Purchasing and Negotiation Training

Editor’s note:  For those who want to test their knowledge of purchasing law, click here to take the Purchasing Law Quiz. 

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

There is perhaps no single topic of greater fascination to the average purchasing practitioner than purchasing law.  The foundation of purchasing and sales law in the US is the Uniform Commercial Code (UCC).  The UCC is not a federal law, but operates similarly in that it applies uniformly from state to state.  The UCC is a set of laws affecting the purchase and sale, storage, transportation, security, and payment of goods having a value of more than five hundred dollars.  This body of law evolved throughout the 20^th century, gaining momentum during the great Depression years.  Our maturing, technologically advanced nation had economic and security motivations to homogenize all the fractious commercial laws of economically divergent states.  It would be easier for business if one common set of statutes applied across state lines.  

Lest you conclude that the UCC is too esoteric, let’s take the case of oral contracts.  Oral contracts are common and almost everybody engages in them, so how does this common custom affect negotiation?  Well, if you have invested time and money establishing and negotiating your company terms and conditions, perhaps a Certification program, you have wasted your efforts.  The wisdom of Sam Goldwyn applies here; “An oral contract isn’t worth the paper it’s written on.”  This statement frequently surfaces in defense.   “We have always done it this way.” 

 Conduct of the parties

 This leads us to the legal principle called conduct of the parties.  This principle states that a contract may be made in any fashion including conduct of the parties that recognizes such a contract.  This means that if we negotiate a deal that calls for shipping of goods on some acceptable schedule, receipt, invoice and payment and we are mutually happy with this deal, great.  The problem arises when the process breaks down.  Whose terms and conditions apply in this case of default?  Do you agree that this is getting messy?  We would spend more in legal fees to untangle this mess than we would have in prudent study of purchasing law as it applies to negotiation. 

Purchasing Manager's Desk Book of Purchasing Law

 The UCC governs transactions involving goods in virtually the same fashion in forty-nine of the fifty states, Louisiana being the exception.  The Napoleonic civil code, the historic basis for Louisiana’s laws, did not, and still does not correspond to the prevailing laws in all the other states.  Save for that exception, the balance of the country is in accord with the UCC. 

 Four conditions of a contract 

The UCC and the law of Contracts specify that these four below conditions must be met for a contract to be formed.  This is essential information to the negotiators, be they buyers or sellers.  We will examine each for impact on negotiation because they contain much information, almost none of which is obvious.

• Competent parties
• Valid legal subject matter
• Mutual consideration
• Agreement of the parties (offer and acceptance)

Competent parties has the usual meaning age of majority, unduly affected by drugs, alcohol, or dementia, but it has another more subtle meaning.  Competent parties also means that buyer and seller have the authority to enter into a contract.  We will assume here that the contracting parties are corporations that act through agents to conduct purchase and sale negotiations.  An immediate question that should arise is does this person have the authority to negotiate.  The question applies to buyer and seller, but not equally. 

 Does the average salesperson have the authority to negotiate a contract?  The fact is that the generic salesperson or “drummer” has very little authority.  They are authorized to solicit orders and take these invitations back to higher corporate powers for approval.  Thus the law provides the basis for the negotiation tactic that we call ‘Higher Authority’.  How about the buyer, does he or she have the authority?  The answer is yes and is the reverse of the seller.  It comes as a surprise to most people that the buyers have at least the apparent authority and the sellers do not.  But we are not done.

 Further complicating this competent parties issue is the actual authority of the buyer.  Many have signature authorities that limit the dollar amounts or types of purchases they may make.  If a buyer acts beyond his or her authority level, the deal may be unenforceable and the buyer may become personally liable.  The UCC imposes the burden upon the agent to determine the scope of authority the agent with whom they are dealing possesses.  As a practical matter, who wants to invest all the time and effort in chasing down an unenforceable deal?  Negotiators must establish the authority of the other person before proceeding in any meaningful fashion.

 Valid legal subject matter is important because we cannot legally contract for illegal activities.  Return to our literary business magnate, the Godfather.  Allegedly, Don Corleone issues ‘contracts’ on others who disagreed with him.  These contacts for hits are illegal and enforceable because the subject matter is illegal.  A more mundane example is the agreement of buyer and seller to ship in state but invoice to the out of state office in order to avoid the sales, use, or inventory taxes.  Here is a clear example of the professional interplay between you and your lawyer.  You perk up at the very suggestion and refer this matter to your lawyer.  The legal principle is that parties cannot conspire to violate the rights of the sovereign (state, in this case).  Moreover, while tax avoidance is legal, tax evasion is not. 

 Mutual consideration refers to the exchange of value between the parties and is generally not a misunderstood topic.  Sometimes parties agree to no-cash consideration such as barter.  If you are unfamiliar with the legal or tax consequences, you defer here again to competent legal advice.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: This is Part II of an eight part series on Sustainability in procurement. It deals with the basics of (electrical) energy consumption and conservation, perhaps the most fundamental of Sustainability topics. 

In concert with the American Purchasing Society, I am developing a green procurement course that will have far more extensive material available in online, print, and portable digital media.  We will update quarterly so companies can build on successes.  We will offer discounts to those who sign up early so send me an email stating your interest and I’ll respond with particulars.

Some electrical energy generating companies promote themselves as green energy alternatives.  Their web sites herald their reduction in fossil fuels, emissions, or use of renewable fuel sources.  In virtually every case, the customer must pay a surcharge on the price for this “green” energy.  If the goal is to feel good about being green by throwing money at the problem, buy your power from these companies.  You will consume the same amount of energy, pay more for it, but contribute to a good citizenship cause.  Nothing is wrong with that approach if your goals do not include saving money.

If on the other hand, you are interested in a much more direct and significant impact on the environment and your bank balance, begin by reducing the amount of energy consumed using some basic and time tested measures. 

Much of energy conservation science is not new but is not well understood.  You don’t need a degree in engineering; just meeting with your energy provider can yield substantial savings.  These measures reached prominence during the energy crisis of the 70s and are as applicable today.  Due to the higher costs of energy today, they save even more money. 

The Lucky 7

 1—–Metering 

Discuss with your energy provider how you are metered and charged.  They can help to find the best alternative for the same consumption.  It is counter intuitive but true that the energy provider wants to reduce your energy consumption.  They can then serve more customers with the same generating capacity and avoid the huge “stranded” costs of new generation facilities. 

2—–Demand 

Demand occurs when usage spikes up such as on very hot days, when homes demand energy in the evening as occupants, or when industry powers up. The surcharge for demand on the grid is intended as a penalty by the producer to discourage usage during peak times.  Develop a plan to shift high demand to off peak hours if possible, such as the case in manufacturing,  

3—–Soft starts

Large electric motors incur usage spikes in (potentially affecting consumption as well as demand) as motors ramp up from a dead cold start.  Since power is the product of voltage and amperage (see below), these devices overcome the inertia of the ‘lock rotor current” and reduce the power drain.  Investigate “soft starts” or frequency inverters to ramp up the start of motors.  You must also be wary of increasing “harmonics” back fed to the grid but the power company should be able to suggest measures to help. 

4—–Lighting 

There are many low cost options to explore.  High voltage fluorescent fixtures (477v/4 conductor) and compact fluorescent fixtures use far less power.  In general, use the highest voltage possible to reduce heat loss.  The waste heat alone from incandescent lighting can raise cooling costs from 15% to 35%.  Furthermore, compact fluorescents last an average of 10 times longer.  A re-lamping program can make a substantial dent in energy consumption and costs savings. 

5—–Heat and waste loss   

Low voltage power, transformers, and lighting drives up consumption and increases cooling costs.  Most power companies provide free or minimal cost consulting to help in these areas of low hanging fruit.  Generally, 1 W of air-conditioning power can be saved for every 3W of lighting energy saved.  Incandescent lighting in particular generates great heat loss. 

6—–Energy audit     

If your facility is more than 30 years old, consider an energy audit, perhaps with a firm that takes a share of the savings.  They will examine everything from insulation, to harmonics in your electric system.  For the engineering types, you might be surprised to see the incredible waste that a one line diagram will reveal just because this process was not managed over so many years. 

7—–Rebates

Rebate programs come and go but the growth in sustainability initiatives bodes well for energy consumers.  Well designed energy savings and reduction programs can earn very substantial rebates from energy companies who prefer to serve more customers with existing capacity than to invest huge amounts in new plant and equipment.

Read about How Green Purchasing is Valuable to the Purchasing Profession

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Toyota as a shining example

We said in Part 1 that Sustainability comes at purchasing from a variety of angles.  This legendary supply chain coup explained below is the quintessential example of how a cost savings initiative generated spawned green procurement results. 

The world famous example of Toyota and its Just in Time (JIT) concept perfected during the 80s offers a jewel of an example of how green procurement and cost savings work in tandem.  On its face JIT was a novel concept that moved away from storage of production parts in warehouses and distribution centers in favor of a pull inventory strategy with kan bans.   In simplified form, kan bans are two bins collocated on the production floor.  When one bin is emptied, the second bin is pulled forward (called a “pull system”), signaling a reorder to replenish the empty bin.  

Toyota leveraged JIT far beyond its cycle time reduction roots.  It required suppliers to conduct all quality qssurance and inspection so that all goods delivered to the receiving docks were immediately transported to the production line kan bans, bypassing any inspection or testing.   

By propagating this process throughout the supply chain, Toyota was able to eliminate close 2 million square feet of warehouse and distribution space across the globe.  The savings have long been recognized as reductions in construction, maintenance, operations, and labor cost. 

When viewed through the green lens, Toyota also eliminated enormous energy costs and associated carbon foot prints.  The huge energy costs of heating, cooling, and lighting were totally eliminated and these savings have been compounded year over year. 

It is quite clear, therefore, that cost savings equal green, in a figurative as well as literal way.  The procurement profession can annex part of the sustainability philosophy and include them in our costs savings because they are real, whether achieved via any agenda. 

We need not be as far up the curve as Toyota to harvest cost savings.  The moral of the story is that procurement has every reason to and zero reason not to invest in green initiatives.  

Toyota has progressed far up the Green path.  This link leads to their landing page on Sustainability.  Toyota differentiates green procurement for direct spend for manufacturing parts from green purchasing for indirect spend.

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Eliminating the mystery shrouding electrical energy 

We can’t see electricity so we don’t understand it, even though we use it every day.  Here is some basic information that will de-mystify electricity.  The discussion has been simplified but the underlying principles are unaffected. 

Ohm’s Law               E = IR, where E is voltage, I is current, and R is resistance.  

This law is the basis of electricity for engineers and physicists.  To understand it, compare an electrical system to a close equivalent, a water system.  

• Voltage (Electromotive force) is equivalent to the pressure driving the water
• Amperage (current or electron flow) is equivalent to the flow of the water
• Resistance in a water system is provided by pipe size and material versus conductor size and material in an electrical system 

Energy          the product of Power multiplied by Time                thus kilowatt hours (KWh) is a measure of energy and the usual basis of consumption used for billing

 Power            for electricity a common measure is voltage multiplied by amperage with the product expressed as wattage or Watts.  Applying Ohm’s law, a 120 W light bulb attached to a 120 volt (house) circuit draws 1 amp.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s Note: This is Part 4 of a 5 part series on negotiation tactics and counter-tactics.  Part I presents an overview. Part 2 explains the first category of Maneuvers. Part 3 deals with Flyers, Part 4 with Gambits, and Part 5 with Ruses. 

The next set of tactics is Gambits.  The word derives from the slang Italian expression for tripping someone.  The use of Gambits implies a more cautious approach where we raise the alert level and actively guard against traps that might be set for us, wittingly or innocently. 

Gambits include

• Good Guy/Bad Guy
• The invalid Offer
• The Lesser of Two Evils
• Sacred Writings

 The Good Guy/Bad Guy tactic is arguably the most barefaced.  Virtually everyone has used or been abused by it.  Should we then be ashamed of it?  Heck no, we use it because it works.  Everyone with whom I have ever done business or discussed negotiation has their favorite story about this tactic.  Many involve car sales or cop movies.  The common thread in all situations is that neither guy is on your side, no matter what it may seem under the individual circumstances. 

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Counter this trite tactic by ridiculing it.  Point out that it is so old that the first time it was tried the Dead Sea wasn’t even sick yet.  If the Bad Guy is the one in higher authority, get him out from behind the curtain.  Like the Wizard of Oz, he won’t seem so omnipotent without his visual aid.  Don’t fall for the trap of negotiating with one or the other.  Declare that you will treat them as one voice and demand that they caucus on who has the authority or ask for a third party. 

 The Invalid Offer is sometimes associated with shady hit and run high pressure sales routines.  It is frequently coupled with the ticking clock tactic wherein you must buy within a fixed and limited time frame.  It enjoys popularity in the case of impulse purchases like time share vacation property.  If you exhibit the temerity of taking the time to think over a proposed fast spoken deal, your penalty is exacted in the form of a higher price. 

Faced with that insult, the potential buyer immediately demands the original price and the noose is cinched.  The tactic of withdrawing the offer simply reinforced the value of the time limitation tactic.  By ‘allowing’ you to buy at the withdrawn offer price, the seller appears to be making a concession, thereby increasing the value of the purchase.  The best way to counter the tactic is to avoid impulse purchases since you have no preparation time.  Recognizing the tactic for what it is will sometimes cause the seller to drop its use.

The Lesser of Two Evils is so subtle a tactic that it hides in a niceness disguise.  It happens when the sales clerk says, “Cash or credit,” and it also happens when the salesman says, “Would you like to arrange the freight or use our carrier?”  In sales, this closing technique is so important it has more than one name.  Two are the Presumptive Close and the Theory of Many Little Yeses.  The theory presumes that an affirmative decision has already been made to buy. 

 The seller never wants to arm the customer with an objection so a question is phrased in a fashion that has only affirmative responses.  We are not responsible for other people’s phraseology, so we redirect the conversation.  To counter this tactic, we clearly indicate that we have other choices.  Something like this will suffice.  “Oh, did I give you the impression that we had come to a meeting of the minds?  Well, let’s see if we can clear things up before we go any further.”  The rejoinder serves notice that closing techniques not devoted to lowering costs need not be applied.

 One of my favorite tactics is Sacred Writings.  It is so effective because of the persuasive suggestion of the written word.  We believe what we read, even the jaded, us skeptical purchasing types.  In a cab from midtown Atlanta to the airport some years ago, on the front page of a national newspaper was a picture and obituary of a Supreme Court Justice.  This judge had retired in my college years, and I could not remember if I favored or opposed his politics, but another piece of my life had slipped away.  I ruminated sadly on his passing.  The very next morning, in my New Orleans hotel room, I picked up the same national paper and found a picture in the errata section.  It was the correct old dead judge.  Nonetheless, I had firmly believed what I had read.

Steve Hague, author, speaker, and Certified Purchasing Manager

Editor’s note: Steve Hague is a frequent contributor to this blog.

How important is credit when financing a vehicle purchase?  It’s everything!  When shopping for a car, if you’re planning to finance it’s also important to shop for the best rate.  

Before you start shopping though, you need to know what shape your credit is in.  The first thing you should do now and at least every couple of years, is obtain your credit report for free.

You are entitled to obtain an annual free report under Federal Law. To obtain your report, visit this site   It allows you to request a free credit file disclosure, commonly called a credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.  You can also call one of them at: Equifax: 800 525-6285, Experian: 888 397-3742, or TransUnion: 800 680-7289 

The sites are secure meaning that there is very little chance that your personal information will be compromised.  You will have to share you social security number in order for the report to be generated.  There is also a FAQ (frequently asked questions) tab on the site that will answer most questions you may have.  For $14.95 additional, you can sign up with one of the 3 sites individually and receive your credit score. 

Read the Report Carefully for Errors

Some of the information that appears on the report may be outdated or inaccurate.  If you see an obvious error, contact one of the three reporting companies at their web addresses:

Equifax           Experian          TransUnion

You will be able to electronically dispute any negative findings on your report and/or you can speak with a representative from one of the companies.  Use the toll free numbers above to do this. 

You may also need to contact the bank, store, or other institution listed on the report if there is an error.  Sometimes simple oversights such as a small fee remaining on a long cancelled credit card can appear.  While this may have little to no impact, you should try to have it removed to prevent future problems. 

To get the best deal in financing the purchase of a car, truck, or SUV; you must know your credit score. It is the measuring stick that the dealership, bank or credit union will use to determine the interest rate available to you to finance your purchase. 

Your credit score, also called a “FICO” score after the company that developed the formula is based upon payment history, amounts owed, length of credit history, new credit, and types of credit used.  Scores range from 350, indicating extremely high risk, to 850 indicating extremely low risk.  Paying all of your bills and debts on time is the best way to maintain a good score.

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The greater your indebtedness, (mortgage, car loan, other indebtedness), the greater your credit risk.  If you pay on time, or better yet, early, your credit rating improves because you have good history. 

Do’s that affect your credit score:

• Do pay off credit card and other bills on time and in full if possible
• Do check your credit history annually.
• Do not apply for multiple credit cards like department or furniture store cards, especially if you never use them or only use them once
• Do make sure that all credit previously extended to you appears on your report

 Do Not’s that affect your credit score:

• Do not take on more debt than you can afford
• Do not ignore overdue bills or those in your name that aren’t yours
• Do not apply for credit if you have just graduated from college
• Do not apply for a car loan for three years following a personal bankruptcy 

Here’s an example of how a simple oversight can cost you money: John is a 30 year old man who had always paid his credit card debt in full and previously had a car loan that he also paid in full every month.  When John applied for a mortgage, he was surprised to learn that he didn’t get the best interest rate available.  When he took a look at his credit report, he noticed that there was an uncollectible debt listing on his report which is the worst mark one can have on their report. 

Upon investigation, he learned that a few years earlier he had applied for a high credit account with a major credit card service.  Since he hadn’t heard back from them, he assumed that his application had been denied.  In fact, the company granted him the card and began to charge a monthly fee but sent the bill to the wrong address. Since the bills never got to him and he didn’t check his credit history, they wrote it off as unrecoverable debt.  John was able to rectify this and get the best rate possible. 

This clearly shows the importance of trying to keep your debt load low while also building history.  Make sure that you keep an eye on your credit as it will make a big difference in financing your next vehicle purchase.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s Note: This is Part 3 in a 5 part series on negotiation tactics and counter-tactics.  Part I deals with an overview of negotiation tactics. Part 2 explains the first category of Maneuvers. Part 3 deals with Flyers, Part 4 with Gambits, and Part 5 with Ruses.  As we move to Flyers, we can expect these to pop up at almost any time in under any strategy.  

Flyers include

• Flinching
• The Hot Potato
• The Do Better
• Silence

A Flinch is a visible reaction that portrays an emotional message.  As a boy at summer camp, I enjoyed long gun training.  The trick to pull on a new kid was to have him watch the older guys absorb the recoil from shooting 12 gauge shot guns, and then give the tender foot an unloaded weapon.  When the trigger clicked, the new guy flinched back in nervous expectation of the explosion reaction he had just witnessed.  Business people too are conditioned to anticipate reactions.  As a negotiation tactic, buyers often flinch to show displeasure with a seller’s proposal.  A particularly effective occasion to practice your flinch is in the price increase negotiation.  Price increases are not high up on the favorites list for sales people to do with their customers.  It is stressful and unpleasant.  Accordingly, many prefer to announce the price increase by impersonal letter, fax, or email.  Don’t let them get away with it without a face to face meeting.  Call them, expressing an urgent invitation to visit you in person and explain their cost justification.  Allow the person to go through their entire presentation.  Wear a look of amazement on your face before reacting with a jaw drop, or a stunned look, or some other gesture of disbelief.  Even though they may know you are overplaying the part, the discomfort may stimulate some concessionary talk.  The price increase is often not fully justified, so the seller is looking for your reaction to judge how they should proceed.  Coupled with other tools we have in our tool kit, we may be able to roll back the unjustified portion.  Here is how Cost Analysis would be introduced into the price increase negotiation. 

Assume that you buy large cardboard boxes from a converter.  The converter buys linerboard from the paper mill, die cuts and folds it, slaps your logo on, and straps the finished boxes to a pallet for delivery to you.  On the drive home you hear how paper mills have floated a price increase of 20 percent.  The radio announcer then says, “And if the price increase sticks…”  What does that last quote mean?  It means that if buyers are not paying attention, they will accept the price increase.  Fortunately, we are in the Cost Analysis mode, so we use this tool to do the heavy lifting of our price increase negotiation.  In advance of the meeting, we prepare a simple cost breakdown to share with our converter. 

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Cost of Liner Board        $1.00

Cost of All Other            $1.00

Price of Box                    $2.00

 Upon completion of the supplier’s presentation, we clutch our chest, pausing for effect.  Seeking understanding, we ask about the mill’s price increase and how that applies to the anything but the liner board.  “Shouldn’t that 20 percent apply to just the liner board,” you ask incredulously?  As an after thought, you add, “And suppose that floated price increase doesn’t stick?  Why you don’t intend to stick us with that, do you?” 

This example might be as overdone as an ad for a dating service, but you get the idea.  Note how techniques, tools, and tactics work in harmony.  We used the “you” statement liberally here when we had the sales person on the ropes for honest abuse.  We used Cost Analysis for its incontrovertible dollars and numbers quantitative support, and we used the flinch.  

This brings us to another offshoot tactic of the ‘No’ statement that we call the Hot Potato.  This is a very effective tactic, particularly in the hands of sophisticated buyers.  A buyer may say to a seller, “In our business, quality, service, and delivery are givens.  You wouldn’t be sitting here if you didn’t clear these hurdles.  So, it really all comes down to price.”  It the seller accepts that tactic, and agrees that it just comes down to price, wow what a score for the buyer.  In one fluid motion, the Hot Potato was buttered up, served, and swallowed whole.  It is an artful way to minimize and freeze all other cost components but price while congratulating the seller on its admission into this elite class of lowest TCO where only its price matters.  Remember that not all of our negotiations will be Win-Win and that this tactic may be better suited for the Win-Lose strategy.  In order to counter this Hot Potato, a seller must recognize it, reject it, and return the talk to cost components.  Is the buyer entertaining a low price competitor because she feels the low price is on the street?  If so, the seller may be able to lower its price in return for concessions on elements of cost that raise the price.  If the buyer is not interested in TCO, better to know early on so the seller may adjust its negotiation strategy to suit the buyer.  The buyer or seller must challenge the Hot Potato as soon as it appears. 

The Do Better tactic has been an accepted part of life since grade school.  When faced with the ultimatum that one must do better, the conditioned response is to just do it.  It reminds us of that cross second grade teacher who caught us with sloppy incomplete homework.  A casual remark in response to a supplier’s question could be, “You’ll have to do better.”  This rather open ended comment could apply to price, quality, delivery, and service, or it could be an expression of disbelief.  It often spurs a bettering of the offer or a helpful explanation, as was the case with our homework.  Skilled sales pros may counter with the question of, “How much better?”  This response is another Broadway opening to launch into our Price Analysis and Cost Analysis investigations, much as we did in the case of the “Where do I have to be” question.  

The Silence tactic is intimately and explicitly understood as a personal relationship tool between men and women.  Leaving that field to the experts, we will move on to the business applications.  Silence is unique for its absence of words.  Unless we add body language messages, this tactic is completely open to subjective interpretation.  I learned the power of the tactic quite by accident.  In a routine sales visit, the VP accompanying the National Accounts rep assigned to me summarily took over the meeting and proceeded to dazzle me with an unexpected proposal for a new product.  He told me about its markets, the features and benefits, and how it would supplement our current business.  I sat in amazement and a bit of amusement as this fellow sped through his presentation and brushed aside signals of his prospect’s confusion.  His mission was to get to the closing question.  As he sped to the climax of his spiel, he ended expectantly on the price.  

I was so taken aback that I truly felt lost for words.  As I remained silent, his facial expression betrayed fear and embarrassment.  He had ended on the price.  I must have been upset by the price.  After an uncomfortable eternity of 15 seconds or so, he couldn’t stand it.  His next words were to improve the price.  He was negotiating with himself!  Since this tactic is silence, enough said?

Editor’s note: Steve writes, speaks, and consults on customer service.

Among the many questions that a young technician might ask a residential customer first might be, “Where is the thermostat?” or something else related to the equipment. In the customer’s mind, there exists a congruity between the question and the purpose of the service call. When the customer’s expectation and the service delivery are congruous the relationship is stable so that rapport can develop.

The title of this article, however, features a question that caused some grief for Tony, a young technician in one of my recent customer service training sessions. He admitted that during a service call, his relationship with the customer was stable and their attractive teenage daughter aroused his curiosity so he asked, “How old is your daughter?” The customer’s subsequent behavior made it apparent that their relationship had spiraled downward to instability.

We were all able to laugh about it during the training, however Tony made it abundantly clear that there was nothing to laugh about when he returned to the shop. Customers will make assumptions based on our behavior and since the customer is always right – we don’t stand a chance.

In terms of verbal communication, the errant “daughter” question was an example of editorializing in which too much information made things worse. When a service professional editorializes they are usually conveying information that contributes nothing to customer satisfaction.

The “Less is More” paradigm applies in most business communication. Especially when you consider that customers hear what they want to hear. The filters through which customers hear others are based on their biases and assumptions. We all hear things differently because we all have different filters. And since our biases run deep, it doesn’t take much for emotions to escalate when someone crosses the line into socially unacceptable behavior.

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Tony was very inexperienced and this event was a valuable business lesson. The lesson learned was that whenever you’re not sure whether you should say the words on the tip of your tongue, then keep quiet. Tony also learned that in business, words can be weapons and the wrong message can result in a business disaster.

Socially acceptable behavior training, especially in residential service, is a worthwhile investment to avert unintentional blunders. Especially since this is such a vital customer touch point.

A customer touch point is an event during which a customer comes into contact with your business. Touch points include your website, the logo on the side of your trucks, your front-line phone reps, your promotional materials and your service technicians in the field just to name a few. Tony, whether he knew it or not, was a touch point. Congruity across these events is a powerful force in business. Customers will gauge and compare the similarity across each touch point.

Smart contractors can harness the power of congruity and customer touch points to their advantage as another way to differentiate their service company from the competition.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Editor’s note: This is the first of an eight part series that will explore Sustainability and how purchasing can and must take a leadership role.  This one introduces Sustainability and how green procurement is so integral to its success.   

Sustainability is coming to corporate American business.  We will need to manage its impact on the sales, purchasing, and image perspectives.  So what is Sustainability and how is it related to puchasing?  For many, it is a tangential, even fringe movement with little substance and unrelated to purchasing.  Others say that it is an eco- fad driven mostly by extremists.  But for the hard core business crowd, it is an opportunity to harvest savings. Savings are another word for reduced costs and there is no one in a better position to do this than purchasing.

Sustainability has no coherent school of thought.  For instance, there is no universal rating system to evaluate an organization’s Sustainability.  Green procurement is also a work in progress.  

Purchasing pros are skeptical of any poorly defined initiative.  Total Quality Management (TQM) and Six Sigma movements were both initially viewed as adding unjustifiable expense, yet are now embraced as value added and cost saving best practices.  The same can be true of a purchasing managed Sustainability strategy. 

Sustainability strategies should have a top-line (revenue growth) and bottom-line (cost reduction and profitability) components.  The overall strategy must address at least these three major business matters, reducing costs, adding or retaining customers, and complying with the law.  

1. Reducing cost

Strategies such as the Reduce, Reuse, and Recycle programs are not new but may not have been previously connected to Sustainability.  Waste reduction and elimination, energy efficiency and conservation, and other operational efficiencies that reduce costs are ideal examples of effective purchasing Sustainability strategies.  Purchasing may need to formalize many strategies already in place and adopting others once we become aware. 

        2. Adding and retaining customers

Reputation and image have disproportionate influence on business.  Our customers may value Sustainability and drive compliance throughout the supply chain as a condition of doing business.  Development and delivery of products and services that build customer and brand loyalty have always been essential to business success.  Well publicized fiascos with heavy metal laden baby toys, toxic drywall, and consumer goods produced in China have had enormous negative impacts on major US companies.  Removing toxic heavy metals is not only green, it is just good business. 

      3.   Legal requirements

The Environmental Protection Agency cites greenhouse gases (GHG) as an environmental and health hazard. Regulation of carbon dioxide (CO2) emissions from sources ranging from motor vehicles to power plants is the law.  This is forcing many businesses to develop Sustainability strategies that address emissions and extend to chemical management in general.  Green procurement plays a great role in making the business case to justify the time and resources needed to mount an effective Sustainability strategy that also complies with the law.   

Green purchasing must lead the Sustainability revolution

Green procurement equals cost savings equals Sustainability.  Cost savings is in the DNA of every successful purchasing pro.  Sustainability in general advocates for the 3Rs of Reduce, Reuse, and Recycle.  Perhaps Sustainability is most well known for conservation of natural resources, particularly energy and water.  Sustainability also demands reduction of green house gas (GHG) emissions, but reducing GHG is a matter of energy conservation and reduction which translates obviously to saving money. 

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But green purchasing costs money, no? 

Let’s debunk this myth.  In almost all cases, the very opposite is true.  There may be isolated cases involving what is called Corporate Social Responsibility (CSR) where there is attention to societal issues such as diversity in hiring over which purchasing has little control.  However, customers of our companies may be driving Sustainability.  Giants of industry such as Wal-Mart, GE, American Airlines, and hundreds of others cannot meet their Sustainability goals of their own without crediting the efforts of their supply chain.  

Their supply chain is us.  We must be conversant with all aspects of Sustainability for that reason.  We have many ways to be the best and only business unit able to make the greatest progress in Sustainability. 

For many years, large energy consumers have had commodity or strategic purchasing specialist to buy energy.  Now, by focusing on Sustainability of all size companies we just need to know where to start, how to measure it. 

In concert with the American Purchasing Society, I am developing a green procurement course that will have far more extensive material available in online, print, and portable digital media.  We will update quarterly so companies can build on successes.  We will offer discounts to those who sign up early so send me an email stating your  interest and I’ll respond with particulars.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Purchasing Magazine regularly surveys its readers about supplier evaluation.  The numbers vary slightly by year but an average of three quarters business purchasing departments have a system (formal or informal) for rating supplier performance.  Would you be surprised to learn and Price is rated highest by fewer than 15%? 

Importance of Total Cost of Ownership

The four elements of cost are: Quality, Service, Delivery, and Price (QSDP)

TCO =the sum of the cost elements in QSDP, or TCO = Quality + Service + Delivery + Price

The relative importance of QSDP allows each party in the negotiation to achieve its goals.  Maintenance Repair and Operations (MRO) parts offer a good example.  A buyer may be more concerned with having parts on hand at the supplier (Delivery) than with the Price.  Downtime costs caused by not having an inexpensive low value item available would far outweigh any Price advantage from the seller’s competitor and thus is probably worth a higher price.  The buyer attains its objective of availability and lower TCO and the supplier earns a price premium.  Economically, it may cost the supplier more to warehouse the customer’s parts and thereby justify a slightly higher price.  The supplier may understandably try to leverage that advantage into the highest supportable price.  It the price gets too high, the buyer will recalculate its TCO.  Meaningful negotiations based on objective measures proceed from the principles of  TCO. 

Each of the QSDP elements can be further broken down into sub elements.  Doing so will create foundation of your negotiation plan.  Here is one way we .could break down each of sub-element of QSDP.

Quality has as many manifestations as we deem are important to our purchase.  In manufacturing, non-conforming material adds costs to the process.  In the food industry, freshness and shelf life of perishables may be a major quality criterion.  The same rationale is true for the other elements.  Delivery may include transportation and storage costs, and Service could include response time and technical personnel and Price might include discounts and payment terms.  These are just a few. More are listed below.  Each has an impact on the TCO however, and we must evaluate how significant that impact is.  In other words we must know our costs.  That is an eminently logical and mandatory piece of advice, but it is not at all obvious, based on the performance of many negotiators. 

These are just a few common sub-elements of QSDP.  Adapt yours to suit the particular purchase.

 Many more can and should be added, depending upon your situation.  These are the objects of our negotiation.  We will build our negotiation plan and concession strategy around these quantifiable and measurable elements of cost so as to achieve the lowest TCO.

Let’s apply this principle to a sample purchase.  If we were to buy concrete railroad ties, here is how we might rate QSDP. 

We chose this order because we determined that time between replacements (Useful life) was most critical to us in terms of overall cost.  The longer the time between replacements, the more the rail lines remain unblocked and available for revenue producing service by customers.  So Quality ranked uppermost.

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Concrete Railroad Ties

1. Quality
2.  Delivery
3. Price
4. Service

Delivery was next the most important cost.  Concrete ties are not equally plentiful as are wood ties around most of the nation, so provision will need to be made in the negotiation for ensuring availability. 

Price came next, and Service last.  Service has virtually no cost component in ties because the Quality element dominates.  With high enough Quality, we won’t need Service and its associated costs.  Price, therefore, came in third by default.

All we need do now is break out some sub-elements of QSDP and we can move we are done for the moment.  For Quality, we could use; rejection percentage, useful life, scrap rate, and remedy policies.  Delivery costs could include transportation and storage.  Service might encompass technical competence or electronic capability, while Price could take in payment and price change terms.

This is exactly the type of exercise you must complete for every purchase.  Once you do it, change is unlikely unless underlying cost structures for our business change, so this is well worth the effort.  Notice that the most important element of cost will have the greatest number of sub-elements.  This pattern is characteristic of the TCO model and makes eminent sense.  If it is more important, it should have more manifestations.

Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant

Total Cost of Ownership (TCO) is the single most important principle in all of supply chain management. It quantifies and measures costs.  The principle of TCO has impacted commercial negotiations by expanding the narrow confines of Price to a vast field of opportunities for attaining Win-Win results.  Anyone can get a lower price.  The object of good business is to attain the lowest TCO. 

In professional purchasing, we can reduce the essence of everything that we do to a single word – Cost.  Any discipline falling under the umbrella of Supply Chain Management can be interpreted and expressed in terms of Cost.  Value and cost are related in that the Best Value means the lowest TCO. 

Many business execs carelessly confuse the concepts of price and cost, using them interchangeably.  To define them simply, price is the money coming in, cost is the money going out and profit is the difference.  Profit is the remainder after subtracting cost from price.  For this reason, cost management is crucial to business success.  For two companies selling at competitive prices, the higher cost company realizes lower profits.  Basic economics show that high costs are bad for business. 

Well, what exactly is TCO, how is it measured and how does it affect negotiation?  First, let us identify the four elements of cost and demonstrate the impact of each on TCO. 

The four elements of cost are: Quality, Service, Delivery, and Price (QSDP)

TCO =the sum of the cost elements in QSDP, or TCO = Quality + Service + Delivery + Price

Several facts about TCO must be recognized and appreciated to conduct an effective negotiation:

1. Each element of QSDP has an impact on the TCO 
2. The importance of each element varies with the product or service being purchased 
3. The relative weight of each element depends upon our assessment of the TCO impact on our business.
4. The identity and weight of each element is an ongoing part of the continuous negotiation process. 

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Price is not only different from cost, but price in fact is merely one element of cost.  The impact of the other elements usually dwarfs the impact of price.  Let’s take the example of the sorry used car purchase.  

“Have I got a deal for you”, intones the plaids and stripes used car salesman of stereotype.  He means a deal on the price, certainly not the cost.  By the time you pay for the new transmission, replace the leaky valves, and meet all the inspection standards, the total cost encourages you to reconsider the wisdom of alternative methods of transportation. 

In order to negotiate effectively, buyers and sellers must understand and evaluate the cost impact of each of the four elements of QSDP.  In fact, our negotiation plan, which we will map out in the next chapter, will be built around the TCO. 

With the stress on quality in business today, is Quality is always the most important element of cost?  Often it is.  Take the case of medical goods such as heart valves for cardiac surgery.  Assume further that you are the patient and it becomes quite obvious of the dominance that Quality enjoys in the TCO calculation. 

Suppose though that you operate a hydraulic press line where one pump powers twenty presses and that pump fails.  Do you then want a pump, any pump?  Would you take a temporary replacement of too high or low a pressure until the correct pump comes in?  More than likely, yes, “Just get me a pump!  I’ll reduce the pressure or eliminate several presses.”  In this case, Delivery far exceeds the impact of the other costs

Service tends to be more important in certain acquisitions such as high tech goods and services and in labor contract agreements.  If the air conditioning goes down in your Alabama facility in July, you want someone, anyone to arrive on site with 15 minutes.  Even an apprentice can check the gauges, fluid levels, belts, breakers, etc while awaiting arrival of the rest of the service crew.

Now we arrive at Price?  Many times, Price is clearly and justifiably the most important element of cost.  Small expense items are good examples.  The purchase of No. 2 pencils is one.  Quality is not a very big issue to most people.  They are plentiful so Delivery falls out of the equation and what Service is involved with a pencil?  So by default, the most important element is Price.  If we are constantly focusing on Price alone, we are not recognizing the impact of TCO.

Steve Hague, author, speaker, and Certified Purchasing Manager

Editor’s note: Steve Hague is a frequent contributor to this blog.

One of the first things a car dealer will ask you when you enter their lot is, “How much do you want to spend per month?”  Most people will give him some type of answer such as, “I’m looking to spend about $350 per month.”  Your answer should always be something like this: “I want to get the best deal on the car I’ve chosen so let’s focus on the actual price.”  

Why wouldn’t you tell him what you’re willing to spend?  Because it’s almost a guarantee that he’ll make the deal work around the monthly dollar amount you give him.  How can you guarantee that he can do that you ask?  The car dealer shell game. 

The shell game is where you take a pea and hide it under one of three shells or cups and watch as the person running the game transfers the pea from under one cup and then another in the blink of an eye.  A similar game can and does get played at car dealerships except your money is the pea and there are several kinds of “shells” the dealer can transfer your money back and forth with. 

The dealer actually has multiple shells to work with and doesn’t need to move at blinding speed.  Here are the options the dealer has for moving money from one place to another to make a budgeted number work: 

1. Down Payment:  By increasing your initial down payment, the dealer can make your monthly car payment smaller and within your budgeted comfort zone that you told him. 

2. Loan Term: By increasing the length of the loan in months, the dealer can make the monthly payments smaller while actually increasing the overall amount of money you pay through interest.  

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3. Trade-In Value: By giving you much less value on your trade, the car dealer can lower the payment on the new vehicle. 

4. Lease: By having you lease the car, the dealer can reduce the amount of money you pay each month to fit your budget. Unfortunately at lease end you’ll turn the car in and have nothing. 

5. Any Combination of the Above:  You as the car buyer need to know exactly how much you can afford to pay whether it be the total costs of the car or monthly payments.  But don’t ever tell the dealer this information or the shell game will begin and it’s your money that’s at stake.