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Partnership Is Not A One-way Street

August 25, 2010

The stories about unilateral procurement initiatives continue to arrive. This week, a couple more global corporations have joined the stampede towards longer payment terms. ‘We are writing to you as a valued supplier to inform you that ….’ Well, whatever value I had before this extension of the payment period by 30 days, I have less now! And what a weak excuse – ‘ we are following industry trends and practice’. I thought companies were trying to distinguish themselves, to be differentitated. Wherever did that concept go?

But I recognise that payment terms are a lost cause for now .. although there is a ray of hope from an unlikely source. According to the Financial Times, the automotive industry has awakened from its plummet towards self-destruction and recognized that suppliers have value. They are doing some interesting things (I’ll write more about those another time), but one specifically is that they plan to take steps ‘to support supplier liquidity’. That includes ADVANCE payments on design and development projects (though maybe not so advance if they take 90 days to pay the invoice!).

However, the purpose of this blog is to highlight another new practice in partnering. It concerns one of our member companies (which shall remain nameless) that out of the blue received an invoice from their customer for ‘Procurement Services’. These were billed at 4% of contract value.

Well, we are all hearing about the pressure on Procurement to raise its contribution to the business – but this approach is certainly new to me. There was no contract and therefore – of course – no Purchase Order to support this unwelcome invoice. Yet clearly the Procurement department that issued it does not expect that its suppliers will follow standard purchasing procedures. They see themselves entitled to issue a non-contractual demand for payment – or else you will lose our business.

This is not business. This is blackmail. It is also remarkably stupid. What customer really believes that this action will not damage the trust and loyalty of their supplier? What customer really believes that a supplier will happily yield 4% of their margin – especially for the pleasure of propping up a Procurement department in another company?  Of course they will rapidly find a way to cover this cost, by raising prices or cutting services.

I would love to know who sits behind this marvellous idea to shift costs and revenues within the business. Is it Finance? Do they reallythink suppliers will simply absorb the overhead? Or is it Procurement, desperate to find ways to justify its existence and ‘show value’? If I were the CEO, I would want to know why I was spending 4% on such an unimaginative organization. And rather than impose 4% levies on my suppliers, I would offer to split the difference and abolish the Procurement department. That way, I would have happy suppliers and I would be a total of 6% better off!

Now maybe there is a counter-side to this story, in which case I would love to hear it.

2 Comments
  1. Tim – this topic seems to be of high interest in the blogosphere. Over on Procurement Leaders (http://blog.procurementleaders.com/procurement-blog/2010/8/24/just-what-is-procurement-20.html), they raise the issue by asking whether Procurement needs to re-invent itself.

    As I commented over there, my outsider’s experience is that many procurement teams don’t have “customer service” in their ethos. Other groups in the enterprise are the “enemy” and procurement’s role is to police them. This makes procurement think it is valuable despite the fact that its customers are failing. For example, did the cost saving leave the operation with a poor supplier who misses delivery? Or, did taking the time to negotiate the perfect contract mean that sales team missed the delivery window for the market?

    Kevin Potts
    VP of Product Management and Marketing
    Emptoris, Inc.
    http://emptorisinc.blogspot.com/

    • Kevin, thanks for your comments. It seems that the question about re-invention just doesn’t go away – indicating that Procurement is either stuggling to change, or struggling to change at the required pace. I agree that the attitudes are far too defensive and that this prevents effective ‘partnering’ with the business or the supply base. But sometimes one has to ask whether management really wants Procurement to change. If they did, would they not take steps to shift their measurements and to think about new organizational models? Perhaps in the end the pressure to’re-invent’ comes more from inside the function and those outside don’t really care all that much.

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