Warren E. Norquist, C.P.M.
Warren E. Norquist, C.P.M., V.P. Purchasing, Polaroid Corp. ret. Executive Fellow, Univ. of Mass. at Dartmouth.
83rd Annual International Conference Proceedings – 1998
Non-Use of Purchasing Cost Company over $100,000,000 per year:
A few years ago two large oil companies combined to form a much larger oil company. Their purchasing organizations were also reorganized into one. (The buying of crude oil was not done by the purchasing function in either company.)
The new VP of the combined purchasing organization decided to compare the prices paid for items such as: tires, batteries, fan belts, wipers, and brake fluid, which were resold though each company’s gas stations. On a weighted basis, he found Company B was paying 20% more than Company A.
Company A had purchasing people buy all the items that were resold though its gas stations. At Company B, this buying was done by marketing, NOT by Purchasing.
The difference was over $100,000,000 in potential profit that didn’t get to the bottom.
The poor performance of Company B’s marketing group as buyers verses the professional purchasing people in Company A is not surprising. You and I know many managers that buy things without getting the essential skills.
Purchasing Skills That Many in Management Don’t Have
Purchasing professionals have skills that many in other areas of management do not have or have never developed. The five important purchasing skills I have repeatedly seen lacking in many non-purchasing managers who do buying are:
- The ability to comfortably talk about price
- Knowledge of the available suppliers, the current capacity situation, and the impact of the economy.
- The patience needed to negotiate successfully
- Knowing and working the details in order to get value for the money spent.
- Understanding what needs to be kept confidential.
The Ability to Comfortably Talk About Price
The ability to talk price is not a common skill. Many in management are very uncomfortable with the subject. They may bring it up but will drop it at the slightest resistance. Or, their words may sound effective but their body language says otherwise. I have often heard salesmen aren’t good at buying. Why? Sales people are trained to worry customers that a lower price means lower quality. They are trained to imply to customers that haggling should be beneath their dignity. As buyers, they often don’t question prices.
Some of the situations I have encountered are:
- Price drops of 60% in services and supplies once bought by non-purchasing personnel, when Purchasing became involved.
- Consultants setting price by watching for facial change to determine when the price resistance point was reached.
- Top management buying office furniture without questioning the price.
- Not questioning the price of training programs.
- Not spelling out the expense charges of consultants ahead of time, resulting in being charged for first class fares and the Ritz for out-of-town consultants.
Knowledge of Product, Services, Suppliers, Market and Economy
Non-purchasing people pay more because they do not have the detailed knowledge that marks the purchasing pro.
- Purchasing pros know when a brand is really a resale item and buys direct for less. Viewgraphs can be bought for 60% less than national brands that are just resales.
- Purchasing experts on office furniture know which major brand of office furniture uses a list price that is five times factory price. You have will have only the normal full price if you get 60% off from the dealer.
- Product price increases that are unjustified because the cost increase claimed never occurred.
- A purchasing pro knows what costs are up and what are down so requested price increases can be analyzed.
Non-purchasing buyers seldom have the ability or patience to get fully prepared on delivery and specification requirement or make cost estimates. The patience to negotiate is almost totally absent. Examples:
- Division officer who was in a hurry to check off that negotiations were complete.
- Negotiations with the Japanese who use long pauses to force you to talk first. How one manager handled it.
- Contracting for a new building design under pressure to hurry up and forget the clauses that would assure value.
- Hurrying up to sign with the low bidder when there may be a less expensive way.
Know and Do The Details
The non-purchasing manager often settles for either a vague description of requirements or adopts a contract written by the supplier with terms in the supplier’s favor. Statements on price are often a starting point with later definition setting a higher price. Examples:
- Officer buying equipment and agreeing to pay too much, too soon.
- Failure to determine time of ownership and when product has been satisfactorily delivered.
- Failure to get warrantees, instruction manuals, and adequate drawings included in the price.
- Agreement to pay full price when the project may be terminated early before large costs were incurred.
Understanding The Need For Security
There is a need to teach non-purchasing managers and other professionals on the information that a supplier could use to get a negotiating advantage and the information that would help Purchasing get an advantage. For example:
- Many managers with and without realizing it carelessly give out information as to urgency, budget available, alternate suppliers, internal squabbles, and prices paid to others.
- A Senior VP told one of two suppliers, “You were a big reason for our good profits last year.”
- One major utility keeps bid information secret from engineers to stop leaks to suppliers. When cost data is needed to decide between alternatives, only the differential in costs are provided to engineering.
- Bids that match budgets to four significant figures.
Other functions often comment to a competitor on a recent quality problem of another supplier and it gives the impression that supplier is out of the running. The next day the problem might be solved but it is hard to retract the impression the comment made.
Purchasing Often Gets Left Out When Services Are Bought
Since Professional Pros have skills not usually seen in most managers, why is purchasing strong in buying product used in production but not in buying services. Because:
- the managers in those areas may want to do the buying themselves and thereby enlarge their jobs. and
- Purchasing may feel resistance and therefore not bother to get the knowledge needed to effectively use its other skills where its abilities are unmatched. and 3) the service providers want to avoid the Purchasing department. By avoiding Purchasing the contractor can often avoid: written specs, detailed questions and analysis of cost, itemized bills, a requirement for receipts and an unquestioning acceptance of “their professional rate”.
A study by CAPS reinforces my view that Purchasing should be sure it has the knowledge and the respect to negotiate for the services the company requires. It can then make the case for Purchasing involvement based on the other skills Purchasing can bring to buying services.
A CAPS Study On How Purchasing is Perceived by CEOs
The study CEOs’/Presidents’ Perceptions and Expectations of the Purchasing Function by William Bales and Harold Fearon report “There appears to be a large gap between what CEOs want and what they think their organizations are receiving”.
The authors concluded:
- CEOs/Presidents have caused or allowed the purchasing of goods and services to become very splintered throughout the many departments….
- The splitting of purchases naturally results in a lower perception of the importance, and often the effectiveness of the function.
- Purchasing CPOs must assume significantly more responsibility… They can do this by researching the “others” who have assumed purchasing responsibilities and by determining the effectiveness of those purchases. They can then identify total organization and potential savings if purchases are handled professionally.
Purchasing Should Get Involved in Service Areas
Purchasing has a lot to contribute and too many managers settle for concentrating on production/operations. A lot of functional areas would have more respect for Purchasing and the company higher profits if they got help from Purchasing in obtaining the services they need.
How Purchasing Can Sell Involvement In Services
First, Purchasing must study an area and learn from the literature and the trade organization of that service area. This is a time to network with others in NAPM.
Sell that involvement of purchasing can allow your customer to separate his/her professional relationship from the pricing and billing one. Point out that a doctor lets his staff talk about price and that the user of the service would gain by letting you talk price. Since most managers don’t like to talk price, this is a major selling point. I sold a marketing manager that we could cut his advertising, printing, print ad production, television production, and network advertising costs and the savings could buy more advertising. The amount saved far surpassed his expectation.
Hiring consultants is a major area where purchasing is left out. The literature in the field, both books and monthly publications can bring one up to speed in a few months. The checklist from the book Zero Base Pricing can help you get started. A similar checklist can be customized for each service area. There are trade associations in each service area. Getting their literature and attending their conferences will bring a purchasing pro up to speed very fast.
If Purchasing makes the effort to have #2 – The Knowledge Skill in a service area, the strength in Skills 1, 3, 4, and 5 will provide an overwhelming case for managers using a service to get Purchasing’s assistance in getting what they need. If your people don’t have the level of skill you see as necessary in any of these five skills, I recommend you get them the training and experience. Only by being strong in these areas (especially the specific knowledge area for each service are) can purchasing deserve the respect and use by management that the profession desires.
A Checklist For Consulting Contracts
- Break the statement of work into milestones, with a product at each milestone.
- If feasible, request pricing on a lump sum basis.
- Establish budgeted man-hours for each milestone, if compensation is based on daily or monthly rates.
- Agree on the people to be assigned.
- Specific Names
- Establish lump sum prices with payment milestones or billing rates at a daily or monthly rate by individual consultant. Tie payment to completion of specific milestones.
- Agree on the amount of the customer’s involvement.
- Agree on the manner in which the consultant will work:
- Total independence?
- Under direction of the customer’s representative?
- Frequency of reporting and to whom?
- Expense Control
- Which consultants are local, which not, and what travel cost will be reimbursed?
- Advanced Agreement in Writing
- No work to commence until the buyer has agreed in writing to the proposal.
- Billing Detail
- Invoices to be documented by specific time period covered
- Payment milestone (if lump sum)
- Man-hours used
- Billing rates on a monthly basis
- Expenses documented by receipts.
- Project Escalation
- No increase in scope will be allowed without advance agreement in wiring as outlined above.
- Completion of Nondisclosure Agreement if appropriate.
- Ownership of product or output.
- Will your company allow the use of its name in the consultant’s promotional activities?
Taken from Zero Base Pricing by Burt, Norquist, & Anklesaria.