1.

Implement Spend Profile/ABC Categorization

Before doing anything else at all, a strategic buyer starts with a spend profile
analysis and ​gets rid of C’s and focuses on A suppliers.

Yes this is fundamental - but applying fundamentals ​consistently​ leads to

success.

Here’s an image to illustrate this principle:

Getters focus their time equally among all suppliers, without realizing that
they’re wasting their time by focusing 75% of the time with the suppliers that
get only 5% of their business.

Strategic buyers not only understand that they must​ focus on A

items/suppliers 80% of their time but also implement systems and
processes on dealing with C items/suppliers.

At the end of the report there’s a link to watch the video training that explains
ABC Analysis and the difference between Getters vs Strategic Buyers!

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​2

 2. Strategic Buyers Do Not Become a PITA
This is what one supplier said to us as to what used to happen in his
organization when coming up with the costing & quote for one ‘special client’:

Cost of Direct Materials per unit = $ 153

Cost of Indirect Materials per unit = $41

SGA = $12

Total Cost = $205

Profit 13% = $26.65

Add 15% on Total Cost for PITA= $30.75

Price to Quote = $262.40

Naturally you would be asking “What is PITA”. Well this is the answer:

Pain In The A#$

While the above example is an ‘exaggeration’ to make a point, the reality is that
some buyers are too hard & unreasonable with the suppliers. Being tough and
demanding is one thing which is fine, being PITA is another.

The good suppliers will add that into their costing, the bad suppliers will not and
will perform poorly and then you don’t want them. Or the good supplier may
even start refusing to send quotes, when it becomes a nightmare for them
servicing one client.

To be a real strategic buyer we need to collaborate with suppliers, help them

and then they will help you. Supplier Relationship Management, Collaboration,
performance management and more are all details that you need to master in
order to become a successful strategic buyer.

Here’s another real life story of why a very large international company could
not get the cooperation of the suppliers.

We were running our 2 Days training on “Contract Administration:

From Award to Completion” and this organization sent 7 of their
Contracts people to attend. At the end of day 1, two of them (both
Contract Managers) approached us and were asking for some ideas
about how to get their suppliers to give them better prices. This is
how the conversation went:

Contract Manager – We would like to get some special prices from

our suppliers, but they refuse to give us. Any ideas?

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​3

 Program Leader – How about committing a volume for 6 months?

Contract Manager – Oh, our VP does not allow us to commit to

volume.

Program Leader – OK, how about giving a long term contract?

Contract Manager – Oh, our VP also does not agree on long term
contracts. We’re talking about a commodity here and prices
fluctuate.

Program Leader - About the price fluctuation it is not an issue as you

can include price adjustment clauses in your agreements. But it
seems that your VP is not really committing much. Why is that?

Contract Manager – Well, we have short term contracts with our

suppliers. So during this time we are still looking for other suppliers
who can offer lower prices. When the contract ends we can then
switch to the new lower cost supplier.

Program Leader – Oh, let me get this straight. Your philosophy to

the supplier then is: “Supplier I will screw you as soon as I find the
opportunity.”

If we want commitment from suppliers, then we need to give our commitment

as well. That of course does not mean that we give our heart out and expect
the supplier to give good prices and good service. We still have to do our job,
we still have to find out whether the supplier is giving a ‘good/lower’ price, or a
costly long term product or service.

After all, we can get cheap hardware, but if the maintenance contract is more
expensive in the long term, we might want to look at a higher price and lower
maintenance cost = lower total cost of ownership. Which brings us to the next
practice that a strategic buyer implements.

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​4

 3. Strategic Buyers Purchase Based on Total
Cost Not on Price
Yes everyone would agree to this, but how often is it done?

The Total Cost of Ownership (TCO) Concept is clear and there’s no need to
elaborate on this best practice because almost everyone knows it, but hopefully
they’re not at “3 bids and select the lowest bidder”!!!

At the end of this report, we have included a link to a short e-learning

class that clearly explains the TCO concepts.

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​5

4. Ensuring The Main Objective of Contract Management
& Administration Is Achieved
Strategic buyers look at everything from a strategic point of view. Contracts are
no different and while there are various objectives to be achieved in any
contract, the overriding objective is that each contract must ensure “a fair and
reasonable price for a high quality & on-time scope of work​”.

That’s why you would have all those

performance measures, detailed terms
etc. But again, you need to start from
the objective and then fill in the other
details. This provides clarity and helps
you when determining what you should
do and should not.

To simplify, we should do whatever we

can to further the objective of the contract, and do nothing that does not help
the objective of the contract.

The most important overlooked feature of a contract is the Statement of Work

(SOW). This ensures that work is done as specified.

Again the strategic buyer looks from the objective of what the contract is trying
to accomplish. Based on that, the strategic buyer selects the right type of the
SOW, out of the 3 main types.

First the strategic buyer understands that there is ​Design/Detail Statement

of Work (SOWs), ​which tells the supplier how to do the work. The statement of
work defines buyer requirements that control the processes of the supplier. For
example this may include precise measurements, tolerances, materials, quality
control requirements etc.

The strategic buyer knows and understands that in this SOW type it is him that
bears the risk of performance, since the buyer requires the contractor to follow
the buyer's way of performing the task or making the equipment. (a getter
seldom if ever understands this, but just follows specifications and bears all the
risk)

Second a strategic buyer knows that in certain occasions the SOW he may need
to adopt is the type that relates to the ​Level of Effort or Time & Materials or
Unit Rate. ​This SOW type can be written for almost any type of service. The
real deliverable under this type of contract is an hour of work and the material
required to perform the service, research repair, development etc.

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​6

 Finally the ​Performance Based Statement of Work (SOW)​ is the preferred
type of SOW for a strategic buyer, since this statement of work defines those
contracts where a performance based statement of work structures all aspects
of an acquisition around the purpose of the work to be performed or equipment
to be supplied and does not dictate how the work is to be accomplished.

After all that’s why a contract is awarded in the first place – to get a specialist
contractor to get the job done for the strategic buyer. The strategic buyer does
not know how to do the job, the contractor does, so let him do it based on his
expertise.

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​7

 5. Implement KPIs/Performance Measurements
that Add Value to the Bottom Line

To ensure that the CEO/COO/CFO listens, we need to use relevant metrics.

While Risk Management, Technology etc should be a priority for strategic buyers
& CPOs, ​the bottom line is the bottom line - a CEO has to produce consistent
profits for the company and shareholders.

Procurement helps to ​increase profit by reducing cost - the CPO then needs
to implement KPIs that clarify how procurement helps to achieve those cost
reductions.

If KPIs of the procurement department are not adding value, then they need to
change.

For example, there’s no point in having KPIs that for each purchase a Purchase
Order (PO) needs to be issued, when issuing a PO costs $75, and we still issue
PO’s even for items that cost $50.

In such cases, more often than not a company adds value by reducing the
number of PO’s and passing many low value purchases to the end user.

How else does a strategic buyer add value?

By implementing ​Cost Avoidance Reporting​, which helps show potential

savings, the first time an item is purchased.

Or by implementing ​Purchase Price Index Calculations​, which help show that

even when prices are rising, we might be getting prices lower than the actual
rise.

Or by implementing ​Cost Price Analysis before setting foot in any negotiations

with suppliers (“A” category suppliers of course rather than “C” category
suppliers).

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​8

 6. Encourage Training & Development of
Procurement Staff

In another report where we provide strategies about “​Out-Negotiating Your

Suppliers​”, we state that in any negotiation with suppliers/sellers, procurement
is outdone because the sellers receive about 200 hours training a year, whereas
procurement receives only about 25 hours training a year.

What happens in a Getter’s/Non-Strategic Buyer’s department, is that many

young professionals are learning purchasing based primarily on the use of their
organization’s procurement systems and software rather than learning the
fundamentals of the purchasing process itself.

While these may be useful tools, they are no substitutes for the logical
processes and foundational principles they execute.

Every Strategic Buyer understands that the training needs to be ​“functional”

training first - the type of development that focuses first on making sure
professionals are competent in their functional procurement skills &
competencies, and later on other more general business and personal
development skills.

Below is a sample competence framework of 10 functional skills that strategic

buyers need to develop:

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​9

 A Strategic buyer also understands that not all trainings are created equal. A
strategic buyer looks at the ratings & participants testimonials.

If the ​satisfaction ratings are less than 80% eg less than 4 out of 5 or 8 out of
10, tread with caution.

If there are no comments from past participants, most likely there’s nothing
good to be said.

Below are examples of comments to look out for and comments to ignore.

Ignore:

The training was good.

I liked that we could connect with other participants and learn what they are
doing.

I enjoyed the course and it was a good time spent.

Why Ignore Such Comments?

Because they are too generic and do not show how exactly the training added
value to them.

Look out for:

We especially enjoyed the practical examples and role-playing exercises used to

illustrate the training concepts being taught.

I liked the exposure to real life practical examples & practical scenarios …

I found that best practices are based in industry business cases that are
practical and able to be applied in my day-to-day job.

Highly recommended! Worth every penny. Great course, excellent trainer! ... all
of us have gained vast knowledge / on the subject.

Why Look Out for Such Comments?

The above comments are from actual participants that illustrate how the training
was practical, real life and show enthusiasm from participants.

A strategic buyer does ​reference calls and contacts previous participants - this
information should be provided by the supplier. If not, tread with caution!

Finally a strategic buyer looks at the ​satisfaction guarantees​, if not happy

with the quality of the training given.

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​10

 For example for satisfaction below 80%, a certain X% can be deducted from the
training fees charged by the supplier. If below 70%, then deduct Y% and so on.

If the supplier agrees to this, then you’re dealing with someone who is confident
of what they can deliver. If not, again tread with caution!

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​11

 What’s Next?
Schedule a Free Session on

“How to Build Team Procurement Skills” - for Procurement Leaders

or

Procurement Certification Demo - for Individuals

at

https://www.purchasing-procurement-center.com/survey-meeting.html

3 FREE VIDEO TRAININGS THAT HELP TO EXPLAIN SOME

OF THESE PRACTICES:

1. The Difference between Getters vs Strategic Buyers.

2. How Purchase Price Index Helps to Show Cost Management
3. Total Cost of Ownership: Price is Only the Tip of the Iceberg -
TCO is Below the Water

Watch them all by clicking (or copy & paste) the link below:

​
https://www.purchasing-procurement-center.com/video-6-must-procurement-practices.html

© Purchasing & Procurement Center +1-312-300-896 info@purchasing-procurement-center.com​ ​ ​12