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September 22, 2012

Negotiation strategies - a cue from our past

Trying to draw a parallel to the four negotiation techniques, I was wondering whether it is mere coincidence or if this bundle of knowledge was indeed systematically transferred over generations to enable us evolve the strategies that we follow today.

As per the ancient Indian scriptures, there are four tenets of "Dandniti" (dealing with an opponent/negotiation with any entity). Lord Krishna, arguably, the world's best psychologist/psychiatrist to date, has also spelt these out in the Bhagavad Geeta (the voice of God). Trying to draw a parallel to the four negotiation techniques, I was wondering whether it is mere coincidence or if this bundle of knowledge was indeed systematically transferred over generations to enable us evolve the strategies that we follow today. Whatever the reason, the negotiation strategies we adopt to deal with a supplier or with a set of suppliers, can "be found to have their roots" in these ancient scriptures.
 
While looking at the strategies adopted by organizations to deal with their supply base, even as we keep discussing the key aspects of the tail spend savings that we have been able to execute or plan to execute at Verizon, I find that these four strategies popularly called "Saama, Dhaama, Danda and Bheda", find extensive application everywhere, everytime, on case to case basis. Let me take this opportunity to share my opinion on each one, as succinctly as possible.
 
Saama in Sanskrit means Logic. If I go a step further to try to look at the synonyms, I easily stumble upon words that signify knowledge, rational behavior and convincing through a logical discussion. Transparent supplier negotiations involve Saama, where both parties discuss each element of cost and factor in the market rates and "rationally agree upon" the framework as per which prices are going to change. I think this might be most applicable in situations where the supplier has a lesser bargaining power and is willing to share information.

Next, Dhaama translates into an offer (maybe something that is easily accepted to, rather than through a "painful discussion"!!) - a situation like this might arise when the supplier is on the "power side" of the discussion. The buyer would have to give up something in order to get into a contract with the supplier is this case. A Volkswagen or a Nissan might have to give up their 5% cost reduction target to achieve a "generation next" world class diesel injection system from Bosch, without taking a chance on their global launch next season!

Danda means punishment. You negotiate, not to negotiate - the world of exit strategies, threats and penalties. Something to do even with the terms and conditions on the contract.

Last but not least, Bheda means differentiation - an incentive to do something different so that the supplier will be able to get aligned to the expectations. It might even be introducing new competition through an RFx process.

I like to stop writing here, as my mind "freewheels" further into other strategies  . . . . . (should I quickly convert this into a 2 x 2 matrix before BCG comes up with something more appealing and acceptable !!!).

Please leave your comments when you have a moment.

September 21, 2012

Cash: Avenues to unlock it in a recessionary environment (part 1 of 2)

In a depressed fiscal environment, cash tends to be an elusive commodity. An exercise in inventory optimization will not only help unlock much needed cash but also improve delivery rates and ultimately customer satisfaction.

In a depressed fiscal environment, cash tends to be an elusive commodity. The market is constrained and typically refuses to release traditional levers of mobilizing cash such as fresh investments, increased collections or simply better sales. However in spite of such a cash poor climate we find that the top 1000 US companies have $740 billion tied up in excess inventory representing nearly 36% of their working capital needs. This represents a rich opportunity to not only unlock cash required to finance further sales and growth but also to correct and optimize inefficient inventory management systems. An exercise in inventory optimization will not only help unlock much needed cash but also improve delivery rates and ultimately customer satisfaction.

But aiming at improving inventory turns typically comes at the cost of delivery or order fill rates. A delicate balance between the two must be made - hence the emphasis is more on inventory "optimization" rather than "improvement".

 

Inventory_Service.pngThough the effort expended in optimizing inventory will require a close understanding of the business and the competitive market (and customers) in which the business functions, the returns will more than compensate for the same. A company with turnover of $ 1 billion can expect to unlock $ 10 million in inventory cost by reducing the days in inventory by just 5 days. But reduced inventory can lead to stock outs and reduced fill rates leading to customer dissatisfaction. Another fact to keep in mind is that a small increase in fill rates also leads to an increase in sales - a quick approximation would be an increase of 1.5% in fill rate can improve sales by $15 million (for the same company with a total turnover of $ 1 billion). Thus the focus on inventory costs and sales revenues need to be carefully balanced.

Industry has evolved tools/applications to address this conundrum - mainly by designing analytics using historic and forecasted demand with fill rates demanded by the customer. Parameters used to arrive at desired inventory levels are usually lead times, volatility, VED, consumption patterns etc. But the questions remain as to how often are these actually done by companies? Inventory optimization needs to be done regularly to cope with the constant change in these parameters. Typically a monthly analytics report and bi-annual inventory optimization project is required to cope with the rapid changes in the market. However, recessionary times make executives run to short time fixes or constantly fire fight and not take a longer term view to inventory management. A centralized inventory optimization analytics group is a good answer to this problem...one which can also easily pay for itself in the short term. In the next post let's look at what the Central Inventory Optimization Group (CIOG) can achieve.

Note: Click here to read part 2 of this post.

September 3, 2012

Curing public procurement of what ails it - a practitioner's view

E - government procurement can play an important part in generating savings and increasing the effectiveness of public sector services, whilst increasing transparency and accountability. It can also create a fairer, more competitive and trusted national business environment, attractive to international suppliers, lenders and donors and contribute in economy growth.

I am sure that most of us would know that public procurement plays a fundamental role in economic and social development programs of a country. Poor public procurement practices can lead to misappropriation or sub-optimal use of public funds. Many infrastructure programs and essential public services are delivered via consultants, contractors and suppliers. When contracts are awarded to less qualified suppliers, the quality and timeliness of delivery suffers. More importantly, this places an additional cost burden on taxpayers and the poor who have the most need of public services such as health, education, transport, justice and social security. Problems galore! So is there a single solution to such many problems? Yes. I do believe so. Use of appropriate electronic procurement tools can improve the efficiency and transparency of public procurement and also increase economic development.

The e-Procurement process is unique to government. While corporate purchasing has become supplier management and driven by business partnerships, government procurement remains dedicated to levelling the playing field between competitors by use of the sealed competitive bidding and awarding bids to the lowest bidder meeting specification. Government records are open and the prices revealed in the public arena. Fortune 500 companies boast of maintaining a key supplier base of 10-15 first and secondary suppliers which is miniscule to what a Government has as registered vendors and many more that bid, but never make it to the vendor list. Given this divergence, a Government has to adopt e-procurement solutions that take into account the above factors.

Challenges
One of the main challenges for an e-Procurement project is the establishment of an appropriate and context tailored strategy. Every project or initiative needs to be rooted in a very careful, analytical and dynamic strategy requiring focus on many aspects and processes, a holistic vision, long-term focus and objectives. Many public institutions limit their activities to a simple transfer of their information and services online without taking into consideration the re-engineering process needed to grasp the full benefits. The government must have a clear strategy to overcome the barriers to change. Part of the strategy is to engage in a rigorous assessment of the current situation, the reality on the ground and the inventory of projects, articulate costs, impacts and benefits of programme as well as continuously monitor and evaluate the project upgrading.

In a typical Government, procurement runs into hundreds of crores and complexity is inherent in the procurement process. What is required to be procured is wholly dependent on the nature of its business, and therefore varies from enterprise to enterprise. In today's scenario, adopting an effective cost saving mechanism is integral to any company's continued existence. Companies across different sectors of industry have been trying to simplify this extremely crucial aspect of their business, in extracting optimal quality, and timely, speedy transactions at the minimum possible cost.

Another important aspect that the Government needs to look into is driving organizational compliance with negotiated contracts. This would enable Governments to keep and sustain their savings. Traditional methods of procurement offered little transparency and lesser satisfaction of negotiation with suppliers. E-procurement offers the benefits of greater transparency, wider geographical reach and lesser time of transaction and better pricing. Also sustained savings can be achieved through automated, easy-to-use purchasing, invoice management, and supplier enablement capabilities. E Procurement Solution would help Government capture and settle all spend and readily obtain global user and supplier adoption. This improves process efficiency, increases compliance, and garners sustainable savings across the enterprise.

Benefits that I think which can justify investment in e- Procurement by government are:

  • Improve transparency in the procurement procedures and practices.
  • Bring in efficiency throughout the procurement process and minimize the procurement cycle time.
  • Foster and encourage participation and promote competition among suppliers.
  • Harness economies of scale through demand aggregation and maximize value for money in government procurement.
  • Enhance decision-making capabilities of procurement officials by providing procurement information through MIS
  • Improve service levels to all stakeholders involved in government procurement.
  • Ensure confidentiality, integrity and authenticity of all transactions and data between the procurement entities and the suppliers. 
  • Optimize inventory levels through the adoption of efficient procurement practices.
  • Enhance citizens' confidence in the government procurement process and the utilization of public funds.
  • Usher in state-of-the-art procurement practices together with the necessary technology intervention.

So in a nut shell, E - government procurement can play an important part in generating savings and increasing the effectiveness of public sector services, whilst increasing transparency and accountability. It can also create a fairer, more competitive and trusted national business environment, attractive to international suppliers, lenders and donors and contribute in economy growth.

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