The 18% Cost Savings You Aren’t Getting – CPSCM™ Report

by Omid Ghamami

There’s 18% savings on average being left on the table in every single negotiation.  Keep reading and I’ll explain.

Our entire profession is challenged to find savings over and over from the same suppliers, year after year.  It’s the only thing that hasn’t changed since our profession started. 

What also hasn’t changed is how we get those savings.  Generally speaking, the bottom line is those savings are elaborately achieved through what in the end amounts to supplier profit compression. 

And those savings are hard to get.  They don’t come easy.  And you’d like to have an eager dance partner, but no supplier is eager for the opportunity to make less profit.  They go to the dance with you because they need the money, but it doesn’t mean they are eager. 

And the better you are at extracting those savings, the more you are respected in this profession.  But how did the supply chain benefit? 

Answer: it didn’t, because you just moved costs along the supply chain instead of taking them out.  You achieved cost savings parasitically.

But here is what is shocking: This is not where the money is.  Where you’ve been digging so hard for savings is not where the real cost savings is.  There is 18% cost savings on average that you are leaving on the table every single time, and there is an eager dance partner waiting to give it to you, that is if you take him or her to the right dance.

So here it is.  There is a continuum in the life of a purchase, and we all know it starts before procurement is usually involved.  And the life cycle of that purchase starts with an end user who has something in mind.

Then there are conflicts of interest for the end user, and not the kind we normally talk about.

The first conflict of interest is they get rewarded for designing something.  Nobody ever got promoted or received an award for picking something out of a supplier catalog.  Lots of people get rewarded for designing something from scratch, and it’s a shame, because over 99% of the time it’s not necessary.

The second conflict of interest is that the end user is focused on what they want to buy ***instead of what they want to accomplish***.  This too results in endless heartache for end users and procurement alike, because those two are almost always incongruent, and you don’t find out until the supplier has your money.

So the 18% cost savings is at this stage, but not based on getting in early and putting it out to bid, which is what we always want to do when engaged early.  THAT’S A MISTAKE.  Stop doing that.

Read This Twice: The 18% savings is in analyzing product/service design for cost efficiency.  These savings are IN ADDITION to whatever you negotiate afterwards with suppliers. 

What you want to do with early end user engagement is to deeply understand what they are trying to accomplish, turn that into measurable performance objectives, and then drive a strategy to acquire performance results instead of goods & services, and then Remove, Standardize, or Simplify any and all cost components in the SOW/Spec that do not contribute to these performance objectives. 

Who is your best friend in this process?  You’ll never guess.  It’s the uneager person you want to take to the dance – your suppliers.

While previously, you were both fighting over their profit margin, now you will be collaborating with them on costs that don’t need to be there to begin with – and suddenly both parties benefit.

Everyone thinks suppliers love making custom products and services for end users who get cute.  Everyone is dead wrong.  Suppliers hate it. 

They’ve spent a fortune determining the best products and services that are proven to solve those problems and then some wizard end user is trying to tell the experts how to run their business.  And now the supplier has to change everything just for you, because you have an end user who thinks they are smarter than the supplier. 

Read This Twice: when you tell suppliers what to do, they will shift all the contractual risk and liability to you, because it’s your idea and not theirs.

And the most deadly words in procurement?  “Failure to comply may result in bid disqualification”.  And with those words, suppliers are forced to comply to ill conceived requests that bake in 18% unnecessary cost on average, so they don’t lose out on the deal.

Want an example?  I have about 500.  I’ll give you one right now.

The US Army used to have a fixed SOW for janitorial.  That means the US Army thought they were smarter than the janitorial suppliers, and were telling **them** how to run their business. 

They were telling them how many people, what shifts, what activities, what chemicals, etc, etc down to the last detail.  The fact that their solution worked perfectly hid the fact that it was designed incorrectly.

Finally someone got smart and said – “why don’t we just measure the results.  Isn’t that what we care about?”. 

And so they did.  They developed a Performance RFP and put in the performance criteria, and then they asked the suppliers to tell them how to do it. 

The result? 50% cost savings because the US Army doesn’t know how to efficiently design janitorial SOWs.  It’s not what they do for a living.  This same thing is happening ALL DAY LONG inside your companies with most every major purchase.

Once you make the shift to focusing on what the end user wants to accomplish instead of what they want to buy, you can make all sorts of magic happen, not the least of which is shaving an unnecessary 18% off of the price on average, while often times leaving the supplier thrilled that they are not getting distracted by your custom design objectives.

Make the change.  This profession needs to elevate.  We’re just getting better and faster at doing things we’ve always done, and that’s not good enough. We need to transform.  The CPSCM™ Program shows you exactly how to do the above and so much more.  No other program covers this topic.  Are you getting 18% cost savings BEFORE you negotiate with suppliers today? 

Now go off and do something wonderful.

Be your best!

Omid G

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