Discover the Pitfalls of Price Comparisons and how to avoid them

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The number of price comparison websites have exploded over recent years; comparing insurance, mortgages, electricity and holiday prices with each other to hopefully secure the cheapest option. But the question has to be asked, even though a supplier may be cheap, ‘are you really getting the best overall deal’?

The same applies in business as naturally companies do not wish to pay more than they need when acquiring new purchases. The vast majority of contract awards are based solely on the cheapest bid in a way not too dissimilar to that of comparison websites.

Care needs to be taken when following this practice however. Often it is certainly the way to go as comparing pricing between suppliers does have its advantages. It is a very measurable factor for award selection and is an easy comparison, in the first instance at least, to determine which bid is 'best'. This article will cover 5 key points to consider when comparing pricing, to help ensure you always get the best deal.

 

Your 5 Considerations using Pricing as the Award Decider

1. Focus on cost as well as price.

Very little consideration is put on the suppliers own costs when comparing prices alone. These supplier costs can include their own raw materials, internal direct labour and overheads.  Opportunities can arise from gaining and insight into your own suppliers’ cost base, namely ascertaining your suppliers’ own margin which proves useful in your negotiation planning and comparing tender submissions and quotes. Being armed with this information can also lead to possible make or buy situations where it could be more cost efficient producing the item yourself rather than rely on third party providers.

Conduct cost analysis and price analysis - the former doesn't go far enough.  

 

2. Have the best possible suppliers included in the selection process.

This seems quite obvious but is often overlooked for a number of reasons; time, market knowledge etc. Planning your sourcing exercise pre-contract is essential and this includes scouring the marketplace for opportunities. Have any new suppliers popped up in your local area or any strategic sources of supply such as purchasing from lost low cost countries been considered? 

You may be able to choose the cheapest price of the suppliers that are in the game but you also need to be sure that the best players are on the pitch!  It can be all too easy to reach for search engines but don’t forget traditional methods which include networking events, trade fairs and industry magazines.

Don’t always rely on your existing supply base to deliver the best deal

 

.3.  Price is not the only factor.

There have been many cases selecting the cheapest price has not resulted in best overall value. Indeed, risks are taking into the organisation due to price taking priority.  This is especially true during challenging times such as the present reduction in the oil price and the credit crunch from ten years ago.

Price itself has to be considered with many other factors during bid selection, the main others being quality (in its many forms) and time  (how quickly can the supplier satisfy your procurement requirements). It’s important to recognise that any criteria used is co-dependent with each other. For example, if you want your  goods or services quickly then the price will increase, similarly a high specification will also cost more as well as possibly having to wait longer for delivery.

Take whole life costing into consideration and not just the purchasing price

 

4. Be confident a cartel does not exist.

A cartel, of course, is the illegal practice where a group of companies get together that protect their own interests by fixing prices. This results in competition based on price alone virtually being eliminated. Often cartel's are tricky to expose but these are some tasks that can be carried out to give an indication:-

  • Check if your supplier and their competitors increase prices at the same time and analyse the differences between pricing with a benchmark quote request
  • Consistently analyse pricing trends and compare the pricing to industry indices to expose and irregularities for unexpected price decreases, often if it’s too good to be true it isn’t!

  • Do not assume that just because the prices are similar that there is a cartel in place, there could well be other drivers that impact all the suppliers such as the costs of raw materials

Be aware of pricing trends between competitors and link to current market dynamics

 

5. Specification has to be consistent. 

If price is being used as a comparator it then follows that the bids received should be the same and be easily comparable. Often opportunistic suppliers’ provide their costs in their own format, which aren’t easily interpreted by the procurement professional. Even worse, not all the costs are identified and established which could lead to nasty surprises for later. This is especially true if the scope of work is definitive by the procuring organisation.  Is the cheapest bid really what you want and does it conform to your requirements? Is anything left out or modified to arrive at that low price?

A quality tender should include a framework to which the procuring organisation has the opportunity to establish their requirements accurately but also provide an opening to the supplier to provide any innovative suggestions.  If this framework is too loose an opportunistic supplier will submit a bit containing a scope that they want to provide. This consequently will result in difficult comparisons, even based solely on price.  Always have an idea what you want and communicate this clearly in the tendering documents.

Ascertain needs before approaching suppliers' with a firm and consistent specification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Why Knowing a Little of Everything Is Often Better Than Being Expert in One Thing in Procurement

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Most people working in Procurement and Supply Chain Management start out in a buyer assistance or expeditor type of role, welcome to the function! Usually they will be put in a box and given a very defined category and set of tasks to learn the ropes in the first instance.

From here, many will proceed up the hierarchy or possibly branch out into other areas. During this journey they will meet others working in different departments and learn what they get up to.

For example:-

  • Account payables when it comes to  remedying supplier invoice queries
  • Engineers and other end users discussing or challenging the specification requested
  • Legal eagles to nail down the terms to use with suppliers and reduce risk into the organisation
  • Marketing and sales department in assisting to get that optimal tender submission in on time
  • Finance and senior management for budget reviews and control

Before they know it those same buyers, contract engineers, procurement supervisors, supply chain managers, along with the rest are interfacing with most department within the same organisation, as well as externally with suppliers. The amount of business exposure these role can offer is truly huge. 

Often, what makes the difference between good people working in this function and great people is the ability to work with and understand other functions drivers. Where are they coming from and what satisfies them?

But where do you strike the balance with your time and effort between really getting to know your area in detail and leaving your department to get to know others? This can be a bit of a conundrum, especially if you have tight deadlines to satisfy.

However, the latter is a critical and essential part of Procurement and Supply Chain to maximising its value to the organisation. Specialising and dedicating time only within Procurement or Supply Chain, and only within this area, can lead to

  • The inability to see issues and challenges from other perspectives
  • The creation of silo mentalities
  • Creativity and innovation being extinguished
  • Decisions being made that will effect and benefit only your department
  • A lack of understanding of other functions objectives that may hit your own

It's not a case whether you can't afford the time, it's a case of you can't afford the time to not make an effort.

Getting to know each part of the organisation, even at the basic level, is just as important, if not more so, for Procurement and Supply Chain Management to make a difference.

 

 

 

How failing to recognise corporate governance can really hit your bottom line

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Corporate Governance (‘The system by which organisations are directed and controlled’, Cadbury Report 1992) is becoming increasingly important across the public, private and third sectors. Corporate Governance can be seen in two ways. Firstly, there are many opportunities to maximise profit, value for money and investment through best practice corporate governance.  Many academic studies have shown that companies that are governed better perform financially better.

However, the other side includes risk.  This includes adherence to a strict set of regulatory mechanisms, internal policies and procedures.

Failure to comply with these regulatory mechanisms can result in large fines, such as J P Morgan being penalised £33.32 million in 2010 for failing to segregate client and business funds. This example is, of course, related to the financial sector and it may just be possible that some procurement personnel see corporate governance as being confined to accountants and senior management. After all, it was the financial sector that contributed to the 2008 financial crash that led to corporate governance becoming embedded into most organisations culture.

But procurement does have a large part to play contributing to the overall corporate governance of an organisation as they are responsible for:-

  • Spending large amounts of company money
  • Deciding which suppliers to use

Additionally, they are also in a position of responsibility and have greater opportunity to commit fraud for personal gain.

In September of this year an English council awarded a contract to a construction company for local public services. It was then found afterwards that the final cost was £1m over budget, nearly double of what was originally planned. An external audit relating to the tendering and supplier selection process has been initiated to find out the background to what has been described as a ‘catastrophe’.

Initial findings found that:-

  • There was no signing off money from decisions made by procurement officers, one to the tune of £319,000
  • No tendering process was made prior to supplier selection

The key element for procurement governance is control, essentially being able to show that the organisation is in control of their spending. To do this the following three areas need to be addressed as an absolute minimum.

1.       Senior management support and stakeholder co-operation. Corporate Governance needs to be bought into in many areas of an organisation. Without this procurement will be running against the wind. Buyers could feel frustrated if end-users insist on circumventing procedure to obtain their third party services or materials quickly from a supplier that hasn’t been approved only to receive no backing from senior management.  Procurement needs to highlight the strategic importance to senior management in this case and how Corporate Governance will contribute towards the company goals and objectives.  In these cases it also proves useful to also highlight areas where the company has lost money through poor Corporate Governance and the risks it can bring if changes aren’t made.

2.       Robust procurement procedures. This will include segregation of duties, clear approval levels, defined roles and responsibilities along with supplier selection. Personnel involved within the procurement process, not just buyers, don’t just need to know the current procedures but also a step further and understand why they are required. Very often procurement personnel are placed in a role and learn on the job, this needs to be supported by the development of policies and procedures aligned to the company corporate governance strategy.  Key here is not only to consistently update your procedures ensuring alignment but also to communicate them to effected stakeholders ensuring they understand the associated drivers.

3.       Monitoring and reporting mechanisms. This final area looks at how an organisation can gain confidence that they are doing what they set out to do with their procurement activities. Due to resource constraints in every organisation these need to be focused on the higher risk areas such as approval for higher value purchases and supplier selection. Of course, the key here is prevention where a firm focus should be on creating robust procurement procedures and policies. However, verification of those procedures and policies are also required starting with internal audits. Having procedures alone is often not sufficient, as in the case of the council example mentioned earlier where procedures were laid down but not followed.

In summary

1. Have senior management and personnel linked to the procurement process on board

2. Ensure robust procedures are in place and are known and understood to those in 1

3. Conduct internal audits and report findings regularly to management


Approved study centre Lean Procurement Ltd and Skills Development Scotland have helped a number of workers that have been made redundant or at risk of redundancy back into the workplace, developing their procurement and supply chain management skills and getting them prepared for re-employment with full funding.

To be eligible the following criteria has to be met

  • You must be resident in Scotland

  • You have been made redundant or currently at risk of redundancy from the Oil and Gas Sector or its' supply chain

  • You have worked in the Oil and Gas sector or the supply chain as an employee or contractor

  • You must be able to show that the training will help you get a new job

  • You must be actively seeking employment

  • You have not committed to, or undergone, the course of training you’re looking for funding for
     

Statements from those that Lean Procurement Ltd have secured
full funding

 

“...Starting a CIPS Diploma course with Lean Procurement provided me with a renewed sense of purpose and professional progression during a period of unemployment.  The ability to do this within a supportive, friendly and relaxed classroom based environment really helped my motivation and the ability to share and learn from the practical experiences of others in the group. The provision of full government funding for this course along with the benefits of a CIPS qualification at the end made this course a no-brainer for me and something I’ll gain valuable knowledge and skills from…”

– Robin Sharp, CIPS Student

“...I started the MCIPS Graduate Diploma last year and can recommend the course and content to anyone. Gaining professional knowledge in the procurement and supply chain sector has been a really great help. I noticed that many procurement roles requested that CIPS was required or working towards it. All the interviews I have had have asked me how I have been trying to improve myself since becoming redundant. Due to financial constraints following my redundancy the SDS transition training fund has really helped me to get on the qualification ladder…”

– Kevin Lumsden, CIPS student

 

Lean Procurement Ltd specialises in all aspects of procurement and supply chain training ranging from one day awareness courses right through to the MCIPS Graduate Diploma, the recognised standard for the procurement and supply profession. This qualification in particular is increasingly being asked for by employers.

As well as increasing your employability in the function there are many other benefits which include:

•    Meeting and networking with other individuals during the learning experience
•    Gaining confidence achieving success by reaching new goals
•    Motivation to get back into employment
•    Having fun by learning in a relaxed atmosphere


Lean Procurement Ltd will assist you every step of the way during the funding process and support your application. For further information please contact us on info@leanprocurement.net or call 07342 953230.

Commercial Objectives v Technical Objectives in Procurement - Should it really be a battle?

An interesting debate occurred last week with my recent blog about how procurement personnel should really learn how to sell. A discussion materialised covering which skill-set a buyer should have that can add the greatest value and lowest risk to the organisation.

Piggy-backing on the topic (as opposed to discussing the Strategic Sourcing process which I promised last week although it is briefly mentioned here), I would like to reach out to the many disciplines out there, not just procurement, to get their opinion on the subject.

The debate focused on when and on what grounds should the buyer become involved in the procurement process with the objective of purchasing the goods or services that provide the optimal value. This is a very large area but I'll try and break it down.

Firstly, it depends on what is being purchased in the first place. The familiar Kraljic positioning matrix can be used in this case to assist in developing sourcing strategies.

Products or services that are deemed of high complexity with a high level of technical specification are usually categorised in the bottleneck or strategic quadrant. Failure of the correct specification given to the supplier (or the incorrect specification delivered) will result in a 'Supply Risk' to the purchasing organisation/ client. Items such as new cooling fans (mentioned in last weeks discussion), a new IT system or a winch for a crane can be in this category.

Other items can be simpler and more standardised such as items for maintenance, repair and overhaul (MRO). In many organisations these are the high volume/ low value purchases as opposed to those in the 'bottleneck' and 'strategic' quadrants.  Consideration should also be given as to whether the procurement in question is an item that has never been purchased beforehand, a straight re-buy or modified re-buy. Straight re-buy poses significantly less risk to the organisation (assuming the previous purchase was successful!). Conversely, something purchased for the first time will definitely need more control and diligence.

Categorisation of these items, or groups of items, are extremely useful and should be conducted in the planning phase (see diagram at top of blog). This greatly benefits the prioritising of resources, effort and risk. From this a multitude of sourcing activities can be established, each can be conducted at different levels dependent on the Kraljic quadrant placing. This can include:-

  • Which disciplines should be involved in each sourcing process and when, e.g.what level of technical participation and technical approval is needed
  • What information needs to be collected and by whom to assist in the decision making, e.g. spend analysis, needs analysis and supply market analysis for each group of items
  • What supplier pre-qualification criteria is required for each procurement
  • How the suppliers offering will be assessed and agreed, using a selection criteria at the outset with a balance between commercial and technical objectives
  • Agree on a sourcing strategy; duel source, partnership etc
  • Development of the execution strategy; RFQ, straight negotiation or ITT
  • Plan any negotiation strategy and which parties should be involved
  • Create a plan to monitor the performance of the vendor drawing from possible lessons learned

In most organisations there should be procedures in place to govern the above and in an ideal situation there should be adequate time and availability of the personnel involved to make the key decisions. However, in the real-world this isn't always possible. Additionally, the procurement procedures and policy may not cover such areas previously stated. Possibly they are already in place and simply not being followed for whatever reason.

So what then?

Often functions have conflicting objectives. Procurement may have savings to demonstrate that they're performing whereas the end-user (the one actually using the materials or services), also wants to do a good job. From his/ her perspective this is done by completing the task in hand, possibly on a tight timescale, and needs to know exactly what is being bought to achieve this. However, both functions serve a similar objective, to satisfy the needs of the customer/ client and maximise the company's profits.  Essentially all employee's are part of the same team, but are the functions aligned and understand each other to ensure this takes place?

What impacts one function will ultimately impact another. Organisations operating a 'silo' mentality internally will often be inefficient in delivering eventual customer satisfaction. Understanding the needs of each function and their drivers are essential. Over time many employee's pick up certain areas of knowledge and skills due to the interfaces with their own department. Often buyers learn what it is they're buying talking to engineers, suppliers and possibly from in-house training. Technical personnel pick up market knowledge as they become familiar with the suppliers that are commercially viable along with discussions with buyers and suppliers. For example, both technical and procurement personnel could have been involved in negotiations or determined supplier selection criteria together. The amount of shared information being passed over time can add up.

The extent that this exposure of knowledge and skills occurring in an organisation can depend on many variables; culture, individuals, structure, procedure and leadership being a few. However, the trend remains for individuals and departments to become multi-functional and adaptable to the increasingly rapid change of industry and customer demands. The right decision is expected quicker but can also lead to greater risk.

For example, I've seen many instances where buyers have taken it upon themselves to make a technical decision without involving technical personnel. I've also seen technical personnel making commercial decisions without involving procurement. Both scenarios led to sub-optimal value mentioned earlier.

Often when mistakes such as the above are made it's easy to nail down governance of activities and tasks, such as buyers should assume no technical knowledge and technical personnel assume no commercial knowledge. Doing this will lose a whole host of opportunities in the process. 

Of course, there has to be a huge element of trust with each function knowing where the line is drawn. Technical personnel speaking to suppliers? No problem! Often it's required to define the specification. However, that engineer or technician needs to be aware of the commercial (and future security of supply) risks of becoming locked into that supplier and on no account commit company funds without the proper approvals. Discussing commercial terms and conditions with the same engineer? Also no problem! The same engineer or technician may well be the budget holder with a vested interest in costs.

It's important to remember that technical and commercial criteria are interlinked, higher spec = more cost and possibly longer to wait for their goods. The two just cannot be separated.

In summary; proper planning, following correct working procedures and utilisation of appropriate tools will greatly help and can accommodate procurement in purchasing the majority of materials and services. In conjunctions with this, nothing beats good communication, trust and an understanding of each functions needs.

 

Colin R McIntyre - Lean Procurement

 

 

 

Why Procurement Needs to Learn How to Sell

Many working in procurement will think to themselves that they don't need to learn how to sell, I didn't for a very long time. Procurement is about buying stuff, right? What's that got to do with selling? Well, quite a lot actually.

Let's start with a definition of a sales process

"Set of steps aimed at initiating and supporting the identification and evaluation of likely customers (prospects), sales presentation, and successful conclusion of sales activities. It requires a close coordination of people, equipment, tools, and techniques, and includes advertising and promotion" (Businessdirectory.com)

Now, substitute:-

  • 'customers' with 'supplier'
  • 'sales presentation' with 'procurement sourcing strategy presentation'
  • 'sales activities' with 'procurement' activities'

The sales process can be seen to be merely the flip side of the coin to a strategic sourcing process.

 

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However, if a sales or strategic sourcing process is followed exactly it should deliver very high results, depending on the quality of the process itself of course.  In practice, this certainly isn't the case, why?. (I'll be writing about the steps of a strategic sourcing process in my next post)

Unlike procurement where a budget is usually handed to the team or the department links in with budget holders from other areas of the organisation, it is sales that create the means to have a budget in the first instance. In other words; no sales, no customers and therefore no materials or services for procurement to purchase.

One of the essential qualities that a good salesman possesses that procurement would greatly benefit from is the power to influence and persuade others. Potentially these qualities have been focused on greatly in the sales environment for much longer than procurement for the reason mentioned above; no sales = no company. 

Stepping outside the workplace for a moment there are many opportunities to get the response you want from persuading and influencing others. The following are only a few examples of those that can benefit and why:-

  • Managers to motivate their teams
  • Leaders to inspire their vision
  • Parents to protect and encourage their children
  • Teachers to get their classes to commit to learning
  • Singles to impress potential partners!
  • Sales to seal the deal
  • Couples to strengthen and build their relationship
  • Job seekers to get that ideal job

From all these people from many walks of life procurement has to be seen to gain some benefit from learning this skill, right? Absolutely! Listed below are some areasand activities that will help procurement drive value in organisations, if they are skilled in this area:-

  • Sell innovative procurement strategies within the organisation
  • Actually, sell ANY good procurement idea within the organisation and challenge objections successfully
  • Negotiate with suppliers to arrive at the best value package
  • Deal with conflict resolution when problems occur with suppliers or internal stakeholders
  • Drive the success of the procurement department through motivation
  • Coach subordinates (or managers!) to build confidence and commitment

From the recent CIPS Salary Survey and Insights, David Noble (CIPS CEO) states that there is a "need to develop a network of relationships using more soft skills so that our professionals can be all things to all sectors".

Influencing and persuading is high up on the list of soft skills needed for a procurement department to achieve their targets and this can only be a good thing for the whole organisation's success!