Rebates As A Tactics (Tool) In Negotiations

rebates

Before you open the full version of blog – if you are in sales, could I please kindly ask you NOT to read any further? Please? This is only written as a tip for buyers.

I have already posted about rebates. And do not get me wrong – i still do not like them. BUT, listening to my colleagues talking about the subject, I realised, that there is a way how we, buyers, can use them for all the right purposes.

The situation in the market is as it is. A lot of sales people almost expect you to ask for rebates. So why not use this? However, for a successful outcome, there have to be two conditions:

  1. During the negotiations the supplier should not know you will ask for rebates.
  2. The supplier should not be informed what are the rules / policies in your company regarding rebates (if there are any).

And the process is as follows:

  • do your best during commercial negotiations part – and that includes everything from pitching your company, attractiveness of account, RFQ, negotiations. Really – get the best prices.
  • After this process is done, as “one last condition” – ask for rebates. This serves as a very good “security check” and has few outcomes:
    • The supplier was expecting for this request and kept “safety margin”. They will give you the rebate and you will make sure they gave you really the best conditions.
    • The supplier was not expecting this request, but still has some “wiggle room” and will give you the rebate promise.
    • The supplier did not keep any flexibility in margin (whether or not they expected your request for rebate). In this case they will simply say no and you will know that you did your job well from the very start.
  • If you have received the rebate promise – ask the supplier to simply give a discount rather then a rebate. In this case you will get best prices AND best financial conditions (as per details in the post mentioned above).

This worked for me. Want to try? Let me know how it ended!

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Rebates As A Tactics (Tool) In Negotiations

Central Procurement Organizations: The Good? The Bad? The Nothing?

Do you know what it feels like trying to find the Truth? Right. Basically, the Truth does not exist. A lot of small truths – yes. And that is the most important: to find Your Truth.

Let’s get back to central procurement organisations. There are a lot of them. Most of them work in FM, MRO, indirects areas. Keywords, which lead to them, are “outsourced service”, “consolidation”, “increased buying leverage”, “reduced administration costs”, some others.

I am a procurement specialist, so I should like it. And in general, I would. You can expect to get the following benefits:

  • Lower prices;
  • Consolidated invoices;
  • Higher level of service;
  • Spend manageability and transparency;
  • Better planning;
  • Clear cost of a function.

However, you should not expect this as granted. A recent example showed, that there are plenty of different scenarios:

  • Dodgy fee structures (yes, more than one different way to charge for the services);
  • High prices due to additional rebates CPO companies are taking from original supplier/manufacturer;
  • Continually decreasing service levels;
  • Duplication of PO entering into the systems – with no purchases consolidation whatsoever (yes, simply re-raising the POs they get from you to the supplier);
  • Unjustified management fees;
  • Broken communications: reporting the good (on time) and ommiting the bad (delays; which, actually, are more important).
  • Inefficiencies: over-staffing and similar.

The situation cannot be black and white. Some might suggest, that only small to small-medium sized companies benefit more from using CPO services, while medium-large companies don’t, as a rule.

All in all – there is no single Truth. My learning was to ask questions:

  • So, the turnover increased. But has PO quantity gone up? Has SKU count increased?
  • How long does it take to raise PO and how many do you raise? How many people does it take to service that? Is there a possibility to automate it?
  • What are the business needs: processes, people, items? Do you have “special” items and “store” items? Which is the biggest part of spend? How many delivery points do you have? Working hours? “Emergencies”?
  • What is the added value that CPO would bring you? Could you achieve it by yourself? I mean, IF you would REALLY try?

And all this reauires – is to stop and think. Challenge the situation. Move a bit out of comfort zone.

Thanks for reading! As always – any questions or feesbacks very welcome!

Central Procurement Organizations: The Good? The Bad? The Nothing?

Cost Of Poor Quality and it’s meaning in numbers for Procurement (template for calculations added)

COPQ

It’s all about key performance indicators these days. They say, whatever you measure and monitor – improves. A lot of companies these days have mature procurement functions: prices of items are negotiated and re-negotiated, innovation is being constantly tracked, value engineering is almost a second word after profit. Is there anything more, where procurement could add value? Yes, there is – by pushing costs of supplier none-performance up the stream.

Our colleagues, who speak Lean Six Sigma language, will understand very well – Cost Of Poor Quality. But this time – not internal. External. Procurement is the department negotiating contracts and commercial conditions. A part about Cost Of Poor Quality has to be a part of it.

Analysing, what does it consist of, might not be very straightforward. However, once the numbers are calculated, you might be surprised by the size of it. Answer this question: what happens in your company, when something goes wrong with incoming goods:

  • package is damaged (transportation, primary, secondary);
  • quantity is not right;
  • delivery is late;
  • goods come with physical damage;
  • colour is wrong;
  • size is wrong;
  • laboratory tests are non-compliant;
  • products don’t meet specification requirements and you are able to spot it only during production, etc.

You will quickly realise, that a lot of people have to get involved and waste their time. Their time is company’s resource. Everything has a price. Why does company have to accept it?

Here is a clue of how a very simplified evaluation breakdown can look:Cost of Poor Quality 2016 06 17.

Try applying this at your work – if the numbers are worth the effort, try negotiating and adding these conditions into your contracts. There will be two options:

  1. The supplier pays the bill and Procurement department will be able to bring added value for the business.
  2. The supplier improves performance and the company will no longer have poor quality related costs. Which can also be tracked and reported as improvement and benefits.

Thanks for reading and good luck trying to further improve your company’s results!

 

Cost Of Poor Quality and it’s meaning in numbers for Procurement (template for calculations added)

The next evolutionary step in leaning supply chains: de-s(c)ale’ing? Last mile service comes to B2B

evolution

Cost reduction nowadays is on of the biggest headaches for businesses. Leaning internal operations, managing demand, solving “make or buy” questions. The time comes to re-think value adding activities in business. And guess what happens to non-value creating activities? You are right! They disappear! The big question now is: what is the next one to be challenged and when? I say: SALES!

Before you carry on thinking this is impossible, let me address main concerns:

  1. I cannot do it. Who do I buy from and how do I do it?
  2. Why would I do it?
  3. Nobody will talk to me. Manufacturers simply do not talk to the end users directly.
  4. How will I manage the supply chain if the manufacturer has no distribution capabilities?

Let’s think. The lack of information was the biggest barrier some years ago. This has changed. Access to information is unlimited nowadays: (r)evolution of internet, technologies gave us the tools; behaviour change (publicising on Youtube, various blogs) gives access to content. While writing this article I googled “how to buy stationery”. Google gave me about 44,100,00 results in 0.43 seconds – mainly sources of items, but also articles about the process itself. Youtube offered videos (fine, simplified versions, but nonetheless) on demand management while buying stationery (Things I actually use). Several weeks ago, I would have argued, that you can buy only very restricted list of items like this (only low value, standardised, non-business critical items). But then, one of my friends – a technical director – proved me wrong. We were talking about equipment buying and some technical specifications of a special thermo-forming machine. What would be your first instinctive move? Pick up the phone and call the representative of the manufacturer? Scribble an e-mail? My friend said: “Nah, I’ll just google“.

bazinga

 

So if you can even buy capital equipment without sales reps – what can you NOT buy without them?

That is all to show you, that you COULD by-pass sales if you wanted to.

Next question is about WHY. Let me give you some indicative numbers. Everyone knows, that sales are expensive. Sales people are expensive. Good salespeople are even more expensive. In my work, I have meetings with suppliers. All procurement people do. The people, that spend their time with you on meetings, are very likely the same expensive sales people. Have you ever tried to estimate, how much the sales process to one account costs? According to my calculations, one day of average ranking sales person, devoting for going out and meeting a customer, can be anywhere from €200 – €1000, if not more (flights, hotel, transportation, salary, expenses). Let’s take €600 as an average. That is the one-off expenses. According to similar estimation, maintenance of an account for a year can be anywhere from €10k to €20k.

  • Sample number one. Indirect spend category, with overall spend of €180k in 20 locations across Europe. More costs in hassle and administration of the category than the category is able to deliver savings. During the process I had two meetings with two people each time from one company. That is, not including my time,  €2400. Plus the ongoing costs of another, let’s say, €15k a year. Plus, to select the supplier, I had another two meetings with two different suppliers, where each of them delegated one person. That is another €1200. Overall, that is additional costs for sales, related to our account: €18 600. It is not on the bill, but someone will have to pay it. Speaking in context of value for money – how many sales people do you need to buy toilet paper, a pen, a chair, disposable clothing… or even a car?
  • Sample number two. 8 locations across Europe, spend circa 1 million Eur. Four physical meetings held, involving overall fourteen people from suppliers’ side. Total – €8400 only in meetings. Mostly from one supplier. Then additional maintenance of account – €20k. Since this category was very mature, the goal was to achieve 5% of savings. Removing these costs would be more than half of the job done.

Nothing comes for free, in general. All of the companies have a ratio of unsuccessful sales attempts. Successful attempts have to cover the expenses of the failed ones. Someone has to pay for everything. And if it is not on the bill, on a separate line – do you think it is not in the price?

So that is why. Because, sales, quite often, is not a value added expensive function. Their job is to maximise the profit for the company they work for. Because when it comes to buying items for household, people go online. There are no sales managers and still, simple people with simple laptops buy various things online: kitchen equipment, holidays, insurance, clothes, furniture. If a simple person can do it – why would a business NOT be able to do it? Yes, there are some technicalities. Yes, there are risks and opportunities. There is some homework to be done. But hey, face it, you would do the homework anyway – with or without sales managers and agents.

One could argue, that the old way of seeing things is still very strong. That manufacturers will not be willing / able to sell directly to the end users, they will not want to adapt to a changing business playground. My reply to them is: BHS, Austin Reed, Woolworths – none of them wanted to adapt to a changing business landscape. Look at them now.

When all of the other questions are replied, there is one last left. How. This is where “uberisation” comes in. In retail, this service is widely called “last mile service“. Why would businesses not take advantage of it? Yes, there will be some points to negotiate, but it is not as hard as it looks. I already know quite a few companies, who are more and more becoming good service providers rather than just being “a specialist in non-specialist products”.

Do not get me wrong – there will be some items, which require more specialist knowledge. But these changing ways of working give as much opportunities as they cause challenges. Instead of talking to a “sales specialist”, who would afterwards would put you through to R&D or quality or technical departments, you would be speaking to a real subject matter expert (whether it is cleaning chemicals specialist, manufacturing line designer or process improvement specialist). The companies would not lose their faces, they would not become “faceless software and hardware monsters”. They would shift. Focus should be on the activities, that really add value. And these cannot be replaced by machines. They bring clear value to the customer, therefore, would be worth buying. Not like sales. Sometimes.

The next evolutionary step in leaning supply chains: de-s(c)ale’ing? Last mile service comes to B2B