Purchasing Management The Profit Management Group In Your Company.

As in most business organizations, purchasing management involves people, processes and technology. So what is purchasing? Purchasing involves the sourcing, purchasing and delivery of goods and services that a company needs either in its manufacturing and business management or for stock that it resells at a profit. The purchasing department is a very important, if not the most important, part of a business as its good management directly impinges on the bottom line. One of the fundamentals of purchasing is that goods are purchased at the best price and terms in order to deliver the best profit for the company. This means that strong and easily understood purchasing procedures need to be in place. Some companies interchange the word procurement for purchasing, in others procurement means purchasing via tender and purchasing means the day to day purchasing via Master Sales Agreements with a select group of suppliers. One of the methods that are used to ensure good purchasing management on day-to-day purchases is the use of purchase orders and purchase requisitions constrained by a known set of rules and procedures. Purchase orders are used to order directly with an agreed supplier. Purchase requisitions are usually raised by people external to the purchasing department when they need a particular product either for maintenance purposes or to increase stock in abnormal situations. In larger companies, and indeed even in some smaller companies, computerised purchasing and procurement systems facilitate purchasing management. As well as managing day-today purchasing, these systems can also manage a tender process and ad hoc purchasing activities. One particular aid to management of your purchasing department is the production of a set of procurement-analysis figures. These can often be tailored to your own companys particular needs. In charge of purchasing management will be the Purchasing Manager and they will have a number of purchasing clerks and administration clerks working for them. They will all have job descriptions that detail their roles and responsibilities. There have been a number of purchasing trends over the last few years. Two of the most important are JIT (Just In Time) which was bought over from Japan in the 1990s. It is the ordering of inventory only when it is just in time to use. In the 2000s e-procurement is becoming more popular as internet security and computer power becomes stronger and more prevalent.

Such is the important of the purchasing department, that comprehensive procurement guidelines are designed and published by governments, government offices, large companies, trusts and charities. These often define such things as environmental purchasing, end of life disposal and dangerous materials. If countries recognize the importance of their publishing department, shouldnt you have a firm purchasing management process in effect?

Purchasing Negotiation 3 Requirements for Success in Supplier Negotiations

Purchasing Negotiation is part art part science. In this article you will learn what it takes to become a successful Procurement Negotiator, since you will know the most important factor before negotiating, who to negotiate with and the approach to take when negotiating with suppliers. But before that a quick answer to:

What is Purchasing Negotiation?

You can have a good academic discussion as to what is purchasing & procurement negotiation, but in a simple language it is the process where corporate buyers & sellers discuss/negotiate terms of a contract before concluding a deal & starting the contract management process. This is both an analytical & psychological process. This analytical & psychological process is seen in the 3 requirements: The first 2 are analytical and the last one is psychological.

I. The Most Important Factor in Purchasing & Procurement Negotiation Preparation!

If you have been led to believe that you must be the smartest man on planet Earth to be a successful negotiator, it is not so. Apart from having good skills as a negotiator, the most important factor is to Prepare. When negotiating on behalf of your company, you must first of all know what you are talking about. Some of the things you will be talking about are, Suppliers Price & Cost, Supplier Delivery Times & Costs, Supplier Service Response time. And so on. Now ask yourself this question: If you do not have good information about these items, how are you going to negotiate? Well, you cant negotiate until & unless you have answers to these questions. So again when it comes to purchasing negotiations you will win before you actually start negotiations. Think about the following scenario. You are meeting the supplier and you have the following info. Suppliers price is 10% above market price and hes making 45% margin on your project (You discovered this by doing a price/cost analysis). The 45% margin is split as follows: 20% on goods sold, and 25% on the maintenance/service contract. (you also know this because you found the Producer Price Index for the goods delivered and services for that type of contract) The normal market margin for goods is 12% and for services is 18% - total of 30% as compared to 45% that your supplier wants to make.

While this is a simplified example, once you have this information, it is much simpler to negotiate with your supplier. If you have the best supplier you may be willing to pay a bit extra but not 50% more than the market (market is making 30% GP, as compared to 45% of your supplier).

II. Who are the Suppliers you Must Negotiate with?

This is also part of being analytical. If you have been a while in purchasing you know about ABC Analysis and how that helps classify suppliers/inventory into 3 categories (A, B, C) based on how much you spend with them. It is an accepted fact that any company will spend 80% of its money with 20% of suppliers, the next 15% of the money with the next 15% of suppliers and the final 5% of money with the 65% of the suppliers. You dont need an MBA to see that you will achieve the most procurement savings if you focus on negotiating with A Category suppliers, since thats where 80% of your money is spent. However there are cases where you want to be careful in negotiating such as sole or single source procurement, where you have only 1 supplier for that item. Also in case of capital equipment when you are acquiring a large item that costs lots of money, you need to spend time to prepare and negotiate, since these are cases where you can save substantially.

III. Approaches to Purchasing Negotiation with Suppliers!

This is where the psychological process comes in that you need to use persuasion, communication, verbal & non verbal skills. Basically there are 2 types of objectives and approaches to purchasing negotiation. The first is the Confrontational or Lose Lose approach where you dont care whether the suppliers makes or loses money. You just bang on the supplier to give you 20% discount no matter what. Lose - Lose Approach We call this lose-lose because while you may get the discount you want in the short term, that will come at the expense of quality, delivery times etc. So at the end while the supplier looses in the discount given the buying organization loses more than the discount given. Apparently that was one of the approaches during their contract negotiation process, taken by GM with its suppliers and after a while suppliers found themselves out of business (and GM soon thereafter while there are other fundamental issues to GMs bankruptcy this also contributed). Unfortunately it seems that this is the case with 80% or so of purchasing negotiation. Win - Win Approach The second approach is that of Win-Win Negotiations. For example, when you write a price negotiation letter to the supplier, you want to be fair to the supplier and ensure that he makes a reasonable profit but he delivers the products/services with the highest possible quality and on time. While Win Win type is most talked about it happens in only about 20% of cases. Plus this is not easy, depending on whos supervising the purchasing department and company culture. To recap first of all you want to spend your time with worthy suppliers ie those who you spend lots of money with (A Category). Then you want to extensively prepare for your

purchasing negotiation. Finally, when on the negotiation table work towards a Win-Win strategy that helps the supplier make a reasonable profit, and helps your company get the product/services at the required quality.

Vendor Relationship Management

Vendor Relationship Management or VRM as it is often called is a set of tools, software and services that help companies manage their vendor relationships. One major advantage of Vendor Relationship Management is that the purchasing company has control of the process and more importantly the information that results from the interactions. Many vendor companies use Customer Relationship Management (CRM) software and tools to manage the purchasing processes. During this process the large vendors collect $millions of customer information that they mine for marketing and advertising purposes. The purpose of CRM is to increase the value of a customer by cross-selling, up-selling, improving retention and thus reducing overall customer management costs. With VRM, they will not be able to do this so losing the business advantage and consequentially increasing the costs of servicing customers. Purchasers on the other hand want to reduce purchasing costs, increase their vendor benefits and reduce the prices of the products purchased. This seems to point to the purchaser controlling the process via VRM. Vendor Relationship Management came to the fore with ProjectVRM, a research and development project from The Berkman Center for Internet & Society. It was created in 2006 by Doc Searls, a fellow of Berkman. Vendor Relationship Management is based on the core belief that "free customers are more valuable than captive ones".(1) It aims to encourage purchasers to be free from the control of vendors. Doc Searls appears to be the main promoter of VRM but there are several detractors that do not believe that it will happen or work. The main obstacle seems to be persuading vendors to: Give up the benefits of their saved data, thus allowing purchasers to benefit from the marketing advantages they previously owned. Introduce the processes and systems required to instigate VRM with multiple customers. Allow purchasers to manage their own processes. Implement the extra security features that would be required.

Many people think that Vendor Relationship Management is the future, the first tools were only released in 2009, and there are few current adopters in the business marketplace. CRM is firmly entrenched as the main method of managing the processing interaction between vendor and purchaser. Will vendors give up their advantage and change their expensive tools? Only time will tell.

What is Tender Management?

So what is tender management? In todays competitive business world, many potential projects and services are put out to tender. That is numerous potential companies are provided with the opportunity to bid for the work. In their bids, they will describe how their company will solve a business problem, provide the service required or supply the goods requested. They will also need to provide a competitive price for this work. The process of designing and writing these proposals or tenders, complete with the competitive pricing, is called tender management, proposal management or bid management.

The Art of Tender Management

As a company is competing against many other companies that may have the same or better qualities and lower prices, the art of tender management or writing a winning tender is highly skilled. A good tender writer who really knows how to write a bidand who will make the tender stand out from the competitors is highly sought after.

When does Tender Management Start?

The tender starts when an appropriate Invitation To Tender (ITT) has been identified. The ITT is a formal document that is published by a purchasing company in order to notify other companies that bids for a piece of work, project or service is required. There is always a fixed deadline that the tenders must be returned by and this makes bid management very time dependent. It all adds to the stress of the entire process. What does tender management include? Analyzing the requirements within the ITT. Designing a solution that meets these requirements. Managing the staff that will write the tender. Developing a compelling proposal that will meet the requirements and stand out from other bids. Producing a pricing structure that will win the bid as well as produce a profit by the end of the project. Minimizing risk and maximizing the impact of the tender. Sticking to tight deadlines.

Tenders Are Not that Standardised

There are standard bid management processes available to manage these activities and one published bid methodology. There are also some computerized systems that will manage the workflow of a tender management process but bid management is nowhere as formalized as project management. This makes experience proposal writers with a history of winning highly sought after. A tender or bid writer manages risk very well and is always organized and able to manage staff within a very highly charged environment. Framework Tender Agreements Such is the popularity of tendering that framework agreement tenders are now being offered. This is where a company tenders to receive a framework agreement that then provides them with the opportunity to tender for future work with the organization. These framework agreements are particularly popular withgovernment tenders and large companies and are often found in information technology and staffing. Tenders can be low level such as a cleaning service or they can be highly prized, such as a bid for a multi-million dollar new computer system but they all have the same structure and processes. They start with the ITT request for bids and end up with a negotiated contract. A good bid manager knows how to manage the process, whilst juggling staff, information overload, searching for missing information and managing time frames.

E Procurement - Challenges and Opportunities

E procurement is an automation tool for corporate purchasing process. The core definition is a business to business sale using the internet as the medium for order processing. E procurement is more than the simple shortening of the supply chain with the Internet closing time and distance obstacles between suppliers and users of products. Instead, it is a comprehensive integrated IT network that encourages purchasing discipline and leverages group buying power for all procurement responsible people in an organization. E procurement systems consist of a number of different tools. These include automation of internal ordering processes, online catalogs from approved vendors, and an electronic Request for Proposal (e-RFP) process that leverages online auctions (e-auctions) to accumulate bids on providing goods and services for a specific project. The reasons for implementing e procurement systems all boil down to one critical metric: ROI. According to the Aberdeen Group study in 20041, companies that move to electronic procurement experience the following benefits: * * * * * Reduced off contract spend by 64%. Reduced prices by 7.3% for spend brought back onto contract. Reduced requisition-to-order cycles by 66%. Reduced requisition-to-order costs by 58%. Increased total spend under management of procurement group by 20%

What all these statistics boil down to is that where visibility exists, controls on spending are easier to implement. The term most commonly used is that e procurement reduces maverick spending. These systems consistently lower the total cost of acquisition. The challenge is that in a capital-tight environment, the cost of acquisition and fielding of an e procurement system can seem prohibitive. For pure-play systems, software licensing and enterprise fielding costs can run from $200,000 to $4,000,000 depending on the size of your organization. Other challenges to implementation include, as with any other new system fielding, pushback from users. Both internal users and even some vendors can create friction and resist the change. For leaders in organizations, it is critical to prepare both internal customers and actively communicate with vendors to ensure they are on-board with the program. In addition, electronic procurement is still growing and changing. Hosted solutions are coming into being, referred to as Procurement Service Providers (PSP) that provide externally hosted procurement systems.2 Like any 3PL or software service provider, for a lower up-front investment, a company can implement the service, though overtime it may prove more expensive.