Here are four articles on human factors in purchasing in China. This article is the first one, which mainly discusses why there seems to be only one supplier to choose from in the highly competitive supplier market, and explains how to achieve fair procurement.
Has your purchasing team ever told you that they are already getting the lowest price and that they have avoided the price increase that a single supplier may bring, and is it commendable? Has your team ever tried to replace a supplier that is obviously uncompetitive, but after knowing multiple facts, it has returned completely because of internal resistance? This is probably the so-called "chain of influence" at work.
The “chain of influence” refers to an invisible but omnipresent network that is interwoven with the relationships, preferences and informal negotiation results between internal and external stakeholders of the enterprise, which is sufficient to affect multiple procurement processes, and the scope of influence Far beyond the boundaries of procurement, across all levels of the organization.
51% of purchasing team leaders believe that their current team does not have the skills and capabilities to implement purchasing strategies1. In China, another 49% of the purchasing team leaders may tell you that if you do n’t know enough about the “chain of influence”, these skills and capabilities will not play much role.
Many CEOs' intuitive reaction after realizing this situation is:
Hire a competent Chief Procurement Officer (CPO) and exchange blood for the procurement team;
Develop stricter procurement regulations and strictly enforce them;
Deploy technical solutions such as real-time bidding, best cost country procurement, supplier integration, procurement cost analysis, etc.
However, adopting these practices in China is often not as effective as in other countries, because the "human factors" in Chinese procurement often play a greater role in releasing hidden value:
Without the full support of all departments, I am afraid that the CPO alone will not have any impact on the results. The average term of a CPO is less than 5 years, and the actual decision makers who are approved by the supplier are often the longest working hours in the company, and they are most likely not in the purchasing position;
The “chain of influence” works by finding ways to circumvent relevant regulations. Strengthen one aspect of control, they will seek other exits to get out of control;
The premise of applying technical solutions is to obtain accurate facts and data, as well as objective decision-making processes.
A wise response is not to try to break the chain, but to learn how to manage it so that the interests of influencers can be aligned with the interests of the company. I will explain how to do this in this series of articles. It is important to look at the four factors that are often overlooked in procurement:
1. Overturning designated suppliers: How should suppliers, as a single source of procurement, position themselves and how to create a level playing field between suppliers.
2. The paradox of transparency: how to find hidden value sources without subverting the process.
3. Reverse cost analysis: how to achieve a win-win situation for both parties in a showdown negotiation.
4. Human Prejudice: Why the way of thinking is more important than the policy guidelines, and how to build a healthy belief system.
Overturning designated suppliers: how to create a level playing field between suppliers
One of the common consequences of the "chain of influence" is that a single supplier monopolizes the supply of a certain product category of the enterprise, and other competitors are not able to participate.
A common practice for companies to avoid this result is to ask three or more qualified suppliers to provide quotations before actually placing an order. Many times, this opens the door for existing suppliers. "Chain of influence" participants can cleverly reverse the competitive situation, for example:
Well-known supplier brands can be used as a selling point to attract customers, but in the end it has become a mandatory requirement for customers;
The product design or testing method has become the exclusive product of the existing supplier, and only the current supplier can meet the standard;
The performance data of each supplier is not accurate, or the methods of collection, analysis and reporting are not uniform;
Vendor negotiation work is full of errors or different calibers;
The current supplier gets the payment faster, so it can provide a more competitive quote;
The oral support for the introduction of the new supplier was strongly supported, but without any positive follow-up actions, the cooperation was intentionally slowed down.
The CEO has no time or resources to rectify the underlying operating mechanism in the procurement process, so what should I do? The first thing you really should do is design a path for stakeholders to be honest about their suppliers' preferences, so as to save costs for everyone. Through the following four steps, you can better control the human factors in purchasing in China:
Win the trust of stakeholders
There is no benefit to being hostile to your own organization. Instead, invest your time in removing the concerns of those who are in line with your basic position and have some influence. You can talk to them, ask about their concerns, and then try to eliminate their concerns in a transparent and cooperative way.
2. Weakening the role of the "chain of influence"
For those who can influence supplier selection, as long as they have no way of knowing the supplier's incentive distribution mechanism, they can cooperate with the action. Companies can inform stakeholders that incentives are unevenly distributed, undermining their coordinated actions to help existing suppliers retain their status.
3. Provide a simple exit path
Stakeholders within the company need to exit an existing supplier relationship in a simple, risk-free way. Companies can help them build relationships with new suppliers and prepare for the transition period for replacement suppliers.
4. Create reasons to terminate cooperation with existing suppliers
Reduce the customer value of the company among current suppliers. The specific method can be to formulate a more unfavorable accounts payable policy, reduce tolerance for defects, or inform the other party that demand will decline significantly.
These tactical steps can help companies break bad relationships with existing suppliers, but they also need to prevent the same situation in the future. For example, it can ensure that there are qualified suppliers waiting for all key purchases, set a validity period for the supply contract, and enforce the policy of replacing the lowest ranked supplier every year.
Central management can also help. Concentrating all key points of influence into a handful of people with clear responsibilities can simplify the decision-making process related to suppliers. This method will give greater power to relevant people, but it is much easier to control an “chain of influence” that contains only two or three stakeholders than to control an “chain of influence” that contains two or three stakeholders.