needs vs. Wants
 Tactics
 Concessions

Positions and interests

Positions
 Negotiator’s opening offers
o Represent the optimistic or ideal Target value of issues being negotiated
 stated demands at negotiation tables
Interests
 Unspoken motivations for reasons that underlies any given positions
 unlikely to be explicitly declared or acknowledged during negotiations may not be
directly germane to stated position
 often personal in nature

Key points on interests

 Learn to play detective
o Try to concern all the parties interests through a series of open-ended
 probing questions
o then listen carefully
 always focus on other parties underlying interest, not its stated positions
Needs vs. Wants
Needs: Negotiated outcomes that negotiator must achieve
Wants:
 negotiated outcomes that negotiator would like to have
 may often be exchanged at concessions
Recognize your counterpart’s needs
 Must consider long-term success
 Issues critical to supplier may not be issues critical to buyer and vice-versa
 Given and take must be considered
o each party should not expect to Prevail in all issues
o settings priorities for concessions and issue tradeoffs
Some negotiation tactics
1. The wince
2. Limited authority
3. Silence
4. The red herring
5. Nibbling
6. Round numbers
7. Who ever speaks first typically loses
8. Outrageous behavior
9. Deadlines
10. Empty pockets

Concessions
 Movement away from position that has perceived value to other party to gain
something of value
o Give and take process is normal in most negotiations
 Need to avoid giving away concessions without receiving something of equal or
greater value in return
o Always keep BATNA in mind
 Without effective concessions strategy, negotiation may result in impasse
 Concessions should be made in decreasing increments, not increasing ones
o Increasing concession values encourage other party to wait you out for even
greater concessions
 Based on length and cost of negotiation
Guidelines for making concessions
 Give yourself enough room to make concessions
 Try to get other party to reveal his/her needs and objectives first
 Be first to concede on a minor issue but not first on a major one
 Make unimportant concessions and portray them as valuable
  Occasionally, say No to other party
 Be careful trying to take back concessions, even tentative ones
 Keep a record of concessions made and try to identify a patterns
 Do not concede to soon, too often, or too much
In the negotiation key take-aways
 Understand and know the difference between positions and interests, and wants and
needs… always be a good listener
 Know how to use and recognize the use of tactics and know the counter when used
on you
 Think about how you will give concessions before the negotiation, give concessions
slowly and infrequently, and always try to get a concession in return

IV. Post negotiation

Execute and follow up on the agreement
 Actual performance or management of contract
 Load into organization’s contract management system
 Provide performance feedback
 Build on success of negotiation
 Monitor contract provisions
 Reaffirm commitment of parties
Brief other stakeholders
 Stakeholders: one who has an interest in or is affected by negotiation outcomes
 Need to be aware of and in agreement with desired objectives
o Includes major issues and initial positions for those issues
o Prevent unwanted surprises
o Develops stakeholder buy-in and support
AAR – after action reviews
 Never skip post-negotiation analysis to improve
 The professional approach: AARs
 Determine the purpose or mission, including the definition of success
 Reconstruct what actually happened
 Diagnose the facts through cause-and-effect reasoning to identify the underlying
reasons for wins and losses
 Decide what to do next time
Being an effective negotiator
 Willing to compromise or revise goals
o When faced with new information
 View issues independently
 Establish upper and lower ranges for each major issue
 Explore more options
 Build on common ground between parties
 Avoid making irritating comments
  Avoid argumentation: too many reasons can dilute an argument
 Make fewer counterproposals:
o Too many concessions
o Too much compromising
o May indicate lack of adequate planning and show invulnerability
Reasons for failed negotiation
 Neglect other party’s problem
 Focus too much on price
 Focus on positions instead of interests
 Focus too much on common ground
 Neglect BATNAs
 Over-adjust perceptions during negotiation
Key takeaways
 Don’t forget to brief stakeholders
 Make sure you do a after action review (AAR) for improvement next time

Successful negotiator
Successful procurement negotiators share some common attributes:
 They realize that training, planning and practice are required to become an effective
negotiator
 They have higher negotiating goals and aspirations than their counterparts
 They are destined to be among an organization’s most valued professionals