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Is Procurement Being Too Aggressive in Negotiations?

A recent post by my colleage Kate Vitasek (author of the “Vest Outsourcing” model) in Forbes magazine argues that procurement is taking too aggressive a stance in negotiations with major logistics providers.  She uses the example of a company who decided to use a reverse auction to award business for a logistics contract worth hundreds of millions of dollars, based on “lowest price”.  That is effectively what reverse auctions do – ignore quality, service total cost of ownership, and focus simply on lowest price.  I have argued in many other of my posts that reverse auctions do a disservice to all parties, but in the end, hurts the stakeholders impacted by this more than anyone.  The executive making this comment also noted that “Many logistics service providers are at a breaking point – especially when you factor in providers that have taken a huge hit with the West Coast labor issues that slowed global commerce to a screeching haltup and down the West Coast.”

Kate also refers to my new book (written with my colleague Gerard Chick), The Procurement Value Proposition: The Rise of Supply Management, which effectively calls for change in procurement!

The books documents how procurement organizations need  to move away from being only about cost reduction to playing a role in value-adding activity and influencing business strategy.  Value will become the “Holy Grail for procurement” in the modern era of global business.

Our book talks about the key trends that will force change: “Organizations continue to grow their supply chain global footprint. As companies expand globally, so does supply chain complexity. Increased globalization brings increased risk of supply disruption.” What do they believe should be done about this? We argue that organizations should “embrace complexity” and manage it through more rapid responses, better market intelligence and greater adaptive capabilities.

Kate notes that It’s myopic to simply shift your risk problem downstream and hope it won’t affect you.  The smarter move is to create highly collaborative relationships with key suppliers where buyers and suppliers work together to mitigate (or even eliminate) risks.  This is a major shift for many procurement executives, but is indeed a critical part of the move to strategic procurement.