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 This Issue—February 2005
 
In this third edition of Gunpowder, we borrow an article from Iasta, an e-sourcing applications vendor, and take a look at 5 tactics to developing a stronger value proposition for suppliers to participate in the strategic sourcing process. Next, just when you thought it was safe to get back in the water, guest editor Kumkum Dalal wades through the next type of outsourcing (this wave might surprise some of you). Finally, our editor-in-residence Lisa Reisman interviews Tony Poshek, an industrial products online auction expert. Tony provides some been-there seen-that bidding strategies for suppliers who are asked to participate in on-line auctions.

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Getting Suppliers Onboard
With the Strategic Sourcing Process

Since the advent of strategic sourcing and reverse auctions, traditional buyer / supplier interactions and relationships have changed—in some cases for the better. But in many cases, it has been for the worse. This, however, does not have to be the case.

The sourcing process, if structured correctly and if it includes non-price considerations, can bring great short and long term results to buyers. For buyers that have never competitively “sourced” a part, commodity or component, there is an especially large first time benefit. We would argue, however, that benefits have started to wane for some buyers in specific industry segments due to their approach to the sourcing process. Many buyers use the sourcing process with the sole aim of beating down the incumbent’s price (with no real intent to ever switch suppliers or to identify higher quality suppliers with better lead times, fill rates etc). This often creates a hostile negotiation environment, upsetting the incumbent and creating suspicion among the other invited suppliers.

Despite the shadier side of the sourcing process, there are real benefits to suppliers—participating in the strategic sourcing process is an easy way for suppliers to avoid SG&A expense and have an opportunity to win new business. This is especially true for suppliers who are invited to participate in an auction for a company that is new to the sourcing process. Even incumbent suppliers can benefit as well by winning a larger share of their client’s business when the buyer consolidates their total purchasing volume, increasing the size of the contract up for bid.

Getting all of your suppliers onboard with the process is not as easy as it sounds. In fact, it has become significantly more difficult in the past few years to convince suppliers in specific categories to participate (this is due in part to the reputation of some of the larger strategic sourcing service providers and technology vendors, who have operated by shaking up the supply bases in specific categories like metal stampings by looking at cost as the primary decision factor).

We won’t pass judgment on these tactics—many of these firms were arguably more ethical in their techniques than many purchasing departments, because of their marketplace rules and code of conduct—but they turned off many good suppliers to the reverse auction process, many of whom will refuse to participate in competitive sourcing events today (at least initially, before coercing).

To help bring suppliers onboard with the strategic sourcing process, the five-step approach outlined below can help. It’s not a panacea to winning over all your ideal participants, but it’s a good place to start.

First, it’s essential to make sure that the RFQ you structure is compete, well-written and contains critical information outside of just part or service specifications to allow suppliers to get a better sense of the buyer’s philosophy and outlook on supplier management. This might include:

  • A good overview of the company and its supplier development programs
  • A statement that describes the company’s philosophy on the strategic sourcing process and perhaps most important, a reiteration of the factors that the buyer considers to be important when making award decisions (particular emphasis should be made that lowest bidder does not necessarily win the bid and anybody that submits bids below “cost” will not be considered for future business with the buyer)
  • A discussion on when, how, and why the buyer uses reverse auctions and other negotiation strategies (this helps explain whether the company takes a partnering view toward their suppliers or a transactional “beat them with a hammer” approach)

It’s also critical to provide some history behind the part or service as well as an explanation of why it is now up for bid. In the case of direct materials or industrial MRO, it is also important to include good, clear drawings (especially in the case of build to print parts)—with no markings or identifiers of incumbent suppliers. For build to print parts it is critical to include specific descriptions of tooling requirements, including age, drawings, condition, etc. By providing insight into these areas, it will help suppliers develop a total cost understanding of working with the buyer over the course of the contract. In addition, the more comprehensive the initial RFQ, the more likely it is for suppliers to want to participate and respond. Smaller suppliers with limited staff are hesitant to devote resources to bid development when the information appears sloppy, incomplete or even inaccurate.

Second, it’s important to provide context to the supplier to win their participation and enthusiasm. The buyer must provide an explanation—either within a printed document, over the phone, or in person—of what it will take to move the part / product to a new supplier. For example, what is the buyer hoping to achieve? Is it a certain percentage savings? Is it improved quality and lower defect rates? Is it better fill-rates and on-time delivery? Be as specific—and honest—as you can.

Third, focus on non-price factors as well as price factors. Structure the RFQ and the sourcing event to include other critical data besides unit cost. This might include quality information, such as internal and customer PPM (parts per million) data, sigma levels, on-time delivery, or fill rates which are either examined separately or weighted into the overall price (or lowest bid). In the case of highly complex events with thousands of line items or lanes (e.g. transportation), it might make more sense to use a non-traditional negotiation format such as optimization which enables suppliers to bundle bids and factors rather than relying on a fixed process.

Fourth, constantly communicate with the supply base. Over communicate if you need to. Develop strong working relationships with suppliers and identify and address their concerns. A poor – or non – response from a supplier could mean that the supplier is gun-shy or has had a negative experience with reverse auctions—not that they’re not qualified to bid. Take the time to find out and see if you can overcome their concerns. Have they had any negative experiences in the past? Demonstrate empathy and understanding. Are there specific steps your team can take to make the supplier feel more comfortable with the bidding process? Provide rapid response (e.g. 24 hour response) to any and all supplier concerns. A phone call not returned from a potential, is indeed a response. Pull out all of the stops to understand why they might be hesitant to participate.

Fifth and last, if you’re working with a technology vendor or services provider who is managing the bidding process for you, ensure that they’re up front with the supply base about how they are getting paid. There are often misconceptions about the buyer / partner relationship. Many suppliers believe that the buyer will “mark-up” a fee on top of their bid. It’s important to be frank and clear about the economic interests over everyone involved in the process.

These are just a handful of tips for bringing suppliers on board. It would be possible to devote a whole book to the subject, exploring topics such as techniques for working with new suppliers versus incumbents, local suppliers versus overseas suppliers, etc. But if you start with a good foundation that focuses on full information disclosure—including the context of the bid package—you’ll pave the way for maximizing supplier participation in your events.

This article was generously provided by Iasta.

The Next Wave of Outsourcing: Design Services

In the domestic press these days (and even in Europe as well) it’s hard to escape stories about outsourcing. It seems everyday there’s a story about the movement of IT and Help Desk support, payroll processing, call centers, HR and financial processing offshore. In addition, many industries have also outsourced a wide range of direct materials or the parts and components used in the manufacturing process such as bearings, metal parts, ceramics etc. But most recently, the product innovation function—engineering and design have started to move offshore. In fact, the outsourcing of Computer Aided Design/Drafting (CAD) services is a huge area for cost reduction for small and mid-sized manufacturers.

Why are US design firms and manufacturers outsourcing CAD work?
The primary reason for outsourcing is financial. Overseas outsourcing provides advantages to large and small firms alike. Firms can now reduce the high labor costs associated with people who do CAD work. In addition, small firms are now able to take on the larger projects (in a cost effective way) that only a larger firm could take on just a few years ago. In some industries, production time is a major issue. For example, in the construction industry, as design and construction schedules become compressed due to client demand, preparation of design documents must speed up in order to deliver projects on time and within budget. Having access to reliable low cost helping hands give small and large firms an added competitive advantage. Moreover, collaborative technology makes it easy for the US operation to coordinate activities with its overseas partners. The US or European operation can focus on core strengths such as product ideation (the first phase in the product development process) which requires tighter coordination with the marketing and sales functions and/or manufacturing and distribution capabilities.

Who is benefiting from this trend?
Any firm currently using an in-house CAD system can benefit. This would include manufacturing firms in highly commoditized industries, architecture firms doing costly drafting work, civil engineering firms doing mass grading as part of land development projects and even mechanical engineering firms doing machine design.

Where are the service providers located and what do they do?
Some service providers are located in the US, but an increasing number are in overseas locations such as Eastern Europe, China and India. Indian firms are aggressively pursuing this market sector. These firms provide a range of tasks including:

  • Digitization of legacy graphics through raster to vector conversion of existing images and drawings
  • Production of detailed working drawings from the designer’s schematics and design development drawings
  • 3D visualization: modelling /rendering of civil/architectural drawings
  • Customization of in-house architectural and engineering design detail libraries for use in preparation of working drawings

How does a US firm with in-house CAD operations explore outsourcing CAD work?
We suggest the following low risk path:

  • Conduct a vendor identification search either on your own or through a third party provider. A search of this sort should begin with contacting your state or local international trade office and the international business committee at your local Chamber of Commerce. In addition, companies exploring the strengths of some of these firms should ask about the firm’s accreditation.
  • Start with a sample of work already done just to assess the service provider’s competence and strengths.
  • If you are satisfied with the results of the sample project, continue with a small project to further assess quality, on-time delivery and competence.
  • Continue with larger projects.

To get the maximum benefit with minimum risk, outsource work that is standardized and repetitive. Also, choose work that is low profile but has high production cost such as drafting and detailing.

CAD tasks are well suited to the model of outsourcing standardized and repetitive activities associated with high headcount costs and low intellectual property concerns. Manufacturing, engineering and architectural design firms are benefiting from outsourcing of CAD, 2D, 3D and CAE work. As CAD tools are generic, engineering firms and CAD managers will have to answer the question, “How do I improve my design efficiency and differentiate the services I provide to my clients?” As cost containment becomes an increasing concern for maintaining the competitive edge, outsourcing becomes a vital business strategy.

Kumkum Dalal is President and CEO of Global Reach Consulting, an advisory firm specializing in sourcing and doing business with India. Kumkum can be reached via email at: kcdalal@grc-consulting.com.

Q&A with Tony Poshek—Auction Strategies for Suppliers

Based in Chicago, Tony Poshek is a Strategic Sourcing Manager for a major industrial products company. Prior to his current position, Tony directed and led hundreds of online bidding events worth over $1B with FreeMarkets. Tony has sourced a full range of industrial products including: metal stampings, castings, plastic injection molding, rubber components, PCBs, electrical components and capital equipment on behalf of many Fortune 500 companies. We caught up with Tony to get his perspective on the advantages for suppliers to participating in online auctions and perhaps more important, a few bidding tips. Tony can be reached directly at tposhek@yahoo.com

When a supplier says, “I don’t like to participate in reverse auctions because we have had a negative experience with them,” how would you encourage them to participate?
For new (i.e., non-incumbent) suppliers, reverse auctions are a great way to get your foot in the door. Suppliers have easy access to new sales revenue that otherwise might not have been available via other channels. I also believe that shorter sale cycle times, reduced SG&A expense, and the opportunity to get in front of a company that you might otherwise either not have known about or couldn’t get a meeting with on your own are key benefits to suppliers.

One benefit that never seems to be articulated is that online auctions are one of the only ways in which a supplier can see exactly where they stand in the market. These events allow suppliers to benchmark their pricing against peers and obtain real time market data. This is invaluable. Large companies spend tens of thousands of dollars per year trying to obtain this type of intelligence. As a supplier to a small and mid-sized firm, you will know, for example, if you lose a bid by 30% your company probably has some serious problems to address.

Another advantage of participating in online auctions is that when they are run by a third party, they tend to follow strict marketplace rules creating a competitive but fair playing ground for all participants. Lowest bidder should always at least get an introduction to the buyer. When responding to a buyer’s offline RFQ, suppliers usually do not receive buyer feedback on their quotations nor do they often know exactly where they stand vis-à-vis their competition. Online bidding events go further in creating a level playing field.

How should suppliers think about their bid strategy prior to the event date?
My advice to all suppliers is to come prepared. By that, I mean that every supplier needs to know their drop dead walk away price. They may not submit it but they need to know it. But let me digress for a moment. I’d like to discuss what I call “reverse auction dynamics”. Whether a supplier decides to take a bid strategy of ‘early and often’ or ‘drop- the-market” with a few minutes to spare, there are certain dynamics that always appear. Most markets tend to start out as a horizontal line from left to right with a slight downward slope. Somewhere between half-way and two thirds of the way through an event, the slope tends to become steeper moving toward a vertical direction and in the last seconds, begins to take on more of a horizontal appearance. What this tells us is that there really is no wizardry involved with when, how often or how much a supplier should bid during an event. All events sort of look the same way.

Of course the fewer the number of suppliers, the greater any one supplier’s chance of being the winning bidder. If you are trying to get yourself noticed by the buyer because these are the types of parts that fit your company’s core competencies or your boss told you this is the type of work you ought to be doing more of, you might want to consider bidding very aggressively. If this is less strategic to you, you might only slightly decrease your price. All suppliers would serve themselves well if they can honestly look at themselves through the eyes of the customer. Has the supplier done business before with this buyer? If not, how will the supplier ‘get noticed’? Some suppliers who may have some type of relationship with the buyer might know that the buyer has some concerns about their quality, for example. Knowing this, if a supplier wants this piece of business, the supplier should try to differentiate on price. The exact opposite is also true. If the supplier knows that the buyer has had quality concerns, the supplier might not have to be as aggressive on price.

How do you coach suppliers to participate in online auctions if they suspect that the buyer is actually only trying to lower the price from the incumbent?
There is a cost both in time and dollars for a buyer to go through an online process. Most small to mid-sized firms would likely not undertake the effort if they were just hoping to achieve a few percentage point savings. Switching costs do become a factor, however, and have to be pre-determined. While obviously a reduction in cost from the incumbent would be happily received by the buyer, the buyer will likely not go through the entire process unless they were serious about potentially switching suppliers.

When the buyer asks for a preliminary bid, what type of pricing strategy should I use?
Preliminary bids are used to determine if the market conditions are ‘good’ as defined by the customer. Moreover, they are used to see if suppliers can get below a ceiling price and meet the reserve price. The buyer knows that if none of the bidders are able to meet the ceiling price, then market conditions will not be favorable to running an online event. If one or a couple of bidders can’t get below the ceiling price then those suppliers will likely be asked not to participate. One strategy for a supplier is to place a bid as close as possible to the reserve price because it will increase the likelihood of being noticed by the buyer. The buyer will be anxious to see which suppliers they should be paying extra close attention to on bid day. Getting below the reserve price becomes the critical challenge on event day. Some suppliers, however, will prefer to save their best pricing for the bidding event.

 

   

 

This newsletter is published by Aptium Global Inc a direct material advisory firm based in Chicago, IL. With offices in the UK, China, India and a network of global associates, Aptium Global works with small and medium sized manufacturing companies to save money on direct material purchases. Smaller companies face the same cost pressures as the Fortune 500, yet often lack budgets for cost reduction services. Aptium Global works with organizations on a pay-as-you-save™ basis, minimizing impact on cash flow and maximizing impact on the bottom line. We aim to publish this newsletter on a monthly basis but reserve the right to miss a few deadlines here and there.
 

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