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How Procurement Can Defend Their Interests in a Market that Favors Suppliers

How procurement can defend their interests in a market that favors suppliers

The one thing that is never disputed is that procurement teams are lean, overburdened, understaffed, and asked to do the work of 2–3 people. Even if you do want to manage spend, you don’t have the time—or team—to do it. FInd out how procurement can defend their interests.

Suppliers are taking advantage of procurement whenever possible

Suppliers have learned that when the typical contract length is 3–5 years, they can give it all away at negotiation. The deal that they sign represents a razor-thin margin. But they only sit there for a month or two. Every time there is a “change,” they grab added margin.

If a waste disposal customer needs a larger container, requests a new frequency, or adds a service—suppliers are primed and ready with honed strategies to grow their margins. Eighteen months after the deal is done, their invoices don’t remotely resemble the contract.

These same strategies existed a decade ago, but procurement had more capability to manage these events. Now, they’re not even aware these things are happening. If they were aware, the threat of lost business would be substantially reduced because suppliers don’t believe they’ll take the time to switch to a new supplier. Procurement has been dramatically weakened on every level.

Why not conduct audits?

Conducting an audit of a supplier requires many hours, but the results are often substantial. You may find that you’ve been overcharged 30% for years, so you start a claim. It will cost you. Even if the truth is on your side, it will lead to a dispute. Suppliers will never want to report that truth. So they will craft a counter-argument, and a dispute starts. It takes time, mental energy, and organizational energy while working on numerous other tasks. It’s not easy.

You have to avail yourself of outside resources to augment in-house capabilities. There are resources out there to make a team of 10 do the work of 25. But suppliers do everything to block you from using those resources. Procurement departments must defend their interests in the marketplace. How?

How procurement can defend their interests

Rich Ham outlines three things procurement must do to defend their interests:

  1. Create solidarity: Each time you enter a negotiation that could involve a dispute at any time, you have to make certain that the key players on your side are aligned properly. Everyone must agree and be prepared to take business elsewhere if it comes to that. Rich rarely sees procurement aligned with their team, and it’s a problem that needs to be addressed.
  2. Look outside your own walls to augment in-house capabilities: There is a vast arena of niche category solutions and third-party partners that can help advance your interests. It can free up your bandwidth. Figure out how to use these outside resources.
  3. Reject efforts by indirect suppliers to foist anti-competitive terms in your agreements. Retain the rights to use the marketplace. Retain the right to audit suppliers. It’s a critical starting point. Indirect suppliers are trying to dictate how their customers spend money with them, and that needs to be rejected. Procurement needs to be aligned against this contract language and behavior.

Where should a procurement team start?

If you can only start addressing issues in one place, start where you think things are running smoothly. If it’s “running smoothly,” Rich points out that you’re likely being gouged. If a supplier is “happy” with what you’ve been paying, you’re likely being overcharged.

Rich recommends starting with a simple policy: have a strategy for everything. Which categories will be directly managed in-house? Is it based on high-priority categories where knowledge of how the company works is critical? Or do your team members have subject matter expertise in certain areas?

Secondly, what is your strategy for the things you aren’t working on? Put pieces in place to manage what you can’t self-perform. Rich shares a plethora of information on the challenges that procurement is facing in today’s marketplace in episode #291 of Negotiations Ninja. To learn more about overcoming those challenges, give it a listen.