Bid Ops Webinar: How Behavioral Insights Are Transforming Raw Materials Procurement

In our most recent webinar we take a dive into how behavioral insights generate leverage for buyers to built successful relationship and negotiate better with their vendors. Click play below to watch the full webinar.

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5 Ways Your Private Equity Firm's Procurement Playbook Can Benefit From Negotiation AI

 
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Last month I attended the Industrial Exchange conference in Miami, a new gathering organized by Jon Cooper for PE firms that own mid-market industrial companies and technology providers. To date, Bid Ops customer base has focused on large enterprises, and I was curious to learn more about how operating partners at PE firms with mid-market assets approach savings.

PE firms generally have “playbooks” that contain systematic business operating strategies that they execute on in order to make the companies they buy more valuable.

Top PE operating partners often have “procurement” or “supply chain” playbooks, and several of the IndEx talks were around pursuing value creation through procurement optimization and strategic sourcing. We reached out to Jon Cooper for a comment on this trend and he shared this insight: “"As shared service offerings become more comprehensive, PE-owned companies and their operators are more likely to use procurement playbooks and related supply chain improvement strategies to reduce cost and scale benefits across newly acquired businesses."

Unlocking that opportunity comes down to discipline around creating a world-class procurement organization. As Blackstone’s Bradley Bogess noted in his main stage talk, the core difference between high performers and average players among the field of mid market industrial companies comes down a disciplined approach to strategic sourcing, especially e-sourcing. This discipline, Bogess suggested, reflects a fundamental practice of regularly seeking better commercial terms in the marketplace.

While there were many takeaways from IndEx, below I’ve summarized five strategies that can be enabling for world-class sourcing discipline, thereby unlocking new horizons of value:

1) It’s better to get savings from unexpected  contracts than from the “usual suspects”

Truly transformative savings outcomes will not happen over and over again with the same contracts unless there are massive changes in their market, period. Thus, try running a process on neglected spend, even if it’s an unlikely category. You may be surprised by the results.

2) Groom “wildcard” vendors to create competition from within your existing supply base

A “wildcard” vendor is a strategic supply partner that is growth-seeking. This is a vendor that wants to grow their account with you on revenue, and deliver better value with lower margins year over year. What makes this vendor a “wildcard”? They’ll continue to expand the range of categories that they serve. Therefore, vendor will want to bid on more of your asset’s categories and will have the functional effect of making the rest of your vendors more competitive. Having a “wildcard” vendor can improve more of your categories and give you leverage over other vendors.

3) More good sourcing processes are better than fewer perfect sourcing processes

Sourcing, like sales, is to some degree a function of a law of averages. If your organization only source once or twice a year, then you probably have to get lucky in order to win. In contrast, if you source 10-20 times a year, there is much greater likelihood of discovering transformative cost savings. Don’t make perfect the enemy of the good. It’s also likely that 1-2 events will account for the bulk of the value created, with a long tail of average or moderately successful processes (and a couple failures). But if you don’t start looking in the dirt then you’ll probably never find the real gold.

4) Manage Vendors, Not Categories

Operating partners and mid market executives should define the health and breadth of their sourcing challenge by the number of vendors, not categories. Categories can create a layer of abstraction that prevent effective negotiation, and if a vendor is supplying multiple categories then you have leverage to ask for discounts even if those categories are managed by different departments. Category silos in mid market companies can allow a vendor to upcharge on services to make up for discounts offered on goods or commodities, hiding costs to blunt the effects of your buying power. But money is money, and for strategic partners it is best to analyze the relationship holistically.

 
The best leverage ultimately comes from true optionality: comparing your vendor versus the market.
 

5) Take The Time To Measure Success & Prep Your Negotiation Execution

It is often said that the most prepared often win. This is more true in supply negotiations than elsewhere, and having a “source of truth” around what something should cost will be a tremendous asset in asking for savings. The best leverage ultimately comes from true optionality: comparing your vendor versus the market. However, should-cost modeling and a decision tree can set your team up for success in fact-based negotiations. One of the value of e-sourcing platforms for the past two decades is in their ability to set context for a negotiation and clearly communicate expectations regarding where the price will come in. Technology platforms may also help automate how teams measure success and ultimately execute against a well-defined savings target.

If you are operating a mid market industrial company and want to learn more about how AI can support improved outcomes in your vendor negotiations, please reach out to me at hello@bidops.com

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3 Steps For Building Strategic Vendor Relationships With A Growth Mentality

 
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1. Use A Checklist To Communicate Clear Expectations & Get Vendor Buy-In Up Front

When companies and buyers have to start managing supplier relationships and need to improve performance with unreliable vendors, this consumes a ton of time and resources. Rather than having to chase down the problem, having a strategic approach can pay off in the end. Before an agreement is signed, it is so important to discuss a forward focused approach and to ensure the competitive advantage of the vendor before the relationship progresses. Practically speaking, this may doing the following as part of an award process:

  • Defining task-level metrics

  • Defining the source of truth for Service Level Agreements (SLAs)

  • Defining key performance indicators

  • Defining relationship milestones

  • Defining red flags

  • Defining triggers for cure periods

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One great exercise to do with your vendor is to simply ask: “What are three indicators that this relationship is successful?” “What are three indicators that this relationship needs improvement?” “What are three red flags that should trigger a cure period?” “What are three things that I want my vendors to hold me accountable for?” Make accountability a two-way street and get buy-in from the vendor partner at the beginning of a relationship. Going through this exercise up-front will create clarity and accountability if and when there are any performance issues later. Answers to these questions should be documented in writing and reviewed as part of a Quarterly Business Review, ideally to track performance and create scalable scorecards.

2. Your best vendors are true partners, not just sellers

Treating vendors like true partners will create layers of value. Build trust and loyalty. Make your vendors feel heard, appreciated and like they are a vital part of your business or organization. Fill them in on changes to your organization and listen to their concerns and recommendations. Numerous studies and surveys have shown companies who treat vendors as partners rather than operational necessities gain a real competitive advantage in the marketplace.

 
Make accountability a two-way street and get buy-in from the vendor partner at the beginning of a relationship.
 

3. Pay Your Vendors On Time. Prompt payment means less relationship management by your vendor reps, fewer emails, fewer awkward conversations and more time spent on planning for the future. Timely payment correlates with a warm fuzzy feeling about doing business with you. The easier your business is to work with, the more reliable your business will be. With consistent payment on time will come respect, and even prioritization. Remember, even with strategic partners you are still competing for your vendor rep’s mindshare, because they have other customers to serve. Timely payment is an easy and effective way to demonstrate appreciation. Remember, you may need to ask a favor of a vendor (“Please rush our next delivery!”) that you may not be able to tip them for. By building a history of timely payment, you are banking social capital that can be a source of strategic leverage in future contract negotiations.


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3 Misconceptions About AI In Procurement

 
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Being in the AI procurement business means that our team gets an inside view into how business leaders across the industry are thinking about implementing AI in their enterprise. Across the board, we see people caught between curiosity about what’s possible and caution against snake oil. Embedded within this crosscurrent of excitement and skepticism about AI, we hear the same misconceptions over and over again, many taken from the popular media. Here are the top three:

1.    AI is better at X business process than the best human. This is likely the misconception that we come across the most. It springs from the tendency to conflate AI circa 2019 with futurists’ popular science hypotheses about what a “strong” or “general” AI would be like (which does not yet exist (and which would, theoretically, replicates human intelligence). Let’s think about this in the context of autonomous driving. Do we believe that AI driving cars on the street today is better than the best race car driver? Heck no. However, if it’s better than the average driver and doesn’t need to eat, sleep, use the toilet (or get a paycheck) then there remains a pretty obvious business case around autonomous vehicles. The same holds true for business process AI.

2.    AI only makes sense after we get our company’s data in pristine condition. This one gets a lot of airtime on the Internet blogs, so I’d like to unpack carefully. While true that “garbage in, garbage out” can apply to some AI analysis of *incomplete* or *inaccurate* internal datasets, there are now a ton of great platforms that will help cleanse and format data that may have duplicates or be missing rows. I’d actually say that it’s reasonable to expect any leading provider of AI services to offer data cleansing, aggregation and re-structuring as an enabling service for whatever their core value prop is. If you’re contemplating a “data lake” strategy as your company’s endgame, I’d suggest checking out Tamr CEO Michael Stonebreaker’s excellent talk about why “data lakes” are just the beginning. Cleaning and integrating datasets can produce enormous value, but much of what AI can help with today is data labeling and pattern recognition to assist with that taxonomy. Ultimately, this is an iterative, nonlinear process rather than a “first clean data, second AI” process, and will run concurrently in most organizations that successfully implement these platforms.

 
Do we believe that AI driving cars on the street today is better than the best race car driver? Heck no.
 

3.    AI only works in specific domains, such as computer vision, image recognition, etc. While the state of the AI market itself remains a subject of controversy, there is no doubt that the advances in computer vision are certainly impressive (and will likely be responsible for disruptive innovation in manufacturing over the next decade). However, these are not the only places that AI applications can cause substantial improvements in process efficiency and outcome optimization. For example, many AI theorists point to the moment that Google’s DeepMind won at Go as a kind of “Sputnik moment” for renewed excitement about AI. Consider that this breakthrough moment occurred around a wave of so-called “gameificiation” where tasks in business, education and tradecraft professions are being recast as games with optimal pathways and rewards and punishments. How unreasonable is it to imagine that if AI can win a game as complex and nonlinear as Go, that AI might be able to win a game as simple as, say a price negotiation?

The truth is that AI in the workplace will inevitably be caught between the overpromises of visionary optimists and the bitterness of skeptics who see the rise of AI thought leadership as snake oil. Our approach to these hot and cold reactions is simple: what are your savings goals, and would they become more achievable if your team could negotiate with twice as many counter-parties over the next year? What about 10x many counter-parties? If having a procurement team that could work 10x tempo is an exciting proposition, then there’s probably a low-commitment way to run an experiment in your own organization and see the value for yourself.

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Bid Ops Interviews Brian Gunia

 
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This week we interviewed Brian Gunia, Associate Professor at the Johns Hopkins Carey Business School and author of the recently-released The Bartering Mindset: A Mostly Forgotten Framework for Mastering Your Next Negotiation.

Could you tell us a bit about your background?

I’m an Associate Professor at the Johns Hopkins Carey Business School. I study three ways that people commonly jeopardize their careers: by acting unethically, negotiating ineffectively, and sleeping insufficiently. Instead of focusing on self-defeating choices themselves, though, I focus on simple, theoretically-motivated steps that individuals can take to act more ethically, negotiate more effectively, and sleep longer or better. I teach a variety of negotiation and organizational behavior courses. Before my academic career, I worked as a consultant at Deloitte. 

Why are you passionate about this topic? What excites you about it? What fascinates you?

I’m passionate about negotiation, in particular, because it’s an area in which people can readily improve their own lives. Most of us negotiate every day, multiple times a day—with family members, coworkers, and yes, vendors. By changing our behavior in a few simple ways, most of us can lead significantly happier and more prosperous lives.

What is one thing you think most people don’t realize about negotiations? What are some common misconceptions?
The biggest thing people don’t realize about negotiations is that they’re everywhere, all the time. When someone says “negotiation,” most people think of buying a car, asking for a higher salary, or sitting across the boardroom table from a business partner. They don’t think of discussions with a spouse about restaurants, discussions with a bank about fees, or discussions with a coworker who hasn’t been pulling their weight. Anytime we depend on somebody else to achieve our own goals, we can negotiate. By associating negotiation with a few limited contexts, however, we severely limit our ability to reap the benefits of negotiation.

The second-biggest misconception about negotiation is that it’s all about figuring out how you can beat someone else. That’s far from the full story. Negotiation is about solving a problem in a way that benefits multiple parties at the same time. Sure, you’ll eventually have to nail down the price. But most people assign that aspect of negotiation far too much emphasis, often completely ignoring the many other (and potentially more important) aspects of the deal that can benefit everyone at the same time (or at least help one party more than they hurt the other).

What do you think is the safest bet for ‘state of the art’ for effective negotiations five or ten years from now?
The safest bet is that the misperceptions in the previous question are not going to disappear anytime soon. So we, as committed and aspiring negotiators, need to help ourselves and others see the negotiations all around us. And we need to be vigilant in treating negotiations as opportunities to find unexpected value, not just opportunities to crush our counterparts.

You seem to be looking at three inter-related practices: unethical behavior, ineffective negotiation or sleep deprivation. Have you noticed any deep connection between these three topics that might escape the untrained eye?
I think the deepest connection is that most people think these issues are not going to threaten their own careers or personal lives—until they do. In other words, most people think they will never fall prey to unethical temptations, already know how to negotiate, and can deal with sustained sleep problems. But then they find themselves unwittingly slipping into a scandal, inexplicably failing at the bargaining table, or letting their sleep problems severely damage their work. Don’t let it be you!

Our audience for this blog is predominantly procurement professionals who must negotiate optimal commercial terms with vendors. How can some of your best practices that are applicable to a salary or professional negotiation provide insight for this use case?
The key word is “terms.” Fixating on one price with one counterpart is sure to produce an impasse or, best case, a deal that nobody finds satisfactory. Treating negotiations with vendors as opportunities to trade several of your priorities for several of theirs is likely to produce some much more creative (even exciting) deals, especially over the long-term. 

What’s some advice that you can give to people who might be interested in generally improving their negotiation skills?
I would honestly suggest reading my book, The Bartering Mindset, which offers a new and different way of thinking about negotiations. Briefly, we often negotiate badly because we treat negotiations like monetary transactions (adopt a “monetary mindset”): We think of ourselves as locked in a battle with one party over one issue, on which the other party wants the opposite. The book teaches you to treat negotiations like bartering trades instead (adopt a “bartering mindset”). In other words, it teaches you to see negotiations as opportunities to make a series of mutually-beneficial trades with multiple partners. The latter is not only much more beneficial. It’s much more fun!

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Why Making It Easier For Vendors To Do Business With Your Organization Is A Vital Competitive Advantage

 
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Edmund Zagorin
CEO & Founder

Ask yourself this question: What is the difference in value between your organization’s best vendor relationships and average vendor relationships? Is it significant? 2x difference? 10x difference? What is the true value of reliable, consistent, trustworthy excellence in a supply or service partner?

During periods of rapid technological acceleration, most leaders will tell you that the difference in value between the best and the rest is more than 2x. In other words, the distribution of excellence in your vendor portfolio looks more like a ski slope down from your y-axis (e.g. a “long tail”) than a bell curve.

The reason for this phenomenon is profoundly connected to the acceleration and diffusion of digital technology that can reduce the cycle time of a business process by an order of magnitude. Some of your vendors are probably fast adopters, meaning that they are able to answer your questions quickly, adapt to changing market circumstances faster, respond to your emails and answer your questions in real time. Consider that the phenomenon of a greater than 2x difference is observable in many other parts of the enterprise, including:

-          departmental cycle time

-          sell-side product market share

-          employee talent & compensation

In other words, your organization’s best department has a cycle time more than 2x better than your organization’s average department. The market share of your organization’s best product or service has more than 2x greater than your organization’s average product or service. Your organization’s most compensated employee is paid more than 2x your organization’s average employee compensation, and is likely to have skills that are worth more than 2x your organization’s least skilled employee. In each of these cases, the difference between the best and the rest is more than double. What does this mean for your supply chain?

 
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After three decades of outsourcing, it is likely that some of your greatest levers of enterprise value work for your vendors. Consider that there may even be people who work in your office, side by side with your FTEs or on site in other locations across the globe who are actually employed by your vendors. They are helping your teams create and launch new products, they are making sure that your contracts are being sold, they are driving important commercial results for your organization. And they are part of your supply chain! This is why talent is only part of the value creation story: awesome vendor relationships will likely play a key role in company biggest outcomes, especially in technical and creative roles that are challenging to hire for.

The classic example in Silicon Valley is Uber and Twilio. Twilio enabled Uber’s ride-hailing service with the technical platform to create a phone number in any country to connect driver with rider, and to enable text messaging. The rest in Silicon Valley history. Would Uber have been able to grow as fast or spread as broadly if drivers and riders couldn’t call each other to ask where the other was? What would the market share versus Lyft look like if the vendor relationship had shaken out differently or was done on unfavorable terms?

This same dynamic is ultimately true of all globally integrated manufacturing supply chains over the next decade, particularly as 3D printing and CAD workflows become ubiquitous. We are already entering an era of extreme price volatility, where commodity prices in different parts of the world fundamentally alter what contract manufacturers will be competitive for the Bill of Materials (BOM). What happens when innovation itself begins to drive price volatility, as a companies prices are literally impacted by their speed of adoption of connected, distributed, autonomous machines? (Think: 3D printers but for everything and everywhere, from metals, plastics and even human tissue, from integrated circuits to nanoparticles). What happens when the use of new fully automated production affects bottom line revenue more than any other single factor? What happens when the disruption created by autonomous manufacturing makes the disruption from autonomous vehicles look like child’s play?

It is quite possible that over the next decade there will come a sudden, urgent tipping point where all manufacturing companies will have to rethink their approach to sourcing, contracting, transporting, assembling and managing all of the materials that go in all of their physical products. Ask yourself: how ready are my vendors for this tipping point? Who are my top vendor partners and my top relationship managers, and what are they doing to prepare for this? How many of them will have retired by 2025? Executives are already doing that math and realizing that if this tipping point for autonomous manufacturing has even 1% the force of what’s described above, then the speed of their procurement’s status quo digital transformation looks a lot more like the speed at which Blockbuster adapted to Netflix (by going bankrupt) than the speed at which Microsoft adapted to Dropbox (by launching Sharepoint). Microsoft has had an amazing turnaround and in some parts of the world Sharepoint is and will remain dominant. The story of the VHS rentals business model provides a cautionary tale.

The good news is that change is possible. The best insurance against the unknown investing in excellent talent is either in your team or in your supply chain partners.

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Why Digitization Will (And Won’t) Displace In-Person Vendor Negotiations

 
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Edmund Zagorin
CEO & Founder

Negotiation is fundamentally a human act, between one or more humans. When two servers “talk to each other” to determine the optimal load-balance, we probably would not say that they are “negotiating”. However, the procurement profession is changing rapidly and globally, and negotiation is part of that profession. So what does the future of procurement negotiation hold?

People

-          Ubiquity of Retirements: a double-digit percentage of the current procurement workforce will reach retirement age and either leave the workforce or remain as consultative relationship brokers

-          Ubiquity of Millennials: many of the executives that will replace the current leaders grew up using delightful digital apps, have an extreme aversion to inconvenience and demand user-friendly business processes, and have a high degree of comfort eliminating broken processes

-          Changing Talent Profile: procurement job descriptions in 5-10 years will look substantially different than they do today, and the demand for advanced data analysis and business strategy will increase

Technology

-          Ubiquity of Procure-to-Pay Digitization: the vast majority of procurement departments will require that their vendors send invoices and receive purchase orders in fully digitized and machine readable formats in order to get paid

-          Ubiquity of Cloud-driven Solution Unbundling: successful procurement departments will use many different digital apps from different providers rather than having one centrally integrated platform

-          Adoption of Fully Integrated OR Outsourced Data Cleansing & Unification: most enterprises will give up trying cleanse, integrate and unify their data with a central directory, and instead will either hire  and support a staff of very experienced data scientists or outsource the task entirely to automated third party solution providers

Process

-          Ubiquity of Tenders, Bids & Auctions: in order to counter-balance the rise in captive contracts brought on by the sell-side’s global ubiquity of CRM solutions such as Salesforce, buyers will enforce tendering processes even with preferred suppliers to benefit from market competition

-          Adoption of Automated Vendor Compliance / Management: chasing down stray documents from vendors for compliance purposes is not a good use of anyone’s time, and anyone with the ability to automate those profoundly tedious document collection tasks will do so

-          Adoption of “Know Your Vendor” (KYV) Risk Management SLAs: procurement negotiation teams sick of putting out fires will prefer both processes and technology that helps them identify red flags and opportunities with their strategic vendor partners in advance, rather than reacting to surprises under sub-optimal conditions

Now, some readers will already rolling their eyes either because they think that these projections are way too conservative (“these things *already* exist) and others may find them outlandish (“that will *never* become mainstream”). But the truth is actually more complicated than either/or.

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Recently, I had a fascinating discussion with an executive at one of our European customers who stated unequivocally that certain procurement negotiation activities will always be done via in-person meetings between buyers and vendors. Actually, I quite agree with this statement. Consider that for the people participating in these organizations, it is quite likely that their companies are booking their travel through a web app that aggregates and discounts airline tickets, book their hotel or Airbnb through a similar service that is also delivered via a digital app, hail a ride to the negotiation meeting via a digital app, and that even the sign-in to the building and the physical dashboard for a meeting room will be an app. Thus, the technology stack that supports this “in-person meeting” is most likely already mediated by at least 5-10 digital apps.

Now, the interesting question becomes: is the company that is relying on apps to get their person to the negotiation going to accept in perpetuity that the best tools for the job are a legal pad, an email account, a smartphone and a spreadsheet?

Given that apps are used to deliver services that are changing the business process of every other enterprise department, it would be shocking to me if the critically important role that procurement teams must play to negotiate vendor contracts were the sole exception to the present wave of innovation. But that doesn’t mean that in-person negotiations will end. It just means they will happen differently, and hopefully better.

Remember what it was like to have factual disputes with someone? I remember being in the Second Grade and arguing with my best friend about what the capital of Russia was (yes, I am a huge nerd). My friend said it was Moscow, I said it was St. Petersburg. He stormed off and said he was going to the library to look it up. A full 24 hours later, he proved me wrong, I admitted defeat and we resumed being friends. Now, there’s Wikipedia, there’s Google. If people have a factual dispute, it is so trivially easy to look up the correct answer. What if looking up how much money your company spent on a vendor was as easy as looking up the capital of Russia on Wikipedia? How would having that type of information at your fingertips change the game?

There is simply too much enterprise value in making this type of data accessible to procurement managers for someone not to do it sooner or later. And making that info available doesn’t mean eliminating in-person negotiations (or the relationships they sustain) any more than eliminating my Second Grade best friend’s trip to the library to find a World Atlas gets in the way of friendship. In fact, getting the facts quickly makes it easier for us to resolve our adversarial positions and then get onto the next thing. This is the role that data will likely play in vendor negotiations, rather than fully displacing the need for in-person relationships between buyers and vendors.

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