The 7 Habits of Highly Ordinary Negotiators, PART 1

by Omid Ghamami

The 7 Habits of Highly ORDINARY Negotiators

What Kind of Negotiator Are You?

What Kind of Negotiator Are You?

Habit #1 – Tries to Find Cost Savings in Price

Purchasing pros, I know there a large number of people who follow me through various social media and I greatly apologize for the tremendous time lapse since my last blog.  I wanted to kick off a 7 part series that would, in aggregate, present a tremendous tool to all of you.

This 7 part series is based a quarter century of me going to hundreds of companies in 21 countries and 5 continents across all industries and sectors.  I’ve witnessed great practices and mediocre practices.  From this experience, and from the biggest gaps between where we are and where I envision we can be, I’ve derived the following blog series, focusing on the The 7 Habits of Highly ORDINARY Negotiators.

Habit #1 is “Tries to Find Cost Savings in Price”. 

We have a profession that tries desperately to find cost savings at the negotiating table, in the form of price.  This has been going on since the first currency was ever developed.  We’ve gotten more and more sophisticated at achieving this objective, but we’ve stayed in the stone ages in terms of what we’re trying to achieve.

In fact, I think this is perhaps the biggest indicator of being an ordinary negotiator.  Allow me to explain.  What do your suppliers hear when you ask for a lower price? What they hear is “make less profit so I can report more cost savings”.  How sustainable of a strategy do you think this is?  How eager do you think suppliers will be in helping you achieve this objective?

Year after year, how many times can you keep dipping into that same well, with management expecting greater cost savings results?  And do you know that suppliers who feel like they’ve been squeezed too hard will find other ways to make their money from you?

What % profit margin do you think your suppliers have?  10%?  15%?  Certainly not more than 25%.  Let’s say 15% for the sake of discussion.  When you ask for a lower price, you are therefore actually saying “forget about the 85% cost opportunity here, I want to focus in on the 15% profit piece”.

Think about that.  When you focus on price, you are focusing on profit.  You are focusing on a very, very small piece of the pie.  The rest of the pie is where all the money is.  I could write a book with all the negotiations I’ve helped companies on where I helped them find up to 90% cost savings by focusing on cost instead of price.  Maybe I will.

By the time your end user has handed you the SOW or Spec, the money is gone.  It’s game over, the ship has already left the dock, the bus has already left the station.  The biggest cost savings opportunities have gone straight down the pipes.

Your end user is trained in developing Specs and SOW that are designed for FORM and FUNCTIONALITY, but not COST or TCO.  Nobody trained them on that.

We keep trying to get upstream with our end users, but for all the wrong reasons: purchasing policy, finding other suppliers, etc.  I shouldn’t say those are bad reasons, but that’s not where the money is at.  The real money is in driving upstream Spec/SOW DESIGN FOR TCO.

Key strategies for doing this include standardization – changing from custom parts and processes to standard, simplification – doing bells and whistles analysis, reuse – technologies, suppliers, processes, parts, machinery, SOW/Specs, and harnessing supplier innovation – best practices they know of because hundreds of their other customers have solved the same problem as you in much better ways (and also much worse ways, and so they know what pitfalls to tell you to avoid).

If you set a requirement that your end user establishes success metrics for the purchase (we will talk about this more in the next blog), then you have a criteria against which to drive the strategies above.  Without success metrics, you cannot do any of those things, because you won’t know (for instance) if shifting from a custom component to a standard component is a smart thing to do, even though it will save you money.  The success metrics will tell you if it impacts the final result or not.  Without that, you may make changes that save you money now, but cost you dearly later.

It’s just like if I asked you “what type of excercise should I do?”  You can’t answer the question until I tell you what it is I am trying to accomplish.  Upstream design for TCO is no different.  Without objectives, you don’t know what changes you can or can’t make to take cost out of the equation, because if you take out the wrong elements, you might increase TCO or fail to meet your end user’s objectives.

We don’t have time or space here to get into examples, but let me say this:  In my experience, only 20% of the cost savings are found in negotiations, and 80% of the cost savings are found in Upstream Design of the Spec/SOW for TCO.  Does that get your attention? It should.  This is the easiest profession to become a rock star in.

Look for the remaining parts of this series shortly to help get you on that path.

Be your best!

Omid G.

 

P.S.  Have you seen my CPSCM – Certified Purchasing and Supply Chain Manager – program? 100% online, hear my voice, see the materials, 30 hours of on-demand training.  You will love it.   I also am offering one hour free training you can sign up for that you will benefit greatly from.  Check it out at www.CenterforPSCMExcellence.org

 

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