Transaction or negotiation is an innate part of a business. For purchasing managers, being well equipped with negotiation skills every time can separate them from all other purchasing managers. Aside from quality negotiation skills, they must also have the skills and detail orientation to comprehend the different sets of data or technicalities about a product. Aside from those, possessing a sufficient amount of mathematical skills and ability to comprehend various marketing methods and different spreadsheets to arrive at a plausible solution or decision is of great importance. However, despite the qualities that a good purchasing manager possesses, his ability to negotiate is still limited. Fortunately, this limitation is not absolute for there are exceptions to this.
In an average negotiation, procedures must be put in consideration by both of the involved parties. However, these procedures tend to put limits on the flow of the whole negotiation. The exception to this rule is the so called “flexible procedures”. This flexible procedure is an exception where the restrictions and limitations that are innate in the rules of a negotiation procedure are being relaxed or there is decreased enforcement. The relaxation of the innate limitations and restrictions will allow a negotiation to make use and go beyond the traditional requirements of any kind of purchasing such as the shelf or urgent purchasing.
Another exception to the traditional rules of negotiation pertains to the duration of the allowed response for a certain proposal that arises from a negotiation. The quick turnaround is an exception where either or both of the parties that are involved in a negotiation can agree upon and reduce the usual period for response for the stipulations of the negotiation and to complete all of the paper works that come with it. This exception will allow the parties that are involved in a negotiation to settle the matters that are discussed immediately without the need to exhaust an excessive period of time.
The aspect of innovative partnership in a negotiation also has an exception to its general rule. Basically, an innovative partnership between the parties involved in a negotiation should always take place in order to give chance for the negotiating parties to devise certain sets of solutions that are innovative. However, the partnership that must exist between the two parties should be a long term one. Before the partnership between the negotiating parties is fully settled, several stages should be undergone. But if in the event that the innovative partnership is a success, it will produce an even higher level of negotiation between the two parties such as a contract or creation of even more innovative solutions. The exception to this traditional rule is to only make the existence of an innovative partnership in the cases of negotiation if a certain problem or complication arises and there are still any known solutions for it.
The formulation of the exception to the general rules of negotiation will allow those parties that are not under complex negotiation not to go through all of the troubles of satisfying the innate rules and regulations of a traditional negotiation. Aside from making the negotiation be resolved faster, it allows the negotiating parties to make improvements to their negotiation that cannot be achieved with the rigidity of the rules and limitations innate in a negotiation process.
In the specific aspect of business known simply as the sale, there are two entities which are primarily involved. The two entities are the purchaser and the supplier. These two partake in the sale wherein its elements circulate things such as currency and commodity (e.g. services and goods).
The purchaser can be defined as the one who avails of something that is offered by a supplier in the quantity in which his amount of currency on hand can correspond to its value. On the other hand, the supplier can be described as someone who caters to or fulfills the demand for a specific or a variety of commodities by the public.
These two entities can simply be described as the buyer in the place of the purchaser and the seller in the place of the supplier. Both are independent in nature but, neither the purchaser nor the supplier can exist without the other. Considering the fact of the independence of each entity regarding a sale, both have their different sets of powers. This balance of power exists to protect and limit the actions of the two sales entities either towards self progress or actions involving the other entity such as a transaction.
The purchaser, or commonly known as the buyer, is someone who sets the demand for a certain commodity or its elasticity in the supply market. The power that is vested upon a purchaser is called “purchasing power”. This power of the purchaser is the ability of a person to afford the commodities that he is willing to have possession of provided that his capacity to pay for the amount of currency that he has allows him to. For example, the purchasing power of a person from the upper middle class is more than the purchasing power of someone from the lower middle class, the middle class and other lower social classes. This power also protects the supplier by limiting the quantity of production of commodities that they have to provide to a certain percent wherein they can still make profit.
The suppliers’ power is a different thing as this is the capacity of the supplier to alter the price of a commodity depending upon high or low is the demand in the supply market. The idea of supply and demand states that if the demand for a certain product is deemed to be higher than the average, then the quantity of supply goes down and if the demand for a certain product is low, then the quantity of supplies goes up. When the demand is high, suppliers need to alter the price and make it a little more than it’s usual in order to protect being out of stock and to earn extra profit from it. If the demand of a product is low, then suppliers need to increase sale by lowering their prices in order to have an oversupply that can affect the process of production. This power also has an advantage to the purchaser because it allows them to take advantage of the decrease in price or to seek cheaper alternative if the prices are high.
The powers of these two sales entities both functions to protect and to give advantage to each other. With the limitations that are posed by these powers, neither of the supplier or the purchaser can experience disadvantages in their field.
How many times have you pulled into a gas station and wished you could buy your gasoline cheaper? You are paying retail at the pump. Do you know anyone who buys at less than retail? Maybe a trucking company that owns a large number of trucks? Maybe a business that owns a fleet of company cars for its employees? How do they pay less? They negotiate with a particular gasoline company and work out a discount in exchange for guaranteeing a set number of gallons purchased every month.
Now let’s go back to the trucking company for a moment. What do you think they do for tune-ups and on-going maintenance? Or when something goes wrong and needs fixed? Do they make an appointment at the local mechanic’s shop? Of course not; they have a team of in-house mechanics that take care of their trucks. What you may not know is the mechanics get paid a salary and they are not always busy. It depends entirely on how many things are going wrong with the trucks how busy they are. They could take some other jobs at a discount to what would have been charged at any mechanic’s shop. So this gives another small company a break. Let’s say they generate an extra $100,000 in billing by taking on other clients. Other than parts, the rest is pure profit.
As a purchasing manager what can you learn? These are your jobs. In the first scenario the trucking company gets a discount by negotiating with the gasoline company and guaranteeing a certain volume of purchases. Without a central purchasing system, even if it is operated manually by one person, you may end up approving multiple purchases for the same item from different vendors throughout the year.
Let’s take something simple like printer cartridges. Various departments may have different printer brands and models depending on their printing needs. Each department may search the internet trying to find the best price and think that they are saving the company money by getting the best deal they can find. If each department does that independently of one another they will likely end up ordering from many different vendors. Even within the same department they may order from different vendors throughout the year depending on who has the best sale prices at the time they are needed.
How would this be different with purchasing software in place? The purchasing manager, like the trucking company, can work with a single vendor and negotiate the best pricing across all departments for all brands and models of printers and cartridges needed throughout the company. As time progresses the vendor could even reward long-term relationships with other pricing breaks in the future. By ordering through that single vendor, both the vendor and the business can benefit.
In the second scenario with the trucking company they took on outside clients to keep their mechanics busy and increased their profit or in essence helping to finance the expense of that labor on their own trucks. Is there an opportunity to take on other jobs for employees who may be getting paid while having gaps in their workload? What about a sister company who doesn’t compete with you, but shares the same customer base.
Think about these strategies. Discuss them and see if you can build upon them. Find what works for your organization.
The current state of economy is requiring businesses to take a look at their procurement strategies that include handling tactics, buying decisions and a lot more. There is always competition, forcing companies to streamline their procurement systems and maximize its benefits. Aside from using the most effective strategy, a company’s procurement team must also undergo trainings to keep them updated about the latest trends and other factors that can affect their business.
Procurement training is necessary and purchasing certifications is not the only option available today. With the popularity of social media nowadays, it is just right for companies to take advantage of it. Companies can build a social media platform that can be used for discussing new strategies which can be useful for the organization. This is a good way to discover new ideas and more than that, it is also an effective communication tool.
It is also a good idea to arrange or let your procurement team join some conferences dedicated in training interested individuals the things that they should learn about procurement. These conferences might discuss structuring financial concepts related to selling or buying e-commerce associations, negotiating business partnerships, gaining IT contracts and a lot more. Attendees will also learn matters related to software licensing, outsourcing, negotiation skills and vendor management. These topics are very important to learn, especially since the internet is constantly changing and evolving with regard to how people sell and buy products or services. Aside from learning valuable knowledge in terms of procurement, attendees will also get the advantage of being able to successfully network their company.
A conference dedicated in providing procurement processes training can also help attendees build a level of awareness which deals with sustainable procurement practice and sustainability thinking. Those who will participate in this type of conference will also learn several tools, techniques and methods which can be used to define sustainability impacts, risks and opportunities. In other words, a procurement conference can help the attendees understand the impact of their environment on their supply chain. When choosing these conferences it may also be a good idea to cross-train team members in areas they aren’t quite as familiar making them more well-rounded.
Any business owner should keep in mind that this kind of procurement training is important to remain up to date with the technological advances that can help them increase their chances of succeeding in their chosen niche. This also applies to small businesses. After attending a procurement conference, the attendees will be more confident about handling negotiations for the company that take place on a weekly, monthly, annual or daily basis. Business deals that include
Increasing energy prices are a major concern for some businesses that highly rely on machines and various pieces of equipment to do their everyday activities. Energy pricing affects the profit margin of some businesses and to make sure that they will be able to keep up with it, they track energy prices closely, particularly oil and gas. But how do changes in the prices of energy affect your procurement strategy?
Most procurement professionals recognize that energy prices have an impact on their businesses. For instance, the company’s track capacity is not enough to meet their needs and the price of diesel fuel is increasing. Transportation is usually the most under-scrutinized and overlooked cost area in a company. Surveys often show that transportation is considerably the largest part of overall logistics cost. Companies spend ten percent of their overall budget on logistics and as mentioned, transportation is the biggest part of it. Business owners should attack what’s possibly the best area for savings. Looking for a more effective procurement strategy or being willing to try other solutions and alternatives is a must in order to continue operating in the uncertain and constantly changing world.
A poor procurement strategy decision can be expensive. If you have to estimate a product’s cost years in advance for your company’s marketing brochure, you might need to know beforehand what the price of a certain commodity is going to be. Should certainty be your main priority, you may want to use a fixed procurement strategy. This particular strategy is designed to give price certainty so that any movement in the energy market will not have an impact on the price you need to pay.
There may be a need for you to protect an upper cost to let you create a budget in advance while having the confidence that you are not going to breach this cost and letting you achieve the ultimate goal of beating the budget you have set for the company. Basically, your procurement model aims to improve your budget. If budget protection is your main concern, you might want to consider a capped procurement strategy. It is designed to provide protection against increasing markets, allowing you to work on a budget while also providing you the chance to take advantage of market instability in order to improve your product’s cost.
If your business on the other hand requires you to use every choice available to optimize the cost you pay for the energy or you find it hard to accurately forecast in advance, you might want to use a variable strategy. This particular strategy is designed to offer business owners the chance to look for improvements in costs they are paying.
Energy costs fluctuate constantly, which can significantly affect the energy bills and performance of a certain company against its budget. It also has an effect on the procurement strategy that they should use. By taking a proactive approach when buying energy and using a procurement strategy that best suits their needs and budget, an organization will be able to improve its functions and reap its benefits for a long time.
Procurement is a term used in acquiring services or goods. It’s advantageous that these services or goods are suitable and they’re obtained at the finest price in order to meet purchaser’s needs when it comes to location, time, quantity and quality. Public bodies and corporations frequently describe procedures planned to advertise open and fair competition for their company while reducing exposure to collusion and fraud.
Approximately every procuring decision is comprised of factors including price fluctuations, marginal benefit, handling and delivery. In general, procurement involves creating purchasing decisions under scarcity conditions. If good figures are available, it’s an excellent decision to utilize economic assessment methods including cost-utility analysis or cost-benefit analysis.
Sustainable procurement, also known as Green procurement, is an expenditure and investment procedure usually connected to public policy, though it’s similarly associated with the private sector. Sustainable procurement is associated with sustainable development’s wider agenda.
Organizations carrying out sustainable procurement are able to obtain their needs in terms of utilities, services, goods and works that aren’t included in the cost-benefit analysis. However, these organizations have a view of making the most out of their net benefits.
Procurement transformation is a precise interest to corporations in the field of procuring services and goods and companies making use of contingent labor. Hence, the process of procurement transformation is to constantly enhance it. If appropriate performance measures are developed at the beginning of operations, procurement transformation can immediately take place.
Performance result data is utilized in order to recognize any fields of opportunity for enhancement. The data should be able to clearly identify where enhancements could be completed in order to improve overall effectiveness. For instance, if the performance data shows higher costs or long lag times with specific suppliers, other methods need to be built on and implemented as a result.
Decisions in order to make transformations or changes need to driven by data. Making changes according to gut feeling or intuition only isn’t suitable. In addition over time assessments that aren’t driven by data will possibly have negative outcomes. Making use of solid evidence or data in order to create a procurement procedure decision helps with considering a wider variety of variables that have an effect on the overall result.
Cloud computing, or cloud-based solutions, is the utilization of computing resources (either software or hardware) that are carried as a service in a network (specifically in the internet). It derived its name from the utilization of cloud-shaped symbols as a concept for complex infrastructures it has in a system diagram. Cloud-based solutions commend remote services to the computation, software and data of a user.
Different kinds of public cloud-based solutions include:
Procurement in the majority of businesses is by far the biggest supply chain cost. In today’s economy, efficient and effective procurement is very important. This is applicable to indirect procurement which pertains to the services and facilities of a company and direct procurement which refers to the materials and products of a certain business. What resources should a procurement team refer to or monitor when designing a plan for their company?
For the senior management, a procurement team’s success depends on the value of savings they produce. Thus, the main activity for procurement each year is to design a savings program. The process wherein procurement takes charge of the external expenses made by an organization, achieves price reduction and puts it under contract is called spend management. However, the problem that most procurement teams face is that not all expenses are under this kind of management and so they’re not part of the savings program. There are lots of possible reasons for this, although the main one is that the other individuals in the organization spend money without the involvement of the procurement team.
On the other hand, studies have revealed that savings of between three to twenty percent are achievable when expenses are put under a spend management system led by a procurement team. Therefore, one way to start a company’s annual savings program is to find out what’s not being handled in this way. How can an organization identify the things that are not going through the spend management process?
First, identifying all sources of data on the expenses is vital. This may be in various places including sources outside the company’s format information systems such as spreadsheets and manual sources like purchase order books. Getting a report from payable systems that identify how much has been spent with the suppliers should be done as well. When this report is compared to the data collected from the outside sources, it will tell the how much spend data a company is missing.
The next step is to extract the spend data from the data sources collected and organize it based on what it was used for. Asking the persons who spent the funds is needed in order to obtain this information. It is also important to gather data on the contracts a company has in place. Take a look at the spend data after classifying it and see if it’s possible to mix the amounts spent on the same products to boost the volume a company purchases from certain suppliers and to obtain a volume discount as well. Compare spend analysis with the company’s contracts to see if there are items purchased under contract. By utilizing the contract when purchasing items, a company will be able to make savings.
Planning for effective procurement is definitely a must, especially with the current state of the economy. Preparation, planning as well as financial management is necessary to ensure that sustainable procurement is obtained and the company will be able to improve its functions and get the returns they are expecting from their investments.
We discussed some of the risks regarding fraud and white collar crimes associated within the procurement industry. Let’s take another look at some of the safety measures we can put in place to guard against not only fraud, but also for the continual improvement of purchasing and procurement activities for your business.
Looking at internal controls and how they function will be key. Ensuring that the controls work as intended will help everything run smoothly and accurately. Controls that are easy to avoid or too cumbersome to put into effect will not benefit the business. Check to make sure controls are in place and everyone is using and following them as they should.
One way to ensure that all the necessary controls are in place is to develop a checklist of procedures that should be followed in all situations. By having everyone on the team work together to develop the checklist there is a sense of ownership in helping to bring this to the business. That will also serve to get everyone on board with the new checklist and in that process you may discover new controls are needed.
As you monitor and evauluate it’s not enough to merely look at the results or publish beautiful and official-looking reports on processes. Adjusting is the name of the game. The ability to adjust and make changes is vitally important to the ongoing improvement.
When you read all of the above did you think of monitoring as something to do going forward? If you stop and think that is generally what will be done, but monitoring and evaluation can also be done restrospectively, looking back over the past. As we look forward into 2013 it may not be bad to pause and look back at 2012 and see what we can learn to apply to make our business even better this year.
Further Study: If you want to make a series effort at monitoring and evaluating we have a PDF to recommend. It is published by the International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations. This document provides 34 different evaluation methods grouped into 7 categories. Not everything will apply to the purchasing department in your business, but you can pick up a few key methods to help improve this year. http://www.ifad.org/evaluation/guide/annexd/Annex_D-3DEF.pdf