The Future of Procurement: 2020: Everything will be Automated

What will Procurement look like in the future?

• There will be a move away from traditional ERP systems to web-based, open architecture systems that are able to interface with many systems in a company as well as its supply base.
• Centralized purchasing will become a thing of the past as end-users handle routine transactions in non-critical spend categories. Buying will be done by the people who use the goods and services. The sourcing system will enforce workflow and compliance.
• End-users will produce agreements that meet minimum criteria. Exceptions will be escalated to Sourcing.
• Contract management and administration will be automated, and will use templates and collaborative tools.
• Risk management will be built into the systems and processes. They will no longer be ad hoc initiatives.

Adapted from VISION 2020: Ideas for Procurement in 2020 by Industry Leading Procurement Executives http://bit.ly/kIwoW3

What are reverse auctions, and how are they evolving?

A reverse auction is a one-time on-line event in which pre-qualified vendors are invited to bid using provided criteria. Participating vendors can see the best price that has been bid so far, and can see where they rank in the bidding process. This allows for vendors to react by lowering their bids. The traditional reverse auction is best suited to spend categories where price is the only criteria.

Newer versions of the reverse auction, called online Requests for Proposals, allow vendors to compete on both price and non-price factors. This lets buyers seek out the best overall value.  The buying organization determines ahead of time which criteria are important, and what their relative weighting will be in the final decision. This weighting can be shared with vendors during the online RFP process. Criteria might include such things as such as production capacity, delivery times, or service levels.

Reverse auctions are useful tools, but it's important to know when factors beyond price will matter, and to consider these factors when making the final choice.

The Six Laws of Persuasion

Persuasion is the ability to influence people's thoughts and actions through the use of specific strategies.  Getting what you want in life will require negotiation with a variety of people and the use of communication skills such as active listening and attention to non-verbal cues. Mastering the persuasion process will enable you to create the attitude change necessary for persuading others to agree with your line of thinking. You must be able to sell your ideas, and in a win-win situation, provide the other side with a fair deal.

To become skilled at persuasion, you need to know more; you must understand the the Laws of Persuasion. Psychologist Robert Cialdini described the six laws of persuasion in his book, Influence:The Psychology of Persuasion. He discusses the prevalent methods of marketing, and how by understanding persuasion laws, you can control how much marketers unduly influence you, as well as how to use these laws to your benefit during negotiations.

Cialdini’s Six Laws of Persuasion:

1. Law of Reciprocity  People try to repay what others provide them. Small favors bring on a sense of obligation. People feel compelled to “return the favor.” If someone gives you something you want, then you will wish to reciprocate because you now feel obligated. In negotiation, limited disclosure of the real reason for a stance, such as "this is all the money we have" can induce a concession from the other party.

Purchasing Ethics: 7 Sensitive Situations

The procurement group can sometimes find itself in the uncomfortable situation of having recommended a supplier that has left internal customers unhappy. Even when cross-functional teams are sued to ensure buy-in to decisions, the end result can sometimes be a questioning of the ethics of the procurement group.

There are a few areas where procurement professionals can unintentionally add to this negative perception.

1. A procurement team member has accepted a gift from the winning supplier.  It could be something as small as a pen.
2. A procurement team member mixes business and pleasure with a supplier, such as discussing business over lunch.
3. A procurement tram member has a personal or financial relationship with a supplier or an employee of the supplier.
4. A procurement team member owns a supplier's stock.
5. A procurement team member provided certain information to one supplier that was not provided to other suppliers in a competitive bidding environment.
6. The procurement team did not provide transparency for a supplier selection, including failing to internally share selection criteria, proposal details, and the rationale for the decision.
7. The supplier selection criteria used was different than the criteria noted in the Request for Proposals.

Regardless of how low in value, procurement professionals should not accept gifts of any kind from suppliers. This is not because it automatically indicates impropriety, but because of how such an action might be construed. This includes free pens and lunches.

Step Five of the Vendor Selection Process: Contract Negotiation Strategies

The purpose of negotiating an agreement is to find a win-win solution that benefits both parties, and sets the stage for a long-term relationship. Negotiating the lowest price possible, especially if it is not sustainable for the vendor is to be avoided.

It's important to establish the following objectives in contract negotiation:

• Terms and conditions 
• Definition of goods/services 
• Compensation including total cost (shipping, taxes, fees, etc.) 
• Financing or payment terms 
• Dates such as contract start and end dates, renewal dates, etc.

Contract Negotiation Strategies

1. Rank your priorities and their alternatives It's not only important to know what your priorities are but also which ones are very important and not flexible, and which ones are lowest in importance and could be "given up" to achieve your top goals.  Higher priority goals should be discussed first.
2. Know the difference between needs and wants Political pressure can elevate "nice to haves" to "must have" status. allowing this to happen
3. Know your BATNA (Best Alternative to a Negotiated Agreement) It's important to know which of your requirements are non-negotiables so that you will know when it is better to walk away from the negotiation table rather than continue. This would also include upper price limits, or the iron-clad necessity for certain 
4. Define any time constraints and/or benchmarks or milestones This includes performance measurement standards such as start, delivery, completion dates or lead times, Associated penalties for non-compliance should also be established.
5. Assess potential liabilities and risks Responsibility and liability need to be established - whose insurance covers the project? Which party is responsible for ensuring government compliance?
6. Clarify confidentiality, non-compete, dispute resolution, and changes in requirements needs This needs to take place before any harm can result.
7. Repeat the above steps from the perspective of your vendor It's important to the relationship that both parties benefit from the contract. Signing a contract with a naive vendor that is damaging to them will be harmful to both parties, and could have a long-lasting negative impact on future contract negotiations with that or other vendors.

Adapted from Contract Negotiation Strategies: Step #5 in The Vendor Selection Process, about.com: http://bit.ly/d4F9Ip

Step Four of the Vendor Selection Process: Proposal Evaluation and Vendor Selection

The main goal of this step is to reach a decision that's in the best interests of the company while minimizing politics and personal preferences that are not based on the facts.

1. Preliminary Review of all Vendor Proposals All proposals should be reviewed for clarity and completeness, and any ambiguities or gaps resolved by the vendor before analysis begins.
 
2. Record Business Requirements and Vendor Requirements The business and vendor requirements of the project should be listed in a spreadsheet.
 
3. Assign Importance Value for Each Requirement Each requirement should be assigned an importance value on a scale of one to ten.  The average of individual team members ratings can be used, or if the team is small, an agreed upon value can be used.
 
4. Assign a Performance Value for Each Requirement This is the equivalent of assigning a grade to vendors for each of the requirements defined in step 2.  Average team members ratings can be used, or the team can agree on a value.  In some cases, vendors will have failed to meet a requirement, and they can be eliminated from consideration.
 
5. Calculate a Total Performance Score This is done by multiplying each Performance Value by the associated Importance Value, and summing these to get the Total Performance Score.
 
6. Select the Winning Vendor The Total Performance Scores should be used as a a starting point for discussion of the top vendors, but not as an absolute decision maker, especially if the top scores are clustered.  Vendors whose scores are very low should be able to be eliminated without much further discussion and analysis. 

Adapted from Proposal Evaluation and Vendor Selection Step #4 in the Vendor Selection Process, about.com: http://bit.ly/atoDH5

Step Three of Vendor Selection: How to write RFPs and RFQs

A Request for Proposal (RFP) is used for services or complex products where the quality, service or final product will be different from each vendor. Negotiation points will depend on these differences.

A request for Quotation (RFQ) is used for commodities, simple services or straightforward parts with little room for differentiation between vendors. Negotiation points will depend on it things beyond the actual product or service such as delivery charges or schedules, packaging, or after-sale support.

The purpose of RFPs and RFQs is to evaluate each vendors ability to meet your company's interests.  They can also be used to leverage the competition between vendors to arrive at the best deal for all stakeholders within your company.  Most importantly, they start building the relationship between your company and the vendor.

RFPs and RFQs should contain the following:

1. Submission Details This should include items such as company address, contact name and deadlines.
2. Introduction and Executive Summary This should include a brief introduction of your company and the requirements of the product or service desired.
3. Business Overview and Background This should include an overview of your company's business, products, and market sector, which will help vendors understand your business needs, and provide background information.
4. Detailed Specifications For an RFP, detailed specifications that are qualitative are needed to drive the vendor selection process.  For an RFQ, quantitative specifications in the form of an explicit set of technical requirements including such things as measurements, minimum tolerances, and quality standards should be included. Other items that should be included include schedules, deliverables and milestones, including penalties and rewards if appropriate.  This list is not exhaustive; it is important not to miss anything.
5. Assumptions and Constraints This includes items such as expenses, upgrade modification allowances, licensing rights among other things.
6. Terms and Conditions These may include financing options delivery penalties, and service levels among other things.
7. Selection Criteria This information may be kept confidential, or it may be shared with prospective vendors to better help them to meet your company's needs.

Adapted from Request for Proposal (RFP) and Request for Quotation (RFQ), Step #3 in the Vendor Selection Process, about.com http://bit.ly/bZ3Brv

Step Two of Vendor Selection: How to Conduct a Vendor Search

1. Compile a list of possible vendors. You will need to collect contact information in a spreadsheet or database. Possible sources for your search could include:

• Google 
• Business associates 
• Registers and directories specific to your industry as well as general ones such as The Thomas Register 

2. Select vendors from which to request information. Use RFIs to narrow your list. Depending on project size, RFIs should be sent to 3-12 vendors.

3. Write a Request for Information (RFI). For smaller, straightforward needs these should be short and simple.

• A cover letter introducing your company 
• A description of the good or service needed 
• A request for company brochures 
• A list of vendor criteria including the response deadline 

Some examples of questions that would establish vendor criteria:

• Are your employees bonded and insured? 
• Can you provide references that we can speak with directly? 
• What are the hours of your technical service department? 
• What is the turn around time for local orders? 

4. Evaluate responses and create a short list of vendors to assess further. Gather the vendor evaluation team and go through the responses. Any vendors not meeting any of the "must have" requirements should be eliminated. The final list should have between two and seven vendors, depending on the scope of the project (both duration and dollar amount).

Adapted from Step #2 in the Vendor Selection Process, about.com http://bit.ly/cCY6Ei

Step One of Vendor Selection: How to Analyze Business Requirements

The first step in choosing a vendor is analyzing your business requirements.

1. Assemble an evaluation team.  This team must include representative stakeholders who will be impacted by the final choice of the vendor for the product, material, or service. Commodity councils, staffed by volunteer employees, are an invaluable method for gathering end-user input.  The size of the evaluation team should range from three to no more than ten participants.
2. Define the product, material, or service. This may be a single line or paragraph from a bill of materials, and it may contain specifications.  It's important to keep "wants" separate from "must haves".
3. Define the technical and business requirements.  Technical requirements can be obtained from the bill of materials or from engineering drawings or manufacturing procedures. Business requirements should include not only required features, but specific minimum quality standards.  The more detail in the requirements, the more likely the outcome will be satisfactory.
4. Define the vendor requirements. It is important to list the criteria the vendor must have.  This can include but is not limited to size, market capitalization, availability of references, domestic origin of raw materials and location.
5. Publish a requirements document for approval.  It is important to aggregate all the information collected in the previous steps,so that members of the evaluation team can provide feedback and ultimately approval.  It can then be sent to senior management for final approval.  This document will become the basis for generating a Request for Proposal (RFP) or Request for Quote (RFQ).

From Analyze Business Requirements Step# 1 The Vendor Selection Process, about.com: http://bit.ly/ad1ZZC

Five Steps to Successful Vendor Selection

The vendor selection process can be daunting, especially if the goods or services are unfamiliar or technical.  Following these steps will help to ensure a successful outcome.

1. Analyze the organization's business requirements:

• Assemble an evaluation team including end users
• Define the product, material or service
• Define and prioritize the technical and business requirements
• Define the vendor requirements
• Publish a requirements document for approval

2. Perform a vendor search:

• Compile a list of possible vendors
• Select vendors from which to request information
• Write a Request for Information (RFI)
• Evaluate responses and create a "short list" of vendors

3. Prepare Requests for Proposals and Requests for Quotations:

Submission Details:

• Introduction and executive summary
• Business overview
• Background
• Detailed cpecifications
• Assumptions and constraints
• Terms and conditions
• Selection criteria

4. Evaluate the proposals and select a vendor:

• Perform a preliminary review of all vendor proposals
• Record business requirements and vendor requirements
• Assign  an importance value for each requirement
• Calculate a total performance score
• Select the winning vendor

5. Negotiate a contract:

• List rank your priorities along with alternatives
• Know the difference between needs versus wants
• Know your BATNA (best alternative to a negotiated agreement)
• Define any time constraints and benchmarks
• Assess potential liabilities and risks
• Define confidentiality and/or non-compete requirements
• Plan for any future dispute resolution
• Assess all of these from the perspective of the vendor (i.e. walk a mile in their shoes)

Adapted from "The Successful Vendor Selection Process" on about.com: http://bit.ly/c12HI5