Know thy industry
From the December 2017 print edition
Part of everyday life is resolving issues, and these issues vary in complexity. Easy issues can be solved expeditiously where complex ones are solved in time. Procurement issues that are complex are normally solved through negotiations.
When required, an organizational team consisting of stakeholders is assembled—the issues then examined by the members—and solutions proposed. Sounds simple enough, but from experience we know that the hard part of any procurement process is to define clearly what we want to buy—for example, clear and concise specifications, a statement of work or statement of requirement.
The product or services are normally outlined at the beginning of the buying cycle, so there should be no disagreement by the time a purchase order is issued. That’s so in many cases, but in many other situations parties to the agreement resort to negotiations.
But this article is not about repeating many volumes on this subject. It’s about one small aspect that affects most negotiations conducted by procurement staff. We call it “Know Thy Industry”.
What it means is professional buyers should know the details of what they are buying as well as the seller of that product or service. Those buyers that spend a significant amount of time learning about the product, how it’s made, what makes it unique, the distribution channels, transportation and warehousing requirements, and the complete costs from raw material to the point of use can negotiate the best value for their organization.
Buying a familiar product or service can be a repetitive exercise if there is no change in the specifications from one procurement cycle to the next, but we have all learned that the only constant in the world is change. For example, products evolve when new regulations and standards are introduced. Procurement teams together with their stakeholders, such as engineers, will review all of these changes. This will then be reflected in amendments to the specifications and, if this doesn’t happen, the result will be a situation where complex procurement negotiations are required.
But knowing what you buy is not enough to serve your organization well. Procurement staff will also benefit from participating early on and fully in specification redesign. Buyers bring valuable experience and knowledge to the team and will be able to affect any future issues that might require negotiations.
Good procurement staff have many tools in their arsenal which they have learned through experience and continual education. By being involved in many aspects of the organizational buying process, a buyer might be able to suggest a new and innovative way of resolving issues. For example, many departments buy products or services that are similar in nature but used for various applications. The procurement method might be different for each client, but the experience of buying a familiar product and all the complexities associated with it—if shared with other departments within the organization—will save significant effort and costs. Complex negotiations might be downgraded to simple or routine price verifications upon suggestions proposed by the buyer.
Procurement, as a central department in many organizations, creates value by connecting the dots, i.e. by having a corporate memory as to what method the organization used to buy the product or service through previous cycles for various end users, what was done well and what lessons were learned. Equipped with that knowledge procurement is well suited to negotiate the best solution for the organization because they have facts and figures at their disposal. For example, a professional buyer will suggest aggregation of volumes to reduce the costs if that is the target for negotiations. Or, if the organization requires service, negotiations might focus on the number of hours the supplier proposes to complete the task stated in the specifications. In both cases, knowledge of the subject matter and access to analytics play a significant role.
Buyers are subject matter experts when it comes to procurement. Specifications have a direct correlation to how much negotiation will be needed to sign an agreement. A well-defined statement of work will mean much less effort from all parties. Procurement departments serve as connectors to all client departments and hold key knowledge and expertise in resolving procurement-related issues. Any organization that taps into such knowledge will benefit in terms of reduced costs, reduced organizational effort and increased supplier performance.