Imagine a mid-level manger in the global commodities group got an email from the operations manager from a plant that read something like this. “Bob, I called ABC supplier to see where our XYZ parts are, and they told me that we’ll get them in 3 weeks. They said the PO gave them a 15 week lead time. But, my materials manager put in the requisition more than 12 weeks ago and said we needed it by last Friday. We have only a 3 week buffer. ABC will hit us with an invoice credit if we don’t deliver on time. Can you see what you ca do to get us the parts asap? Thanks, Steve.”
Unfortunately, the buyer traded off lead time for a price discount without understanding the impact lengthening the lead time would have on the production schedule. Furthermore, no one informed operations of the negotiated lead time until the situation was escalated to management. The information “sat” in the system. Hopefully, this is not a common scenario at your organization, but when it does happen how will you address it?
In the scenario above, the manager (Bob) told the team assembled for a meeting, “You are not a hero if you shave pennies off of the price of something just to create a headache for operations.” While we all sensed his frustration, the statement was not powerful. It doesn’t solve the problem.
The underlying issue was some buyers don’t know how to stack rank or prioritize tradeoffs. In other words, buyers have a handful of tradeoffs that have worked in the past and they use these tried-and-true tradeoffs without a complete understanding of their impact to the larger business goals. Moreover, buyers are not encouraged to talk to operations and when they do, they can face irritation from operations.
After talking to several buyers, it was easy to understand to factors driving the tradeoff. Here are three reasons that really pointed to the underlying problem.
- “I thought I was doing the right thing to drive down the price and the supplier said he could give me my target price if I could hold off for a couple of weeks. It’s never been a problem before.”
- “We’re measured on price savings. No one ever tells us about what operations needs or wants, just what we need to target this quarter.”
- “The lead times in the requisitions are always inflated so I know we have wiggle room to negotiate.”
Like many seasoned negotiators, Bob assumed that buyers know how to stack rank and prioritize tradeoffs. Meaning, the buyer knows that the price point is important, but not so important that she would negotiate longer lead times to get a better price just to cause production delays, that in turn create costs to her company in the form of “credits”.
You might be thinking that your team can recognize that a longer lead time will cost the company. Ok. So, let me ask you this: how are your team members when negotiating terms and conditions? The scenario above is clear cut, but when working with T&C’s, is it possible that your team could make a similar mistake?
One team did make a similar mistake when negotiating a complex service supplier agreement worth $500,000. Both parties agreed to leave the metrics discussion to a later date. The contract literally said, “to be determined no later than September 1, 20xx.” To make matters worse, the supporting documentation to evaluate the metrics was likewise “to be determined no later than September 1, 20xx.”
Not surprisingly, the metrics and reporting discussion did not happen and the service provider was not meeting service deadlines. What did surprise the buying company was that there were no metrics outlining the obligations regarding service deadlines. It was a tradeoff—not for a better price—to get the deal signed so the service provider could begin work on a long overdue project. The metrics discussion was “causing delays” so both teams tabled it to start work.
Both situations have a common denominator—neither the buyer nor the supplier understood the impact the tradeoff would have on the buying companies’ operations.
Coach People to Understand the Impact to Operations
In my experience, business people (sales and buyers alike) don’t understand how to rank and prioritize tradeoffs until the proverbial you-know-what hits the fan. So many potentially damaging tradeoffs slide by unnoticed that negotiators on both sides of the table use those same tradeoffs over and over again until someone tells them that there is a problem.
I don’t think that anyone “should know” how to stack rank and prioritize tradeoffs. It is a thought process that can be taught. And furthermore, teaching a thought process will help people analyze situations more carefully and understand the impact their decision may have on the larger organization.
To develop your team’s skills, I suggest that you regularly ask your team members these questions:
- What were the tradeoffs that you made to reach this agreement? (Have them list the tradeoffs for you so you can get a full picture.)
- Who did you talk to, what questions did you ask, what information did you look at before making those tradeoffs? (Have people lay out their research here.)
- Are you aware of any hidden costs/impacts associated with a tradeoff? (For example, a buyer who purchases a larger quantity than requested will incur warehouse carrying costs associated with the overstock.)
- Did you consider the hidden costs/impacts associated with a tradeoff? (For example, a buyer knows in theory about the carrying costs, but buys overstock anyway.)
- Are you (the person being coached) satisfied with the tradeoffs? (You may learn they did the best they could with the information they had.)
These questions will help people identify the “knowns”. In other words, they know and can place a value on the cost to the organization for a longer lead time or the carrying costs for overstock. This analysis will then lead to the ability to stack rank and prioritize tradeoffs.
As a leader you want to help your team develop the analytical framework to identify the top tradeoffs from a laundry list of all available tradeoffs. Not to encourage buyers (or sales teams) to keep using the same tradeoffs time and again until a problem occurs.
Once a buyer (or sales person) has their list of tradeoffs, they prioritize the tradeoffs they have to have versus what would be nice to have. This process will help them narrow the focus from all possibilities to those that this deal warrants.
Returning to the lead time scenario above, had the buyer understood the production schedule, the buyer would not even considered lead time as an initial tradeoff in her list of top five tradeoffs. Lead time in this situation (but not all situations at this plant) was a must have. Saving money was a nice to have when compared with the cost of the “invoice credit” for a late shipment to the customer.
When the buyer was faced with the sales person’s offer to “hold off” on the product for a discount, she would have either declined the tradeoff outright, or stopped the conversation to ask production for their input before issuing the P.O. Perhaps she would have also asked her manager Bob if the savings were worth it. Of course, he would have wanted both the requested lead time and a price discount, encouraging the buyer to go back to the supplier for more negotiations.
No matter how sophisticated or busy your team, help them to develop their negotiation skills. Work with them to identify, rank and prioritize their tradeoffs. It will help eliminate operational issues in the future.