Beating up on your vendors 2

[zuccus]

First I need to set the stage, my company is an integration company where we buy a bunch of equipment, instruments, controls, valves, piping and such and make the system work together in the way it was intended. Therefore we buy a lot of equipment from vendors and resell it to our customers. I am one of the few people who has responsibility for sales and execution.

Recently we have taken on some very large projects and have hired a "Strategic Sourcing Person". Basically this guy goes in there with a vendor and says you will lower your price 5% and be happy that it is only that much. In our upper management's eyes he has saved the company more than $5,000,000 in the first couple of months he has been here and they have just been ranting and raving about him.

I am one of the few people in my company who has always worked with our vendors to make sure we are only buying standard and cost effective products from them and my vendors love me for this. I typically get my products faster, cheaper, and with better support.

So he hasn't been on any of my projects yet, but my vendors are all hearing about this and coming to me and asking what to do. My products are near their bottom dollar already (I have checked through other resources). They are telling me if this guys starts harrassing them, their quotes are going up 5% to cover this. This puts me in a tough spot, because now my quotes have to go up 5%.

I am having a hard time explaining to the senior staff level at my company that by specifying non standard equipment they are getting quotes on something for $100 and saving 5% and buying it for $95. They see it as $5 straight to the bottom line.

I am specifying only standard parts, getting it quoted for $90 and buying it for $90 and getting much better support at greater margins.

I need some help on how to explain this to a bunch of MBA's.

Thanks

 

[zdas04]

zuccus,
Good Damn Luck. When a PhD candidate at the Harvard Business School coined the term "Supply Chain Management" based on Honda's "just in time" procurement in the 1980's, he basically screwed over every non-manufacturing business in the world. SCM guys go to vendors and strong arm them. The vendor response is to know that this is going to happen and raise their prices 25% so that a 15% cut will result in a 6% increase.

I did this. I knew that I was going to get beaten up over my first rate increase I'd implemented in 8 years. I needed about 15% more money, so I raised my rate 50%, when the negotiations were complete, my new contract was 20% higher than the old one. The SCM idiot was proud of himself for beating me "down" to 5% more than I'd wanted.

The other side of the SCM Disaster is the contracts that they implement. Before SCM, most of the Master Service Agreements that I signed were 3-4 pages with very similar no-drugs, work safe, don't tell anyone our secrets, and we'll pay you clauses. Then along comes SCM and the contracts are 50-60 pages of incredibly dense language (one sentence had 7 negatives in a row, so I had to diagram the sentence to determine if I was prohibited or required to do the action described). I regularly put a note on those sort of contracts with the comment "the only people who will sign this are those bottom feeders who have no intention of adhering to it" and refuse to sign them. A friend of mine at one of these stupid SCM-driven companies said that he has gone from 25 choices for companies doing gas-field fabrications to a single approve source, and that one source produces unacceptable (but inexpensive) results. He has data that shows that re-work and failed tests have increased his project costs 200% because SCM "fixed" the process. The data is compelling, but he was told it would cost him his job to publish it.

When I worked for a big company, there were a long list of recurring tasks that I just did without involving SCM. One of them was moving a screw compressor from one site to another. I moved over 300 of them and the average cost was $6,000. Maximum was %9,000 and minimum was $5,800. Today (8 years later, so costs have inflated some) moving the same compressor is $300,000 on average with a minimum of $200,000 and a maximum of $525,000. Compressors are the same. Wells are the same. Difference is that SCM requires every piece to be bid every time--bidding is not inexpensive for either the contractor or the company; the low bidder rarely gets a second chance so every move is a whole new learning curve; and the low bidder always has "adders" that weren't included in their bids.

Getting people who are not in the trenches to understand these realities has proven to be impossible for me to accomplish. I hope you have better luck.

David

 

[ajack1]

Oh the joys of business.

Any company that pays over the odds for parts/ services puts themselves at a disadvantage; however any company that drives down prices so much that suppliers will not work with them or go out of business will also suffer.

The same applies to overpaying staff verses losing top people to companies that pay more, using cheaper or inferior materials, small companies expanding quickly verses suffering cash flow problems, the list goes on and on.

The most successful companies get the balance right most of the time or at least on the most critical decisions and for every example someone can give to “prove” something to be true someone will give an example to “prove” the exact opposite is true.

The real problem is what seems like a good idea at the time and even offers short term gains often has unseen long term consequences that are not so favourable.

Still if it was easy 75% of start up companies (in the UK) would not fail in the first three years and not so many established companies would go to the wall.

It is always better to be lucky than good.

 

[controlnovice]

I'm running into the same problem now.

Procurement gets rated on how much they can show they saved....no matter the consequences of what or how it gets installed. So, they are constantly trying to lower upfront costs, and we get stuck with fighting change orders and longer startups. But procurement doesn't see those once it's purchased....and they get their bonuses and move on.

The contractors and vendors I've worked with in the past just raise their prices to maintain or exceed their profits.

______________________________________________________________________________
This is normally the space where people post something insightful.

 

[zuccus]

Thanks guys, I maybe fighting in uphill battle here that isn't worth being a career ender. I have expressed my opinions and they fell on deaf ears. I am just a guy who has been doing business for a long time, I don't have one of those "MBA" things so maybe I don't understand it.

zdas04, your comment below made me laugh pretty hard.

"one sentence had 7 negatives in a row, so I had to diagram the sentence to determine if I was prohibited or required to do the action described"

Controlnovice, we have the same problem here. Procurement get's incentivesed for all the wrong reasons and it drives the rest of the organization nuts.

Zuccus

 

[drawoh]

zuccus,

If you ever get a chance, read Poorly Made in China by Paul Midler. Superficially, the book slags the Chinese, which I am sure, appeals to a lot of people. On closer examination, you get a look at the people the Chinese suppliers are dealing with.

It also does a good job of showing how a manufacturer can make money, even when their costs are higher than the money you pay them.

The Paul Midler link is to his blog, which I am just starting to read.

JHG

 

[GregLamberson]

zuccus

Perhaps when the vendors start refusing to provide components based on this guys tactics, it will get management's attention. Not all MBA's are stupid, some are just too smart for their own good (or anyone elses)!! I'd say how you laid it out to the forum in your post should suffice for anyone with a reasonably level of intelligence.

If you have a project starting, another thing you may want to do is set up a kick off meeting with your key vendor reps, invite this character to it along with some sr mgmt and get the issues out on the table.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[casseopeia]

No doubt you will find those Home Depot style MBAs right next to the compassionate HR people...and they will all be riding unicorns powered by solar-powered glitter.

"Gorgeous hair is the best revenge." Ivana Trump

 

[tygerdawg]

Great, Cass, star for you giving me a much-needed chuckle.

On a serious note, these situations are an opportunity to educate those chowderheads thumping their chests over short-term, but ultimately destructive business decisions. Once upon a time I crossed swords with Phil the Purchasing Manager. My assembly process used a stamping. I requested Phil talk to the stamping supplier and get (1) a part number and (2) a directional orienation arrow put on the surface of the part. Phil flipped out in a meeting, claiming that would make his part cost increase a couple of pennies per part. I had done my homework and quantified the quality, failure, rework, and excess cycle time cost of a wrongly-assembled part due to (1) wrong stamping part number and (2) wrong orientation of stamping. Failure & rework costs were amazingly huge, and he had no clue of the financial impact of such a failure that could be corrected FOREVER by such a simple request. I pulled out my report and clobbered him over the head with logic and engineering analysis. The change was implemented immediately.

Following that episode I learned to write specifications very explicitly. Also created a quantitative comparative analysis of quotes & vendors that applied value to fuzzy things like good work reputation, high quality installs without subsequent problems, etc etc....all the things that would allow me to sleep through the night. I made effective use of meetings of essential stakeholders (manufacturing engineering, production, quality, product engineering, ...and Purchasing) so that the voices of reason could be heard in the open. This went a long way to opening the eyes of the procurement folks and avoiding the conflicts of "lowest-price mentality". Rarely have I ever chosen the lowest cost supplier because there is a cost of "ease of implementation & trouble-free production."

TygerDawg
Blue Technik LLC
Virtuoso Robotics Engineering

http://www.bluetechnik.com

 

[lacajun]

I really dislike beating up on vendors. They are kinda' like operators, maintenance hands, and construction workers in that they can make you or break you. They also need to make a profit, which is a great word.