The knowing dealing gap

Alan Day

Many procurement teams don't research markets, suppliers and internal requirements properly, leaving them at risk of poor decision-making, says Alan Day

Years ago, one of the tasks of my first role was putting a research pack together for negotiations in Japan. At the time I didn't appreciate the content (or the skills I was learning). It wasn't until I was eyeball to eyeball across the negotiation table that I realised the true value. By doing the research, the Japanese were now dealing with people who knew their market, their operations and their input costs as well as they did, while fully understanding our internal operations and what was possible.

This gave us a distinct advantage and not just at negotiation time. By spending more time researching, we were able to take advantage of changes in the marketplace more quickly, we were more attuned to market innovations, and through internal research we were better equipped to challenge the total cost of ownership (TCO).

Since then, I have spent my time reviewing procurement departments and comparing them against best practice. Without fail, they score highly on negotiation skills and poorly on research skills and the application of information obtained. I have trouble reconciling these things - how can you be in a good position to negotiate if you haven't done your research? The only thing you are left to negotiate with is unit price, which means you're missing the 30-50 per cent TCO savings opportunity through, for one, challenging demand and specification.

There are three areas that procurement professionals need to research: the market, the supplier, and the internal dimension. Investigating each area requires different skill sets, only some of which are being used by procurement departments.

In researching the market, the aim is to understand structure (market competition and the power brokers), financials (market size and growth, key market ratios), trends (including government and technology implications) and gain an idea of best practice.

Michael Porter's "Five Forces" is one of the most common techniques employed when reviewing the market, but often these aren't completed in their entirety (if at all). Another technique is to rely on information provided by suppliers, which can be useful if a little biased (this is fine if you're talking to enough suppliers). Additionally, there are great third-party reports available, but these often need consolidating into a single view.

Supplier research is completed to understand their capabilities (product or service offerings, operations, technology investments), positioning (market standing, pricing structures, corporate strategies) and financials (ratios, product cost build-up).

Product cost build-up is the most useful technique, but it is also the most difficult, which has meant it is one of the least used. It involves working out how much the product or service should cost the supplier. This requires a knowledge of "feed stocks" or bill of materials to make up the particular product/service, as well as the supplier's operating structure and costs.

However, the most important area of research that procurement professionals undertake is internal. The objective is to understand the internal customers' specification needs (versus wants) and the volumes required.

Oddly, it is this area of research that is most often skipped. Obtaining information from the business without people feeling threatened requires strong interpersonal skills. The ability to analyse how the organisation uses the product or service is also important. But it's not just about number crunching; the key skill is turning the data into meaningful information that internal customers can understand.

The common objection to completing research is a lack of time. But, in my experience, procurement professionals who invest resources in this area gain greater savings and strategically improve business operations by shortening lead times, reducing stock holdings and improving the introduction of new products and services.

Alan Day is managing director of State of Flux, a supply chain change solutions organisation