Inflation and hard times

 Well, if you don't value your Procurement team now, when will you?

And of course your sales team, operational team and in fact everyone in your business.  But just at the moment your Procurement team are really key.

I'm not terribly good at noticing prices in shops (which tells you that I earn enough money to not be worried about every single penny, unlike too many other people).  But even I have noticed prices going up.  And not just by the nominal 10% or so that is the current inflation rate.

MacDonald's have increased the price of their cheeseburger.  But not by 10% but by 20% (from 99p to 119p).  And if you look around the supermarkets you will see they are far from alone.  Lots of products have broken past the psychological £1 barrier, and gone up to £1.20 or more.

Now this may well reflect real changes in supply conditions and the cost of materials.  I don't know.

But what I do know is that we complain more or less the same about a 20p rise as we do a 15p rise, or a 10p rise.

So sensible sales teams will take the approach that, having had prices held back for years by relatively low inflation, and with customers all expecting there will be inflationary increases, the thing to do is go large!

Why have lots of incremental, annoying price rises?  Go for one big one, and hope to get ahead of the game a bit and increase profits in the process.  If inflation is 10%, why not go for 20%.  Or 30%?  If you can't put up prices now, when can you?

And this is where your procurement team comes in.

We know that for manufactured goods the cost of materials is usually about half the overall cost.  So, if inflation is 10%, we should expect to see a 5% rise not 10%.  After all wages have not yet increased by much, so not all costs have gone up.

Of course, industrial prices are rising even faster than domestic prices (15%+) and I am not suggesting that suppliers can hold down prices for ever.

But as a buyer we should be testing and checking.  Understanding our supplier's position, but also expecting that prices will fall equally quickly rather than being a new baseline.  That prices have increased an appropriate amount, rather than more than is necessary.  Making sure suppliers know we are happy to have monthly price negotiations rather than one big rise.  Maybe some kind of quarterly or annual rebalancing as prices vary.  This is the time when we show our value to organisations.

And of course your sales team should be putting up prices.  Yes, that is how inflation rises. But eroding profit margins are not a good idea either.

Yes this does mean that PAWA Consulting fees will be going up to.  Book now to avoid the rush (as they say).

Which savings? How do we prioritise?

Last week I was in Germany, working for a multi-national engineering manufacturing company.  Great place and great people.  The Procurement Manager took us out to dinner, and I took the opportunity to ask him what his major problems were.  He took a few seconds to think (a sensible man), and then described his situation.

All the business units have to make savings - everyone is clear about that (although margins and profits are up across the board).  However he is locked into his approach.  Effectively there is a triple lock;
1. Price reductions
2. Working capital reductions
3. Zero inflation.

All laudable goals, but of course the interaction of them leaves him very little room to manoeuvre with suppliers.  A contractor cannot be award for good performance on a 3 year contract with a say 0.5% increase, regardless of the changes in their input costs.  Higher stock levels and fewer deliveries or longer lead times cannot be used to incentivise the agreement.

To make things even worse, the product mix is highly variable and unpredictable and sales are not located on site.  So if they sell in the EU working capital can go down when the manufactured item is invoiced to the customer.  If the customer is in China and terms are DDP, then it will only leave stock (accounts) 5 weeks after it has been dispatched from the factory when it arrives at the customer.  The procurement department has no input to that, but of course has to deal with the WIP issues.

Tricky.

So the Manager has to achieve all of his targets both individually and collectively, and there can be no trade off.  He was very unhappy when I raised the sort of tricks that business managers often use to make those targets - he is going to do it properly.  I am sure he will, but it is a situation where a little more flexibility might actually help achieve the overall targets.  In particular I worry that Quality is at risk if they have to switch to new suppliers rather than stay with established ones simply in order to gain lower prices.

Retention discounts, or the dangers of loss leading bids

I went to a very interesting evening at the University of Bradford School of Management Knowledge Transfer Network, which featured featured Nigel Greenwood of Simply Customer talking about the Customer Journey, and Martin Haley talking about segmentation.

Martin mentioned the old Marketing rule of thumb that it costs 6 times as much to win a customer as to retain one.  And that triggered a few thoughts about procurement.

The costs of bidding for business are considerable, whether it is a formal tender process or a more traditional business to business relationship of meetings and negotiation.  Having won a contract, obviously the business has to perform well in order to retain it, but assuming it does then there is and advantage to both sides if the relationship continues.

My question is whether Procurement think about this sufficiently, and whether we put enough emphasis on squeezing prices in return for extending contracts.  Obviously it saves procurement time and money in avoiding a new bidding process, but there are a few processes going on that we might not think about in sufficient detail.

The cost of sales is obviously shared across all potential customers that suppliers target, but if we are already contracted then the cost of sales to us should be lower.  Perhaps not by a factor of 6, but certainly by 2 or 3.  Do the pries charged during the extension reflect that?

In addition we can think about the well known experience learning curve (or Boston Learning curve) which has been demonstrated back to the days of the Model T Ford.  The more units made, or the more times we carry out a service the more efficient we get.  The relationship is a log-log one, so is commonly portrayed as a curve where every time we double cumulative production the cost per unit goes down by a certain amount.  This obviously does not happen without some effort on the part of the Supplier, but is an indication that longer contracts become particularly attractive to suppliers as set up costs are written off and experience learning reduces the cost of delivery.

Taking this into account, some suppliers will initially submit a loss leading price assuming that profits will come later in the contract.  If we start targeting those savings then the supplier risks making less money than anticipated - hence the phrase that loss leading leads to a loss!

When considering the end of a contract, it is common to more or less roll over the existing price - maybe taking into account variables such as inflation and raw material costs.  Should we be looking instead to have price reductions taking into account the reduced price of sales AND experiential learning. 

There is no such thing as a free lunch, and we might see that initial prices rise if we want to share in the future efficiency savings - but it is something we probably should think about a bit harder.

NHS Pricing on labels

Jeremy Hunt, the health secretary, is leading an initiative to put indicative prices on all NHS medicines over £20.  Though I have been negative about some government initiatives, this is one I support - though before you swoon in surprise I have to point out that I think the strapline "paid for by the taxpayer" is cheesy and unnecessary.  (I am though quite in favour of the proposal of a chap on BBC Question Time that MPs should have to wear the same line on a badge on their suits - but maybe it doesn't go far enough and we should insist they all wear HM Parliament boiler suits branded with that as a logo.  But I digress)

People are very unaware of the costs of the NHS.  A prescription costs £8.20.  I am not sure how much of that is actually administration costs (and I cannot find it - perhaps you know?) but given that a private prescription from a doctor may cost £15, and according to CIPS a Purchase Order typically costs £50, I believe that in fact ALL that charge is administration cost (and probably does not cover all of those costs).  So we literally do not pay for the pharmaceutical at all - just contribute to the administration of the process.

Which of course leads to the usual complaints that is is cheaper to buy Asprin over the counter than to get it through prescription.  People do not realise what they are actually paying for.

Let's do some back of a fag packet assessments.  (now that few people smoke, what can we use instead of fag packets?  Just asking)

Nearly 20 years ago my wife was taken ill in the USA.  Though we had medical insurance the bills we received (and had to pay before claiming back the money) where a real eye-opener.  The initial 5 minute consultation with a doctor was $50 - he said "go to hospital".  Kerching.  We went to hospital, where my wife had a 5 minute consultation ($150), and got a prescription for antibiotics, which cost us $80 at a nearby pharmacy.  Total cost $280 plus a bit of driving around.

Recently my son broke his ankle here in the UK.  A NHS doctor's consultation (she said "go to hospital"), a 5 minute consultation with a nurse, an x-ray, 5 minutes with a doctor, plaster clinic, and loan of crutches cost us £2.50 in car parking fees.  Subsequent new rubber ferrules for the crutches, x-ray, removal of cast, 5 minutes consultation with doctor cost us a further £2.50 in car parking fees.  A total of £5 and a bit of driving.

Looking on the internet the cost to the NHS might be £4 for the ferrules alone.  (Ferrules was a new word for me, so I am getting maximum mileage from it)  Based on salary cost of £50/hour that is £25 of staff time at minimum.  We haven't even considered overheads, infrastructure etc.

Based on my US experience I would expect that the cost might have been say twice what we paid 20 years ago, so $560 or £350.  According to this website that might be the lower end of a range that could run from $520 to $1000, or even $2500.


If you get something free you tend not to value it, but to take it for granted.  The NHS is free at the point of use, which is great because I did not need to consider the cost or call my insurance before taking my son to the doctor.  However I then did not actually value the service accordingly.

Incidentally my kids were born by emergency Caesarian section back in 2002.  The average bill for that in the USA according to a 2011 study by Truven Health Analytics was $50 000.  For that operation, and a month in Intensive Care Baby unit we paid just some car parking fees.   I call that a bargain.  How much of a bargain, I only realised by doing some research.

If I had been presented with an indicative bill for that service, then perhaps it would put the complaining about the price of parking into a bit of perspective.

The illustration incidentally is for a US bill for treating a snake bite.  Ouch and ouch again.

Pricing Workshop postponed from 14th July 2014

The Pricing Workshop scheduled for the 16th July for the University of Bradford has been postponed or cancelled.  The reason is that there was so much interest in the Public Procurement evening that it is being  built on with another event on Monday

I shall be helping out on that rather than running a lead in to the Pricing workshop, which we hope to reschedule for later in the year (but no promises).

Here are details about the Knowledge Transfer event.

Knowledge Transfer Networks

Business solutions and executive development opportunities from a Globally recognised Business School here in the heart of Yorkshire.

 

 

FREE Knowledge Transfer Network Evenings

 

In partnership with

 

Bradford Metropolitan District Council

Calderdale Metropolitan Borough Council

Kirklees Metropolitan Borough Council

Wakefield Metropolitan District Council

 

  

‘Working with council procurement.’

  

14^th July 2014

Arthur Francis Lecture Theatre, Bradford University School of Management,

5.30 - 6.00pm registration - 6.00pm Evening speakers - 7.30pm Food - Networking.

After coffee on arrival, the evening offers you direct access to insights on this management theme through our speakers. Later, you can network with people over a nibble (or two) and share experiences. For us it’s not about the networking it’s about the knowledge and the insight we can all develop.

 

Speaker topics:

 

Procurement Myth Busters

 

And

 Breakout sessions on

 

Tips for successful tendering

European Union Directives

Social Value

YORtender

 

This evening is about finding out what is on the horizon in procurement from your local councils but also about finding out more about how they work, what drives them and correcting some of the myths about process and actions you need to engage in to work with them. The will be plenty of chances to air views and to ask…well the daft questions about what to do and how to do it. There will be some break-out sessions to look at different topic areas too.

 

For more information or to book on the event please contact ktnetwork@bradford.ac.uk

The coming Spring: Procurement and the Recovery

The evidence is stacking up that the UK is in recovery mode.  Now there are a couple of points about that. Firstly, it may not feel like a recovery – but my experience is that it never does until the recovery has been going for a year or two.  Maybe more.  Secondly the recovery is never uniform.  Rather like my favourite quote “the future is already here – it’s just not evenly distributed” (William Gibson) all recoveries start off patchy before they “float all boats”.  So there are going to be mixed recessionary and growth signals for months to come. 

So what does this mean for procurement?  Well it requires a bit of thinking and a change of behaviour. 

When your popcorn is ready to eat the rate of pops drops, but if you wait for them to stop altogether you have overcooked it. If you wait for all signs of recession to be gone you will be in the midst of the boom.  The number of suppliers going out of business will drop, but some will still fail even though the finish line is in front of them.  Continue to be careful about the financial health of suppliers.  The recovery can finish off some companies because of the need to increase capacity, hire new staff, and rising input prices which is hell for the Cashflow.

The recession was all about forcing down prices, and costs out.  This often meant wage freezes and hiring freezes.  So there is no pent up demand for wage rises, which will eventually have an impact on prices.  Suppliers are going to be much less willing to agree bottom rates in return for guaranteed work – a long contract could leave them exposed.

A lot of suppliers mothballed or closed capacity during the recession.  This means firstly that they have to invest to re-open that capacity, and secondly that there might be supply shortages.  Both of these will also tend to increase prices, but availability might be low.  Suppliers will sensibly bottom slice their lowest margin business, so if you are still in “recession mode” pressing for the lowest possible price then you might struggle for supply.  Once survival is guaranteed suppliers are going to look for the “fat” to put on their bones for next time.

Many suppliers ran staffing at minimum levels.  As the recovery develops the job market will open up, and staff will be looking for promotions just as suppliers need more personnel to cope with increasing demand.  So again there are likely to be price rises and gaps.

And suppliers may no longer be quite so keen on your work.  If there is more to go round, they can be more selective.  If they have a limited supply and can get good prices wherever they go, then they will select customers on other critieria – like how you treated them during the recession.  It’s a bit late to worry about the consequences of that now, but you might want to find ways to apologise for beating them with a big stick for the past 5 years.  Or of course to remind people about your support of them during hard times.

So, just remember that things are changing, and change is dangerous.  Make sure you are not stuck in the mind set of the past five or six years and suffer as a result.

(The cherry blossom in Leeds always told me that Spring was on the way or here already)

 

Pricing

This is one of those things that seems simple until you start to think about it.  Or maybe you always think it is difficult.  Either way it is one of the keys to success for any organisation.
I am going to do a couple of events about it later in the year - an evening event for Bradford University School of Management on Monday 14th July which will be free.  A couple of days later I shall run a full one day workshop on Wednesday 16th July 2014.

More details to follow.  If you are interested in either event then let me know and I shall make sure you have all the information.