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Case Study in Purchasing Rationalization

Introduction In 2002 a major American chemical company had completed a year of supply chain reengineering and decided upon a number of best practices that should be implemented. One element of the reengineering was that they decided upon creating a shared service function at their headquarters which rationalized the purchasing and accounts functions of seven separate businesses already located at the site. The creation of the shared services function was estimated to produce a cost saving of 10%, or $20 million, of their purchasing budget each year. The problem that they faced was overwhelming. The seven companies had overlapping vendors, items, numerous contracts with the same vendor with different pricing structures and a variety of payment terms. The company created a task force to develop and implement a plan to create the shared services function. Identifying the Problem The seven business functions were located at the one site, but were distinctly separate. Each of the businesses had implemented their own technology strategy; systems, hardware, and vendors. If the shared services function was to use the companys new ERP system, there had to be a data cleansing and conversion process devised for each of the seven business functions. The task force received data from each of the businesses and it became clear that there was a significant level of duplication within each of the businesses as well as across businesses. One business function had seven separate contracts with the local telephone company, three of which were still valid. In a startling revelation, it was found that the seven companies had over 60 contracts with FedEx, and 43 with UPS. Implementing the Plan After reviewing the data from the businesses, it was decided that a separate teams would be required to complete the following:

rationalize vendors across businesses update or delete existing data negotiate new contracts and pricing with existing vendors

The team found that there was a significant overlap of items that were purchased across businesses and that the company was not using the purchasing power it had to gain the best prices from vendors. As further investigations were made into common items that were purchased across the company, it was found that greater savings could be achieved by limiting the number of vendors for specific groups of items, such as lab supplies and computer equipment. The seven businesses used nine lab supply companies and by offering a larger volume of items to be purchased by only one or two lab supply vendors, the savings could be as much as 60%. Once this level of saving reached the ears of senior management, more focus was put on rationalizing vendors and in some cases, single sourcing was found to be appropriate when one vendor offered even more significant levels of saving.

The Result The shared services function went live on their ERP system fifteen months after the start of the task force. The combined seven businesses had reduced their total number of vendors from 34,000 to around 900. The number of items they purchased was reduced from 110,000 to 15,000 and a team was put in place to monitor and approve new items and new vendors as they were required. Although the company estimated they would save 10% in the first and subsequent years, the estimate was raised to 23% for the first year and 15% for subsequent years based on the results of the task force. The company decided that after making such large savings, that they would continue implementing best practices in the purchasing function. They developed a plan for adopting procurement cards and the introduction of evaluated receipt settlement, where they would pay vendors based on goods received to gain vendor discounts for prompt payment.

Case studty-2
A large company in the UK is buying an important set of Data Base software to use as the underlying engine for all of its IT applications. Once this software is purchased and installed, replacing it would be near impossible because of technical and financial reasons. While most IT manufacturers claim that their software is portable and easy to change, reality dictates otherwise. The price also runs into millions of pounds with a huge yearly maintenance fees that is never ending and in fact increase every year... The technical department satisfied itself while working with the supplier in "partnership" that the product is the best in the market and have recommended its purchase to the management. Any half-decent buyer knows very well, that under these circumstances getting a half good deal is an up-hill struggle. The technical department is now asking the buying organisation to begin the negotiation with the said supplier to achieve the best possible deal for the company. Let us see in such circumstances, how the negotiating strategy and tactics approach would deal with this negotiation. Firstly The Basic Negotiation Approach Following the basic negotiation approach and applying all the tactics learned, the company will get good discount because of the large up front payment it is willing to pay and the basic negotiation skills applied to the situation. But here is the problem: as soon as this software is purchased and installed the whole balance of power for all future purchases and upgrades changes in favour of the supplier. This usually happens because once such proprietary" software gets installed, it becomes very difficult to replace. It is no longer a commodity. Maintenance fees will inevitably spiral out of control and the next time the buyer tries to negotiate another deal with the same supplier he/she will find that their negotiating world has been completely changed. The same nice yielding sales people that they were used to dealing with have now turned into real pack of sharks putting their conditions and demands on the company now do we think it is possibly that they used their strategic negotiation skills in the first place to ensure that they lead them to this powerful position?

Secondly - The Negotiation Strategy Approach The negotiation strategy approach in this situation is, as you would now expect, is completely different from the tactics approach. The Strategic Negotiator sees the bigger picture, uses the "whole brain" approach, and doesnt wait until the company tell him/her that it has decided to buy this particular software. The buyer is working closely from the outset with the technical department, the planners and the people who will make the decision. It never comes as a big surprise for a good buyer that the company now wants to buy something. The buyer knows that such software will be needed and that he/she has to move now and mobilise all the required elements of the company for the acquisition long before the supplier gets a sniff of it. The strategic negotiator agrees with the stakeholders on the deal brief and the wish list of the users before hand i.e. future use and requirement, upgrades, potential uses, number of users etc. The buyer then adds to it, the commercial wish list that must include a long-term framework agreement to secure future pricing, among many other commercial wishes. The Buyer Now has: Informed and mobilised all of the necessary company resources on his side. Agreement with the stakeholders before hand on the best outcome Planned and held a strategy sessions with all concerned to plan for the negotiation.

All these steps informed the strategic negotiator on the best course of action to take for this acquisition, and the best negotiation strategies to apply before the negotiation with the supplier begins. The buyer involvement early in the process have certainly ensured the best deal possible for his company, short and long term. Now as they say - the world is his/her "Oyster" and the buyer is fully prepared for making the deal that is best for the company, not just for the supplier!

Bargaining Price with the Chinese

Chinese haggling tactics and bargaining can result in foreigners making costly concessions.

K. G. Marwin Inc. developed a particular technology in the 1980s, called the Trilliamp Process, that the Chinese government sought to integrate into an ethylene facility in Lanzhou, the capital of Gansu province. It signed a contract with Marwin, which in 1985 invited inquiries from U.S. and Japanese manufacturers for production of the machinery. Marwin recommended the Japanese company Auger-Aiso as most capable of producing the turbines, while the Chinese invited two U.S. companiesFederal Electric and Pressure Inc., which manufactured through the large Japanese trading company Mitsuboto compete for the multi-million-dollar contract.

The Scene
To undertake the negotiations with the three prospective suppliers, six Chinese officials and three representatives from the Bank of China were selected. The Auger-Aiso chief negotiator was Todman Glazer, the companys Japan branch manager from the United States who resided in Tokyo and was assisted by his Japanese colleagues. Glazer remembered the tight deadlines he had faced on previous trips to China; now positions had been reversed, with the Chinese facing the pressures and deadlines. He realized the value of thinking like ones opponent seeing things as they do. This was the first potential deal with China in the ethylene market, and Auger-Aiso faced stiff competition from Mitsubo, which had already cornered the Chinese oilprocessing market. At the first negotiation meeting in Beijing, the Chinese insisted that custom required the visitor Glazerto make the first presentation. This he did, even though he was accustomed to allowing his opponents to speak first. Glazer began by addressing the excellence of Auger-Aiso technology, explaining that the manufacturing would all be done in Japan to ensure product excellence. When the Chinese offered no indication of their position or price, Glazer felt obliged to quote an upper-range price that would allow flexibility. The Chinese still made no comment. In the afternoon, the Chinese heard offers from the combined Mitsubo-Pressure team, then Federal Electric. By the end of the day, Federal Electric had dropped out of the race, accepting that it could not compete.

Revolving Doors, Changing Moods

During the first week of negotiations, a pattern emerged. The Chinese would meet with Glazer and his colleagues in the morning and ask for a price, saying that their competitors had already bid such-andsuch a price, which was invariably lower than the last Auger-Aiso bid. They would meet with MitsuboPressure in the afternoon and use the same approach, causing the latter to drop its price. Moreover, each meeting would end with the Chinese saying, We will call you tomorrow.

But, because they never called, both prospective vendors became panicky and visited the Chinese office without notice to present an even lower bid. As the Chinese kept the vendors guessing and in the dark, Glazer understood how the Chinese had earned a reputation as master negotiators. At the second meeting, tactics changed and there were different people representing the Chinese side. An antagonist would suddenly burst out in loud Chinese and harangue the Auger-Aiso side for some fifteen minutes, complaining about the quality of the machines they were offering. A protagonist would then intervene and, apologizing for his colleague, would say he had been upset about the current situation. Glazer regarded these outbursts as no more than arranged role playing, designed to make the protagonist (the good guy) appear more trustworthy to the foreigners. But, Glazer realized, all the participants were play-acting. Then there was yet another change. The Chinese located the Auger-Aiso and Mitsubo-Pressure teams near the meeting room, in adjacent rooms. Mitsubo-Pressure would be called in and asked for its best price. After the team had returned to its room, Auger-Aiso would be called in, told the latest price, and asked if it could beat this. When the prospective vendors could drop their price no lower, they would add something to the package. Auger, for example, added oil gauges for its turbines, effectively a three-percent add-on. Even so, the Chinese still would not commit to placing an order.

When the Price Is Right

Glazer could hardly believe that he had lowered his price twenty per-cent that week; to do so would have been out of the question in the United States. On the final day, Auger-Aiso made another offer and, for the first time, the Chinese made a counter offer. Auger-Aiso accepted, and agreement was reached. A few hours later, Mitsubo-Pres-sure came back with an even lower price, but the deal had already been struck. Glazer spoke later about how difficult it was to compete with Japanese trading companies, explaining that U.S. companies had so many factors to bear in mind, including insurance and a variety of liabilities. Meanwhile, Japanese trading companies, which had vastly different legal parameters [within which] to operate within, could more easily focus on getting contracts and closing deals. He believed that Auger-Aiso had been awarded the contract because it had been the preferred supplier right from the start.

In most respects, the Chinese negotiating style for big-ticket items has changed little over the past twenty years or so. Vendors still go to China and submit to the pressures of intense bargaining, while the good guy/bad guy routine remains a tool of intimidation. Although Glazer saw through the tactic, it could be the undoing of less-experienced foreign negotiators. Glazers suspicion that Auger-Aiso was the preferred supplier from the beginning is plausible. Consider the case in chapter 3, involving the Japanese packaging printing press manufacturer Kumi-Chantdung, in which the successful vendor turned out to be the initially preferred supplier. The clever Mitra was able to intuit that his company was preferred, and so gained the upper hand. One can only wonder whether, had Glazer guessed that Auger-Aiso was the preferred vendor, he would have been less willing to drop his price toward the end.

No mention is made of socializing or banqueting because more than one team was competing, as in another chapter 3 studywhich the present case most resemblesinvolving Benjamin, who was invited to submit a proposal for a huge Guangdong brewery. It is also interesting to note that, compared with the Benjamin case, the one above places less emphasis on the technical package and specifications, including installation and engineering support. This may be because, over the years since 1985, the Chinese have become more sophisticated in terms of quality requirements, whereas in the past price was the dominant factor, and its reduction the best way of giving face. In the 1980s and 1990s, the Chinese bought a great deal of technology that could not be applied and machinery that was inoperable. From this the Chinese learned how to get the best package at the best price.