Lorrie K. Mitchell
Lorrie K. Mitchell, Relationship Manager, BellSouth Telecommunications, Inc. Atlanta, GA 30375, 404/420-6068.
In the past, procurement departments selected vendors primarily on the basis of price. Today, Supply Chain Management (SCM) Departments select suppliers on the basis of their capabilities and the potential win/win relationships that may be developed. We've discovered (in many cases the hard way) that selecting the supplier with the lowest price does not always equate to selecting the supplier who can provide the best product/service nor does it guarantee a successful mutually beneficial relationship between the buyer and the supplier.
Buyers are seeking to maximize value in purchases. They want to select the most appropriate supplier to provide the requested product/service and meet all of their needs, but somehow price tends to get in the way. Rather than negotiating with the supplier, buyers begin to negotiate with and second guess themselves regarding the validity of their request. They ask themselves the questions: "Maybe I'm asking for a Mercedes and a Buick will meet my needs" or "Maybe I could live with product/service X because Y will probably far exceed my budget".
This is not the way to select a supplier or begin a successful relationship! On the contrary, this is a buyer/ supplier relationship that will be strained from the start. Not because the supplier is not providing the agreed upon deliverables, but because we, the buyer, have improperly chosen to settle for less because we thought it was the best financial decision.
Previously, SCM has fought the stigma with their clients of always wanting/needing their clients to select the least expensive supplier. The fallacy was that procurement was only concerned with money. The goal of SCM today is to facilitate the selection of a supplier who can best meet the client's needs and then at the fairest negotiated price.
How do you accomplish this, you ask. The answer is simple, and you've heard it numerous times before. Communicate, communicate, communicate AND THEN educate, educate, educate!!! Start first with your client and then move on to your suppliers. Don't wait for your clients to come to you. Rather, proactively look for forums among your clients to educate and communicate your value-added services to them.
Develop your own personal Client Guidelines. In order to communicate and educate, you need tools. Your Client Guidelines is a document you can share with your client that will set their expectations and identify deliverables - deliverables they'll be providing to you. If your goal is to select the right supplier, you, as the SCM manager, have got to be able to:
How do you do this? What documents do you need to develop? The answers, simply said, are:
We all know (only too well) that there is nothing simple about the preparation of the aforementioned documents. It takes a lot of thought, preparation, and basic hard work to get to the point where we have adequate responses to these questions. Let's look at some of the areas we need to bring to the attention of our clients to ensure they include all the pertinent and necessary information for a supplier to provide a good reply.
Clearly, your client is the Subject Matter Expert, and your goal is to get every bit of pertinent data they possess documented and to the appropriate suppliers. If used to its potential, your Client Guidelines should be a "one-stop shopping" tool you may use to educate and guide your client through their project.
Identify what your client is looking for. Everything you need will flow from your Client Guidelines. Communicate your game plan to your client. Let them know the activities and information they will be responsible for providing. Remember, no one likes surprises. You'll be acting as a team from this point forward, so you may as well have everyone's buy-in up front. If they understand the process and how important their input is to the process, they are sure to be a willing partner.
The SCM manager needs to set the scene of the activities to follow with their client group. This concept is no different from whether you are planning to build a house or contract for computer support services. Who are the right players, i.e., the ones with the expertise to form the Technical Selection Team (TST)? Once these players are identified, jointly develop a doable project timeline. Use the Client Guidelines once you've gotten buy-in on all activities. Now you're positioned to set associated dates.
Assist your client in the development of their specifications/capabilities document. In more cases than not, they've never done this before. True, you don't write specs either, but you at least know what a supplier is looking for when they are responding to a solicitation or any request for product or work. The answer to that question is outcome/deliverables. What is the scope of the work to be done?
Identify any applicable documents that should be included. This may include any company publications or applicable forms. Actuals and forecasted quantities for the next three (3) to five (5) years, as appropriate and applicable, can also be quite helpful to the perspective supplier(s).
There are other requirements for instance, if it's a service. Will it be provided on-site or off-site? The client will need to identify what property and services they will provide and what the supplier is expected to provide. What systems will be interfaced with? What are the quality standards and performance criteria anticipated?
Lastly, progress reports describing how the supplier is doing are usually needed. Additionally, if you share your project timeline with your suppliers you'll be surprised at the cooperation you'll receive, not to mention the lack of requests for extensions. Remember, no surprises!!
Determine which suppliers have the product/capabilities you need. Now you've educated your client with how to describe the product/service they are looking for in a manner that describes the outcome. It's time to develop the second, if not the most important, document in selecting the perfect supplier. That is the supplier technical/ capabilities questions. It's one thing to describe the deliverables you're looking for, and it's another to determine which supplier(s) can provide it to you. The reason these questions are so important is that without their answers you and your client have NO way of knowing if a supplier understood what you were looking for and if they indeed have the capability to provide it. No wonder so many suppliers are selected solely on the basis of price!! It's like going to school, attending the lectures and reading the prescribed books. But can you answer the associated questions?? Now, THAT will tell the tale!!
The only way to determine what the suppliers can do is by asking the suppliers two (2) types of open-ended questions. First, your client needs to identify general questions to determine supplier capabilities, size, past business experience, etc. Secondly, specific questions addressing the product/service outcome need to be documented. Once the questions are identified, the TST needs to determine the importance or weight associated with each question. For instance, is the answer to each question a "must have", "good to have", or general info for the success of the project?
This organized systematic approach in selecting a supplier ensures selection based on capabilities and requested outcomes (not solely on price) while eliminating subjectivity to a large degree. This approach not only ensures the client that the best supplier was selected, but also can provide a documented summary of the reasons why they were selected. Of course, pricing is important, but, as you can see, it quickly takes a second place if your client's needs are not met.
Negotiate a fair and reasonable price. One important tip is when you issue your solicitation to the suppliers, ask them to package their technical/capabilities responses and economic responses separately. When you meet with the TST to review the technical responses, let them know the game plan. Explain to the team that while they are evaluating the technical/capabilities responses, you will be analyzing the economics. And do just that!! Start with a summary, i.e., comparison of prices, but be sure to follow-up with a total cost of ownership comparison. Your client wants and needs to know exactly how far this project will set their budget back - capital and expense. This needs to be explained to the team up front. You don't want them to think you are holding anything back. Let them know that you want them to be able to determine which supplier(s) will fit their needs without the burden of second guessing price, i.e., this sounds like what we need, but their fees are too high. It's up to you, the SCM manager, to negotiate the price once the subgroup of supplier finalists is selected. Explain to them that when they complete the technical evaluation and a subgroup is selected, you will be providing an analysis on the supplier pricing for discussion with the TST.
I always relay this little story to my clients to explain the reason I separate the pricing from the technical response before they begin their evaluations. If I go shopping for a party dress in size 4, and I find a great dress at an unbelievable sale price but in a size 18, what good is it to me!! The economics may be great, but if I can't wear it, i.e., doesn't meet my needs, it doesn't matter how much money I saved.
Again, pricing is more than first cost. Yes, you must do an apples to apples comparison, but you also need to take it several steps further. Your client want to see more than a summary. They want to know the capital and expense dollars associated with their project, and more specifically, they want to know their Total Cost of Ownership.
Develop and maximize the relationship. To maintain the momentum, your next step is to determine which supplier(s) would be interested in sharing risk and success with you. The development of the buyer/supplier relationship and the establishment of a Performance Based Contract (PBC) will ensure a successful working relationship with the selected supplier. This is simply not only a tool, but also a "good business" approach to successfully working with a supplier. In this world of Win/Win negotiations and contracts, all SCM managers are interested in working with a supplier that REALLY wants to work with them, i.e., establish a true "give and take" relationship.
A PBC is the necessary tool to foster a long term relationship with the supplier, whereby, both the buyer and supplier focus on their long range financial and value-added benefits. In the past, contracts were negotiated solely with a set fee structure. Occasionally, a penalty clause would be negotiated into the arrangement, and less seldom an incentive clause was included. A PBC is the true Win/Win scenario of the perfect union of these concepts.
Is a PBC beneficial? Buyers are demanding high quality, innovation, and excellent service at fair and reasonable prices. Quality suppliers want to provide the best product/ service and they expect to be rewarded for exceeding expectations. A PBC provides an opportunity for shared risk while maximizing the opportunity for mutual success.
What type of relationship should exist/be developed with the supplier? A PBC IS about developing a strong mutually beneficial arrangement where both parties have something to gain and something to lose if their "partner" is experiencing a problem.
What type of environment is conducive to making this type of relationship work? Is there a strong communication and sharing of information between the supplier and buyer? Between the supplier and the customer/end-user? A good specifications/capabilities document is critical. Communication and buy-in of the customer/end-user is critical since ultimately, they will be implementing the PBC. Both parties need to know that the other will go beyond the agreed upon terms and conditions to make this a successful and profitable relationship.
What do you base performance on? The identification and establishment of performance indicators and the associated outcome criteria are a must. Although performance measurements will vary depending on the product/ service, customer satisfaction, product/service quality, support process performance, end-user satisfaction, efficiency, supplier performance, and/or measurement methods, each relationship needs to determine exactly what will it will take to make it a success.
SCM managers should be focused on every aspect of adding value to the buyer/supplier relationship. Techniques to increase communication and trust between buyer and supplier achieve client buy-in and participation from the onset. These techniques force SCM to really talk to their client and encourage the client to become involved in their business. The client becomes aware of the importance of developing a strong mutually beneficial arrangement where both buyer and supplier have something to gain and something to lose if their "partner" is having a problem. Developing a PBC has the potential of increasing the value of the products/services provided by raising standards. Buyers now realize this is necessary to achieve and maintain a competitive advantage in today's marketplace. This selection process along with a PBC creates win/win opportunities and REAL partnerships for both the buyer, his client, and the supplier.
The author: Lorrie K. Mitchell is a Relationship Manager in the Supply Chain Management Department of BellSouth Telecommunications, Inc. Lorrie has a B.A. in Mathematics from the University of Miami and a Master of Science in Technology Management from the Stetson School of Business and Economics of Mercer University. Additionally while at BellSouth, she was formerly a full-time faculty member at the Keller Graduate School of Management where she taught Contracting and Procurement Management and Mathematics. Prior to her work at BellSouth and Keller Graduate School, Lorrie was a Buyer for Burdines in Miami, Florida and taught Mathematics at the Secondary Level in Miami, Florida and Monterey, California. In May 1997, she presented "Performance Based Contracts - Maximizing Success and Sharing Risk" at the 82nd International NAPM Conference in Washington, D. C. Lorrie's work with and philosophy regarding Performance Based Contracts was described in "Can You Make Wider Use of Performance Based Contracts?" in Supplier Selection & Management Report, August 1997. Additionally, Lorrie was interviewed for articles relating to Performance Based Contracts appearing in the January 1998 issues of Procurement Management Magazine and Electronic Components Magazine.