How to make use of foreseeable irrational behavior in humans to guide the organization to make correct purchasing decisions.
The "chain of influence" is a shadowless and invisible network composed of interpersonal relationships, preferences and informal agreements, which can affect the final purchase result and cause enterprises to suffer economic losses.
Many people believe that with the increasing popularity of digitalization and automation in the procurement process, human intervention in procurement will become smaller and smaller, but in fact, any logic or fact depends on the person who executes the process. Stakeholders have the opportunity to intervene in various events in the operation of the enterprise and incorporate their own biases, such as:
1. Overdue delivery by a supplier can be considered a direct breach of contract, but can also be addressed by adjusting production schedules.
2. For the quality of the incoming materials, the buyer can give economic punishment according to the contract, but it can also give the supplier an opportunity to replace the problematic materials.
3. For urgent orders, suppliers can ignore, reject, increase fees, or try to complete.
4. The quality inspection requirements of the supplier's new products can be highly valued or completely misconceived.
5. Preparations for emergency negotiations can be done overtime and carefully, or you can wait until you have time to discuss them slowly.
6. The saved purchasing expenses can be recorded in the profit and loss statement of the production department of the factory or transferred to the sales department to increase the profit margin or reduce the sales price.
Policies and rules cannot control all people's choices, nor can they influence the personal biases and preferences behind choices. If the individual nuances are superimposed, and the axillary elements are combined, they can have a huge impact on the final result. Generally speaking, purchasing choices often need to weigh different factors, such as purchasing cost, product quality, and production stability.
For example, suppose that a chemical supplier in Shenzhen quoted a quotation for the same product substantially lower than the current price of a supplier in Zhuhai, but with an additional minimum order quantity (MOQ) requirement, and the MOQ was higher than the buyer ’s consumption for 6 months. . Do you want to change suppliers at this time? The policy compliance department will consider whether to resolutely implement the inventory control policy. The CFO is mainly concerned about whether it can increase the cash position. The security department will consider the state's storage standards for dangerous products. As such, whether to change suppliers requires multiple parties to weigh and choose . It can be seen that seemingly simple choices often bring a series of complex prejudices, and the end result is not always the best for the overall interests of the enterprise.
Purchasing value is hard to come by. In order to ensure that it is not eroded by all kinds of human prejudices, try the following seven methods:
1. Empower the CPO, invite the CPO to the Executive Committee and report directly to the CEO. Let the CPO sit on the right-hand side of the CEO during the meeting and openly solicit or support the opinion of the CPO. This series of small moves will help strengthen the CPO's prestige and raise the CPO's position in the minds of colleagues in other departments;
2. Introduce a set of cross-sector key performance indicators (KPIs) to balance corporate strategic goals with the interests of various departments, political risks, and social status;
3. Carefully design the "boost" action-cleverly intervene at nodes that are susceptible to human bias to promote results that benefit both the business and the people involved. For example, a supplier is performing poorly but is unable to terminate a contract with it due to strong internal resistance. In this case, try to let this supplier know that the final product made from their parts will have a huge drop in sales next year, and may let them "get interested" away;
4. Use digital technology to establish a cross-region integrated database link (sales-bill of materials) for all "procure-to-pay" processes and "order-to-cash" processes — Stock — Order — Contract — Supplier — Invoice);
5. Change settings to be fair, easy, and unfair. For example, set the system default options to enable the best performing suppliers to receive payments quickly, while suppliers who have not proven themselves need to complete tedious account checking procedures;
6. Differentiate the strategic purchasing team and the daily purchasing team, and supervise the delivery of orders and negotiate commercial terms with suppliers should be the responsibility of different people;
7. Set the position of strategic procurement as a rotation system and change it every two years, and stipulate that the appointment of this position is a prerequisite for promotion to director, so as to enhance the importance of procurement positions and achieve the purpose of recruiting outstanding talents.
The value of purchases will not be fully realized at the moment of signing the contract. Instead, it depends on how the internal staff of the company implements these contract terms. Enterprises must understand that the impact of human factors on procurement will never stop. And effectively managing the hidden power within the enterprise can release huge potential procurement value. It is worth mentioning that although this series mainly discusses the procurement practices of enterprises operating in China, it also has certain universal reference value for other industries and businesses.