Are Procurement Professionals Negotiating Too Aggressively?

In a post over on our Linkedin Group Jeffrey Friend posted a link to a Forbes article raising the question – Are Procurement Professionals Negotiating Too Aggressively?

The article contained many embedded articles within it, making the subject matter very broad and complex. We provide our analysis and insight below:

The Forbes article is like many of its kind, strong on rhetoric and weak on substance and reminds me of the many complaints from advertising agencies when procurement stepped into the mix.

To argue that purchasing departments are negotiating too aggressively requires further definition and context. For example; what is too aggressive? Is the purchase a leverage item or a strategic item? We don’t know either from the article.

Coughlin from Expeditors International complains about:

“a sharp rise in buyers pitting suppliers against each other.”

I am not sure what he means by this but basically it implies competition where previously there was not much. Is this not exactly what a buyer for a leveraged buy should be doing for their company?

Another complaint emerges:

“Customers, Shippers, and consignees are writing their own rules, developing contract terms and conditions and are shifting significant and unreasonable risk to their service providers and carriers.”.

In my experience it has always been best practice for the buyer to start with their own T&C’s.

The issue of being ‘unreasonable’ is subjective, related to historical practices and not necessarily what is fair and equitable to both sides. Maybe, buyers in his industry are waking up to existing inequalities and seeking to address them. What is unreasonable is a matter for negotiation.

In Coughlin’s defence, his example of a customer who was demanding liability terms that equated to 500 years’ worth revenue for a lost shipment is clearly an unreasonable position for a buyer to take. Also, buyer’s statements such as the one quoted:

“All your competitors have said they accept our terms and conditions.”

This is a fairly obvious leverage statement that a well-prepared negotiator would easily rebuff. His role there is to educate the buyer to turn the talks around or use his BATNA.

Another contributor, Logistics expert/analyst Adrian Gonzalez agrees that procurement departments are going too far and uses the example of a company that performed a reverse auction to select a 3PL to its large transportation spend. He states:

“this company was turning over several hundred million dollars of transportation management responsibility to the lowest bidder.”

The statement requires more context to determine if it is correct.

A reverse auction does not compel the buyer to select the lowest price. Usually, there is a traditional RFP before the reverse auction to level the quality/service playing field with only qualified vendors participating in the auction. Weightings can be used based on non-price criteria that are applied to each bidder’s quote to arrive at an overall value figure. This is not the same as awarding the contract to the lowest bidder. So again the application of best practice is all that is required. The use of an auction is therefore not grounds for complaint.

The article does point towards Professor John Henke’s more reasoned arguments using his pioneering research on Chrysler’s procurement practices that show a direct link in aggressive procurement practices and Chrysler’s profitability. A thoroughly good read for anyone interested.

Henke calculates Chrysler lost up to $24 billion in profit in the past 12 years due to –

“lost supplier trust.”

associated with adversarial procurement practices. The issue of trust is key here. Not aggressive or soft negotiation techniques. Lost trust is due to swings in approaches to suppliers. A buyer can be tough, and still trusted. Brave CPO’s must clearly fight for consistency in approach to suppliers irrespective of an upturn or a downturn to develop a relationship based on trust.

The article then takes another dive down the subjective path using the recent publication by Chick and Handfield, ‘The Procurement Value Proposition: The Rise of Supply Management’ to extract further sound bites, such as:

• Calling for procurement organizations to move away from being only about cost reduction to playing a role in value-adding activity and influencing business strategy.
• “Organizations continue to grow their supply chain global footprint. As companies expand globally, so does supply  chain complexity. Increased globalization brings increased risk of supply disruption.”
• Organizations should “embrace complexity” and manage it through more rapid responses, better market intelligence, and greater adaptive capabilities.
• Call for organizations to recognize procurement as a strategic business function, and for procurement professionals “to bring more to the table” by pushing procurement in “directions that represent new business models and approaches.”

Are Procurement Professionals Negotiating Too Aggressively?

Puting things in context:

That procurement professionals must develop differented negotiation strategies is accepted. Many procurement organizations have been trying to focus on ‘value’ rather than cost for years, but the business priorities set by the CEO, CFO, etc. work against this. The desired change the article calls for is, therefore, dependent upon a combination of CXO enlightenment and procurement function capability to both make the business case and demonstrate the capacity to deliver on the promise.

 

The search for the holy grail of ‘Value’ is unfortunately still elusive to all but the very best procurement organizations. The majority, still need to focus on developing the capability to make the case for the structural shifts necessary in most organizations for procurement to deliver on its value proposition.

Nuff said…

We welcome your comments… what do you think?

You may also like: The-corporation-as-a-negotiating-entity-part-1 which you can view here