6 Procurement Metrics That Should Be Included In Every Deal
Wondering what to include or exclude in your upcoming deal? What are your key Procurement metrics?
There are six very important variables that any Procurement Manager should definitely include in every deal. Knowing what these variables are, will help you to capture all the issues that are likely to affect the total value of your upcoming negotiation.
Once you define them, you can use them to broaden the scope of your negotiation and to consider the consequences of performance around these variables.
Remember: always link the variables to each other to get the most of your deal! Learn all about the most important procurement metrics.
How much will be paid?
As a procurement manager, you can build agreements that include different pricing structures. These can be linked to the following variables
- The Purpose for which the product or service will be used for
- Relationship loyalty
Remember: the variables should always also be linked to the other five primary variables. If you do not do this, the negotiation will most likely end up in a positional bargaining game. To avoid this, make sure you link price to the following variables.
How many, how much, or what type?
Most Procurement Managers will know: there is a direct relationship between and price and volume. How higher the volume, the lower the price. The economies of scale usually provide for this. Skilled Procurement Manager asks for a published discount tariff for every piece the volume goes up.
Another negotiation variable to link to volume is the volume threshold, where you get a discount and/or bonus on the total purchasing value when you reach a certain volume. These agreements can be called ‘retrospective bonuses, purchase volume rebates, growth bonuses. Make sure you include them in every deal!
When, where, lead time
This refers to where, by when, and how the product or services are to be delivered or completed. In the example of delivery planned every first of the month, further variables can be introduced in the negotiation to make sure the consequences are clear when delivery commitments are not respected by the supplier.
Think before closing your deal: what are the factors that can possibly influence my delivery? And, how to mitigate all risks? For example, when you’re a Procurement Manager working in construction: choose to negotiate that accommodate shared risks, recognizing circumstances beyond control like weather. If it snows 60 days during the winter instead of the common 10 days and delay will be inevitable, make sure that is included in the contract. What are the implications and who’s gonna pay for it.
4. Contract period
When will the contract start, how long will it be active, when will it be reviewed, and: under which terms can the contract be terminated?
Before closing any deal, think of the contract duration. The start, stop, pause, and cancel terms are important to include in every contract. Even if you have an ongoing rolling-contract, there will still be circumstances upon which an opt-out clause can be contractually exercised.
Another variable designed to protect contract period commitments is termination, where you stipulate where one party can terminate the contract with or without reason or consequence as well as defining when the option to renew becomes available.
5. Payment terms
When, how, currency
There are many ways of constructing payment terms to reflect the risk to those involved, the commitment to see the work through, or simply to increase the value of the deal. The team of Procurement Tactics breaks them down into 4 simple variables that every professional negotiator can include in the process of dealmaking.
- When and how payment will be made
- Advanced deposits
- Delayed payment
- Late payment penalties
Proposals that include payment terms can be triggered based on the performance of your supplier, can be held on account, paid retrospectively, be refundable, or with a defined number of days credit.
Sometimes payment terms are a reflection of cash flow requirements, the risk associated with the creditworthiness or history of the other party, or simply a reflection of the standard terms of the most dominant party in the negotiation. Whichever one of these features, payment terms have a financial implication for both parties and will feature as a primary variable.
What the product, service, or agreement will include and/or how it will be supported by the supplier.
Specifications relate to almost anything that impacts the quality of the product or service that is being offered. A product in a supermarket in addition to raw materials can relate to size, design of the packaging, carton box, type of packaging, traceability, color, opening: and each of these will have a multitude of options each impacting on the cost or value of the finished product.
For example, imagine the number of variables involved for a Procurement Manager sourcing components for a spaceship from one of the main manufacturers with literally thousands of specifications, which all affect the total outcome of the agreement. The complexity of the product or service, where it’s being sourced from, the financing arrangements, and the relationship between people and companies will all have some impact on the level of detail and the number of variables that will relate to specification.
Tip: When starting the negotiation, try to find out as soon as possible which is the most important variable for the party negotiating with. When they tend to focus on price, try to negotiate harder on other variables as compensation for or adjusting the price point. Again, make everything conditional. This will ensure you get the most of your total deal.
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