Transport Procurement StrategiesPosted November 30, 2017
This morning eighteen procurement professionals from thirteen companies joined us for our first Supply Chain Breakfast event. Hosted by our partners KPMG, at their offices in Auckland, we see this as a kick-off to creating and lifting a community of supply chain professionals.
What did you miss? Here is a quick recap.
Why and When to Find New Suppliers
If you are in procurement, you can spend resources finding new suppliers, or spend them developing an existing supplier into a better partner. Both strategies play a role, but we wanted to go deep on the first: exploring new suppliers.
When should procurement be exploring?
The easiest strategy is “win-stay”, beloved by slot machine and blackjack players. If your current supplier makes you happy, don’t look around. This is sloppy, but it self-reinforces. Exploring when you are dissatisfied is virtually certain to lead to improvement while exploring when you are happy may not.
The second approach is to check the market once a year with a tool like an RFQ. It mechanically has procurement explore with a fixed amount of resources and on a predefined repeating cycle. That is better but still wasteful and underperforming. There is nothing to say that once a year for a few weeks is the right time or amount to explore.
The best approach is to explore when you have a good chance of getting a better result. But how would you know that?
The naïve way is to think about the total number of available suppliers and compare it to the number you have already evaluated. If there are 100 providers, and procurement evaluated 5, then there are 20:1 odds that a better offer will be uncovered. This naïve approach can be improved with industry expertise, i.e. checking the most likely candidates first.
The other consideration is how much improvement is possible. That is a function of the gap between what you have and the best in the market. For some services it may be thin, for others it is fat.
The last consideration is the flexibility of switching supplier. How long will you be contracting the services for, and what are potential switching costs? Multi-year contracts with substantial implementation requirements deserve more exploration of options.
So, if exploration is worthwhile how should you proceed?
The first step is to set the winner determination rules, i.e. make your options comparable. Nothing is worse than getting many suppliers to submit offers and then realising you were not clear with them or internally about what matters the most. Setting trade-offs before hearing offers also de-politicises the selection process.
Once you agree on how to grade suppliers and their offers, the second step is to open the net wider. Many procurement processes have unstated or unintentional forces that result in options being cut too early. Attend to those issues. Also, try to create offer flexibility. Allow subsets or supersets of services to be offered. In supply chain, decoupling of transport and warehousing is a great example for that.
Finally, exploring needs to deal with the risks of the new business relationship. These risks are largely deception and secrets.
Deception is the most pernicious because it is a counterparty intentionally misleading procurement. How to de-risk deception? Three steps: avoid, assume, and punish.
Avoiding deception is done by not creating incentives to be deceived and minimising your reliance on unverified claims. For example, offer to pay a nominal amount for answering an RFQ even if it leads to disqualification. Also, have set budget and resources for verification of material facts.
Assuming deception is occurring is a powerful tool in itself. Simply tell a supplier that their claim appears dubious and that you’ll proceed with a watered down version. If they want to provide evidence proving the claim in full, that’s great. If they cannot or will not, you are not going to be caught by a bad assumption.
Finally, make it clear that deception will be punished through contractual terms and also publicise the facts. Make deception a costly strategy for a supplier, so they stay aligned with your needs.
But how to deal with secrets? Secrets are either information asymmetries or unstated assumptions. The best remedy here is to have great contracts. A transport contract should cover the eight dimensions shown below. Writing down both your and the supplier’s assumptions into a contract will uncover almost all the material secrets that normal procurement has missed.
The Eight Mechanisms in a Good Transport Contract
- Decision rights. The transfer of authority to make a decision from one party to the other.
- Rate card. How price is calculated for a given service.
- Minimum purchase commitment. The buyer’s obligation to purchase.
- Minimum supply commitment. The seller’s obligation to accept requests.
- Order process. How the buy order is to be executed, including flexibility or strictness on quantities, timeline, mode of communication, and so forth. Includes information sharing agreements during this process.
- Execution process. How the services will be executed, especially regarding the service level expectation. Includes information sharing agreements during this process.
- Payment process. The steps and responsibilities necessary for payment, including payment cycle time. Includes information sharing agreements during this process.
- Duration, durability, and enforcement. How long the contract will be in effect, in what conditions it is no longer valid, and the means one or both parties have to enforce their obligations.