Best Practices in Supply Management Journal

Best Practices in Supply Management Journal

65th Edition, May 2014

Articles In This Issue

“Beyond Strategic Sourcing…Gaining Greater Value”

“Mediation in Contractual Disputes…An Inside Look”

 

 Visit the Strategic Procurement Solutions Web Site

 

 

 

Founder Appearances and Job Opportunities.

 

Upcoming Founder Appearances:

May 31 – June 3, Mark Trowbridge will present a three day workshop on ‘Innovative Practices in Technology Contracting’ at the JW Marriott Resort in Dubai.  Click here for registration information Link to Dubai Conference 

Our company’s founders often partner with ISM, NCMA, APICS, CAPPO, and NIGP affiliates to present day seminars and dinner event keynote addresses.  More than 100 presentations have been made to local affiliates during our history.  Please Click Here to arrange a presentation for your chapter’s 2014/2015 fiscal year.  Note – We now offer CPSM exam preparation training workshops.

 

Job Opportunities:  We are currently helping clients fill the following SCM career opportunities.  Contact Strategic Procurement Solutions through our website if interested…

- Capital Project Category Sourcing Manager, Texas Oil/Gas Company.  5 – 10 Years of Sourcing & Contracting for CapX and Professional Services Expenditures in the Oil/Gas Industry.  Base Salary Between $115K and $130K.  Excellent Bonus and Benefits Package.  Relocation Negotiable.

- MRO and Corporate Expenditure Category Sourcing Manager, Texas Oil/Gas Company.  5 – 10 Years of Sourcing & Contracting for Maintenance, Repair, and Operating (MRO) and Corporate Center Expenditures (including IT, Marketing, and Human Resources) in the Oil/Gas Industry.  Base Salary Between $115K and $130K.  Excellent Bonus and Benefits Package.  Relocation Negotiable.

- Procurement Programs Manager, Texas Oil/Gas Company.  5 – 10 Years of Contracting Management, P2P Technology Systems Management, and Supplier Management in the Oil/Gas Industry.  Base Salary Between $115K and $130K.  Excellent Bonus and Benefits Package.  Relocation Negotiable.

- Senior Sourcing Leader, Southern Wisconsin Area.  4 – 8 Years of Sourcing & Contracting for BPO (Business Process Outsourcing) and Professional Services.  Base Salary Between $100K and $110K.  Excellent Bonus and Benefits Package.  Relocation Negotiable.

- Marketing Sourcing Specialist, South San Francisco Bay Area, California, Technology Company.  Annual Base Salary between $95K and $115K USD, plus bonus and benefits.  Relocation negotiable.

- Facilities Sourcing Specialist, South San Francisco Bay Area, California, Technology Company.  Annual Base Salary between $95K and $115K USD, plus bonus and benefits.  Relocation negotiable.

- IT Sourcing Specialist, South San Francisco Bay Area, California, Technology Company.  Annual Base Salary between $95K and $115K USD, plus bonus and benefits.  Relocation negotiable.

- Director of City Procurement, Greater Sacramento, California. Experienced governmental procurement leader with strong Capital and Operational procurement and contracting skills with background in progressive municipal procurement.  Base Salary between $95K and $125K.  Strong Benefits Package. Relocation Negotiable.

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This electronic journal is now distributed bi-monthly to over 13,000 Supply Management Professionals around the globe. Note that our educational articles are ‘in depth’, unlike most online publications.  We hope you enjoy this edition. Feel free to forward to your SCM colleagues!  And keep SPS in mind when your organization needs top quality Supply Management Consulting, Employee Skills Testing & Training, P2P Efficiency Reviews, Cost Reduction Support or SCM Staff Augmentation/ Recruiting Services.

 

   “Swamps, Alligators and MRO- by Mark Trowbridge - Principal, CPSM, C.P.M., MCIPS
No matter the industry, every procurement group deals with Maintenance, Repair, and Operating (MRO) expenditures. For companies in the manufacturing space, MRO is obviously a very large portion of their total spending. But nearly all organizations also have MRO expenditures which require sourcing expertise, whether they are verticals like retail, government, or even financial services. 

MRO is a messy category for many reasons, including the following:

  • Every organization’s MRO requirements are different. Capital equipment selected by a manufacturing firm from a particular OEM will require replacement parts (spares), schematic diagrams, maintenance and user training, diagnostic tools, etc. be procured from that OEM during the lifetime of the assets;

 

  • Name brand tools, products and services often are available only through protected distributor territories, thus limiting competition in particular geographic areas;

 

  • Our internal customers each seem to have strong opinions about which products or suppliers are the “best”;

 

  • Initial capital project decisions live on for the lifetime of the assets. For example, the annual cost to maintain a piece of electro-mechanical production line equipment averages 20% of the initial equipment purchase cost. When extrapolated over a typical ten to fifteen year equipment life, the maintenance expense far outweighs the initial purchase cost;

 

  • Inconsistent equipment, hardware, or fleet standards exponentially increase the replacement parts which need to be kept in inventory;

In the last few months, I’ve personally directed three of Strategic Procurement Solutions 360o Supply Management Efficiency Review projects for organizations in very different sectors. One of the projects reviewed Procure-to-Payment (P2P) operations for a metropolitan city spending around $200 Million each year. That procurement group had significant costs involved in the maintenance of their citywide infrastructure, including maintenance of streets, lighting, buildings, parks, water treatment facilities, etc.

 

Another of our efficiency reviews was for a US Fortune 200 oil/gas company. MRO expenditures for this process production company were a significant segment of their $3 Billion in annual procurement spending, and covered maintenance of pipelines, pumps, valves, heat exchangers, storage tanks, vehicles, etc. They also had significant CapX project expenses which overlapped with their MRO expenditures in respect to suppliers and products.

 

In between these two reviews, I helped to analyze the supply chain operations of a global technology company which had significant MRO expenses related to their ongoing acquisition, configuration, and distribution of laptop, desktop, and tablet computing devices.

 

Annual cost reduction/efficiency improvements we identified for each of these different clients ranged between $1.4 Million and $24 Million. In each case, MRO expenditures were among the most complex categories for the organization to address as they implement our recommendations.

 

The remainder of this article will discuss four ways to wade through the Swamp of MRO so as to streamline efficiency and capture optimal savings:

 

Method One Standardize, Standardize, Standardize: Organizations benefit greatly by standardizing throughout their infrastructure. Prior to entering the SCM consulting arena sixteen years ago, I led much of the sourcing for one of the largest American financial services enterprises. Our organization had nearly 200,000 employees and 5,000+ branch locations. To better manage our branch and ATM networks, we standardized our teller-line ATM machines, computer systems, furniture, safe-deposit box arrays, security systems, signage, furniture, and displays. We even established several sizes of “Branch in a Box” which were configured for various standard branch layouts. This allowed us to reduce our costs to equip a new branch location in a prompt manner, and to optimally maintain equipment through our own maintenance infrastructure.

 

Method TwoGet Visibility into Inventories: MRO expenditures can’t be managed until procurement gets visibility into what is being held in inventory. I remember working with an electric utility company which had around 5,000 employees. When we evaluated their MRO expenditures, we found that the company inventoried 46 different brands/styles of work gloves in their six inventory warehouses. The energy firm’s project sponsor said “Let’s just send the inventory listing to people at each location and let them develop standards.”

 

But we wisely insisted on having samples of each pair of gloves brought to one central company conference room. We arranged the sample gloves into groups by type. Then we brought the company’s maintenance managers into the room. Within an hour, it became abundantly clear to the maintenance leaders that just eight styles of gloves would satisfy the company’s requirements. And with that decision made, the procurement group was able to solicit pricing from glove manufacturers/distributors and significantly lower their costs. Without the samples, though, they would never have been able to consolidate the glove selections just using the inventory listings.

 

Method Three - Leverage the Power of Strategic Supplier Relationships: No matter how competent our own MRO product management practices, those of key MRO distributors are usually more sophisticated. So partnering techniques like Supplier Managed Inventories (SMI), KanBan, and JIT can be very helpful.   And our suppliers will apply their staffing and resources to help solve our MRO challenges.

 

Method FourNegotiate All Lifetime Cost Factors for Capital Purchases: Capital equipment acquisitions must be strategically planned and timed so as to comprehensively address lifetime cost factors. The best time to negotiate ongoing discounts on replacement parts and training is when the initial acquisition occurs. Don’t allow what some companies do; which is to merely negotiate with the OEM the purchase price for the initial equipment purchase and (maybe) an initial set of spare maintenance parts. Once the CapX portion of the project is completed, the capital project manager (or EPC firm) just gallops off into the sunset and on to their next project. 

 

It’s only then that too many procurement groups discover that nobody negotiated ongoing discounts with the OEM equipment provider. And after the fact, what discount do you think the OEM will provide when then asked by the procurement group? How about “Here’s our published price list.”

 

Instead, top procurement teams must position themselves for the initial negotiation so that lifetime costs can be positioned optimally. Optimally, OEM standards should be locked into multi-year contracts that comprehensively address all lifetime TCO factors, including Purchase Price, Installation Cost, Initial Spares; Discounts on Consumables, Replacement Parts, User Training, Maintenance Training, and Maintenance Services; Right to Duplicate User Manuals, etc. With these benefits locked in place for most or all of the asset lifetime, total cost advantages can be achieved.

 

Many other techniques certainly apply to the swamp of the MRO spend category. Without a strategy and the right methods, though, the MRO swamp will bog a procurement group down and eat them for lunch. But with the right approach, we can manage this challenging category.

 

Strategic Procurement Solutions helps companies and governmental groups to optimize their supply management operations. We do this in just a few short weeks through our 360o Supply Management Efficiency Assessments. Please contact us at Info@StrategicProcurementSolutions.com for information about this service.

 

 

About the Author – Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 30 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors…culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, for Bank of America (then, the USA’s third most-profitable company). During his final two years with Bank of America, Mark’s areas of responsibility delivered a Quarter Billion Dollars in cost reductions. During the last 15 years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, Asia, and Malaysia. He is a frequent author on supply management topics, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, IFPSM’s eZine, eSide Supply Management, and Strategic Procurement Solutions’ own Best Practices in Supply Management Journal.  Mark’s  is among the top 1% Most-Viewed LinkedIn profiles.

 

 

c  “Privity of Contract…An Important Legal Concept in Procurement Contracting”- by Robert Dunn, MBA, C.P.M., Principal
An very important legal concept in procurement contracting is that of “Privity of Contract”. This principle pertains to whether an agreement can be binding upon a person or entity who did not sign the contract. The word “privity” is no longer used much in everyday speech, but is still very alive in legal circles and case law precedence. From the same root, we get English words like “privy” (“I’m not privy to that information” or “I have to go to the privy” [email us for an explanation of the latter]) and “private”. 

Privity of Contract is inextricably linked to one of the four foundational requirements for the establishment of a contract, that of “consideration”. In order for a contract to exist, something of value must be exchanged for something else of value (i.e. “consideration”). The Latin expression for consideration is “Quid Pro Quo” (In Exchange For). In most procurement agreements, the buyer pays monetarily for products/services provided by the seller. Each party is providing consideration in exchange for what the other party provides.

 

So what happens when we deal through another entity with the provider of products or services? Consider the following complexities:

 

Example A – Subcontracted Services:  A company contracts with a staffing provider to provide temporary personnel to work in its administrative offices.   The contract signed by both firms says that the staff persons provided by the staffing firm may not remove the company’s confidential information from their offices. A month into the contract, the company learns that their confidential information is being compromised by one of the provider’s staff members. Can the company sue the staff person for breaching the contract? The answer may be “no”, since the staff person was not “privy” to the agreement as a party. The company can certainly sue the staffing provider firm for breach of the contract, but likely not the staff member. No contract was ever signed by this staff member and no payment (i.e. “consideration”) was ever paid directly from the company to the provider’s staff member. There was no “Privity of Contract”. In this case, the contract should have required the staffing provider’s staff persons to each sign an agreement (or subcontract) with the staffing provider or even directly with company, causing them to protect the company’s confidential information.

 

Example B – Enforcement of an OEM Warranty:  A purchaser buys a piece of equipment from a distributor. The purchase contract signed with the distributor says that the performance of equipment is warranted for 36 months. Two years later, the distributor goes out of business. Another month later, the equipment fails to operate. Does the purchaser have a right to sue the manufacturer of the equipment? The answer may be “no” unless other documentation existed to hold the manufacturer responsible.

 

Privity of Contract is an important principle for procurement professionals to consider any time third-parties are involved in what we’re acquiring. Third-parties may have rights which can impact the value of what we’re acquiring from a supplier. Subcontractors hired by a construction contractor may have liens on our property until paid by the contractor. A programmer who is subcontracted by a technology consultancy may own the code they wrote for our project, unless the IT consultancy had a separate contract in place with the programmer transferring their intellectual property rights to the technology consulting firm.

 

Strategic Procurement Solutions help clients in the private and government sectors optimize their Contracting Management practices. We work with procurement leaders and their legal counsel to develop template agreements, clause libraries and fallback language. We also evaluate contracting management processes, system utilization, and techniques. Our skilled instructors train procurement audiences with onsite workshops like Strategic Contracting™ (2 days) and Innovative Trends in Technology Contracting™ (2 days).   More information can be requested at Info@StrategicProcurementSolutions.com 

 

Disclaimer – Strategic Procurement Solutions’ informative articles should not be construed as legal advice. Readers must discuss content with their own legal counsel to determine possible application to your own environment and governing laws.

 

About the Author:  Robert Dunn, MBA, C.P.M. is one of Strategic Procurement Solutions’ founders.  His 40 years in procurement leadership covered management positions in the Government, Technology and Financial Services sectors; culminating in a role directing all of BankAmerica Corporation’s procurement operations.  He has served as President of two ISM/NAPM affiliates, and taught supply chain management at the post-graduate level for California State University – Hayward and St. Mary’s College – San Francisco.  He has also worked with major corporate and governmental clients in the consulting industry for the past 18 years, and was one of the founders of Strategic Procurement Solutions.   Robert has worked on major procurement initiatives in North America, Latin America, Europe, and Asia.  He is a noted author, with recent articles in eSide Supply Management and Strategic Procurement Solutions’ own Best Practices in Supply Management Journal (the latter of which is now distributed to over 13,000 readers).

 

 

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Strategic Procurement Solutions, LLC – All Rights Reserved