The issue of improving procurement transparency: Transparency is often considered to be one of the key ways to discover hidden value, but sometimes it is better to keep the details of the procurement process secret.
Improving transparency is a double-edged sword
Increasing transparency is often considered one of the safe ways to discover hidden value in procurement. Recording and communicating every detail of supply and demand activities can reduce the possibility of missing value. However, transparency is also a double-edged sword. If it is not used carefully, it may become a weapon for suppliers / customers to deal with in their negotiations, and it may also prevent front-line employees from putting forward innovative ideas for cost savings.
For example, registering previously unknown sources of value will give suppliers / customers more opportunities to discover them and use them as bargaining chips for themselves. Let's look at an example: a customer ordered a set of equipment and chose a wooden pallet for packaging to ensure safe transportation, but through recycling, you cleverly recovered 70% of the packaging value. In this way, you can save 70% of the packaging costs, but if the customer finds that they paid the full packaging cost, then they will definitely ask you for a corresponding refund, which will not only eliminate the value brought by packaging recycling, but also Puts you in a more disadvantaged negotiating position.
The "trick" of suppliers
Not only that, front-line procurement staff can also see many similar "tricks" to help companies save costs. such as:
1. The supplier repeatedly counts the project expenses involved in multiple links into the invoice, exaggerating costs. For example, if a piece of equipment needs to replace multiple parts, the repairer will deliberately add the disassembly cost of the device to the replacement cost of each part and repeatedly charge the disassembly cost of the device;
2. The contractor's pricing of the project is lower than the cost price, and he hopes to obtain high profits from other work beyond the scope of the contract after the contract is signed;
3. The supplier provides a lower unit price for small batches of products, but raises the price for large batches of products to recover the profits;
4. Relevant personnel pre-screen the RFQ responses, intentionally highlighting their preferred suppliers.
5. Relevant personnel verbally place higher requirements on all potential suppliers except their favored suppliers. In order to ensure quality, these suppliers will increase their quotations. As a result, uncompetitive but favored suppliers will Able to win contracts at lower prices.
6. Suppliers coordinate in advance, focusing / focusing on different parts of the market, product line, or project scope, respectively, to avoid price wars and erode profits.
7. The price premium for urgent orders is not specified at the quotation stage. The supplier intends to extend the delivery period in the contract, hoping to “manufacture” more urgent deliveries from subsequent transactions, waiting to collect a high premium, aiming to win the contract with a lower unit bid, but concealed the bidding link Other than total cost.
Try to avoid the trap. Try the following:
Increasing transparency can indeed help companies find similar hidden cost savings opportunities, but if these hidden value sources are uncovered, companies will have to invest more to achieve savings, but without bringing benefits to internal stakeholders Correspondingly, internal stakeholders may partner to prevent these opportunities from surfaced. The secret to solving this problem is to provide the right people with the right incentives to encourage them to discover and share this value-creating idea and adjust transparency appropriately.
While digging through the benefits of transparency, try to avoid the pitfalls. You may wish to try the following principles:
1. Information is transparent, but not all data is freely shared
For those who possess or have access to sensitive business information in an enterprise, the enterprise should establish strict restrictions and resolutely implement them. For example, an enterprise may allow the enterprise resource planning (ERP) systems of different factories to interact with each other, such as the Shenzhen factory and the Beijing factory, in order to achieve a unified standard, but at the same time, access rights should be strictly restricted. Only individuals who have passed strict screening have Right to access supplier's quotation information. To a certain extent, it can reduce the leakage of current suppliers' quotes and prevent other suppliers from maliciously using leaked information to obtain contracts.
2. Use digital technology to automate data collection and prevent data leakage
Avoid manual data entry as much as possible to enhance the security of data security weaknesses.
3. Define results, not processes
This opens up more possibilities for stakeholders to innovate, but only if you set goals that can weigh conflicts of interest between different sectors and between long- and short-term value creation.
4. Rewarding innovative ideas
Enterprises should provide appropriate incentives to front-line employees, encourage them to share ideas, and directly link with performance to avoid as much as possible the bias caused by human judgment.
Act promptly to avoid over-analysis. Encourage and create conditions to motivate stakeholders to test new ideas and act without regrets.
Better practices for businesses
There is an old saying in China, "there are policies and countermeasures." This sentence is particularly relevant when dealing with human factors in purchasing in China. We should beware of over-reliance on policy guidelines and rules and regulations, because they are the source of power of the "chain of influence" and can give certain actors and non-executives certain powers. At the same time, centralized decision making can create bottlenecks for you and even paralyze your business. I think that companies can take a better approach: by creating a good environment to motivate employees to continuously improve their creativity, proactively discover hidden value creation opportunities and make good use of them to benefit the entire enterprise.