Are your suppliers doing you favors?

Are your suppliers doing you favors?

Really big favors?

Often suppliers tell their customers what a big favor they are doing for them by holding a price even though a contract expired while they were negotiating a renewal. Nice guys, huh? I mean here you were dragging your feet and they held the price anyway. They didn’t take you to list.

Then there are times during negotiations that the supplier may say, “Hey, the contract expires in a week and you’ll revert to list price. I don’t want that to happen. You don’t want that to happen. Let’s wrap this up ASAP”! Under this sense of urgency you sign without fully examining the fine print. Big mistake.

As supply chain professionals we need to know that this is akin to someone telling you they're doing you a favor by not driving 50 mph on your street which has a speed limit of 25 mph. All they are doing is following the law. Telling you otherwise is plan old sales puffery. The Uniform Commercial Code (U.C.C.) establishes an implied contract under the “course of dealing” and/or “Usage of Trade” sections whenever the buyer continues to purchase goods when the parties have intended to make a contract and such contract is entered into within a reasonable time (code 2-205 states three months). Thus, the buyer is entitled to pay no more than the higher of the two contract prices during contract interims.

The point here is that buyers may (and should) refuse to pay an increase during a contract negotiation with an incumbent supplier that exceeds the offer for new pricing. During gaps in contract periods (not to exceed 3 months) the obligation is to pay the higher of the two contract prices, but no more. Buyers should never let an artificial deadline (technically known as “Fire Drills”) force them to make decisions without all appropriate due diligence being performed.

If a supplier has taken you to list during the 3 month period you are entitled to a refund. Demand it and you’ll get it. Organizations can usually go back 3 years and get refunds.

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The excerpts from the U.C.C., taken from www.law.cornell.edu/ucc, supporting this position follow:

U.C.C. - ARTICLE 2 – SALES PART 2. FORM, FORMATION AND READJUSTMENT OF CONTRACT

§ 2-204. Formation in General.
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

§ 2-205. Firm Offers.
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

§ 2-206. Offer and Acceptance in Formation of Contract.
(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;
(b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.
(2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

§ 2-207. Additional Terms in Acceptance or Confirmation.
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

Certification – Why and Which One?

The website for the Council of Supply Chain Management Professionals lists 12 professional supply chain organizations with a credentialing program. It does not include AHRMM, meaning there are at least 13. I suspect there are numerous other industry specific programs resulting in far more than 13 certifications. While this appears to be a Tower of Babel when you understand the process it actually makes sense. First, it shows that certification is becoming a standard requirement among supply chain practitioners, and second, it indicates that not all certifications test the same body of knowledge. Which one, or more appropriately which ones, should an individual pursue?

The largest and oldest society of supply chain professionals in the world, the Institute for Supply Management (ISM – 40,000 members worldwide), provides an instant verification of credentials of its membership online. Punch in a name and viola! you can see if a person actually has the certification they claim to have. Why is this important? Certification by this body actually carries weight in the real world. ISM’s credentials are used by leading companies to differentiate job applicants and internal candidates seeking promotions. They document a body of knowledge that is considered to be the equivalent of 12 – 15 college credits of specialized supply chain knowledge that cuts across all industries. The bearers of the C.P.M. credential have passed 4 test modules with a combined testing time of something like 10 hours. They have been tested on standardized procurement processes from needs assessment through contract management. Further, they have demonstrated a detailed understanding of management in areas such as business law, quality programs, supplier relations, interactions with other management members, personnel, diversity management, green initiatives, etc.

ISM’s website provides a “See who has been certified or accredited in the last 30 days!” feature. At any given point there will be between 250 and 350 names and their locations are worldwide: everywhere from the USA to Europe and the entire Pacific Rim including China, Korea, Japan, etc. As example as to the importance of this feature, Toyota, a perennial Top 5 supply chain company, requires the C.P.M. for advancement in its management ranks and is actively involved with ISM at many levels. Clearly ISM’s C.P.M. is the gold standard of certifications. It is the equivalent of a CPA for supply chain pro. In 2008 ISM is raising the bar by launching a new credential, CPSM, that will require knowledge of even more such as world trade, etc. in addition to all of the other existing requirements. The old inch thick study guide has been replaced by a three volume set. Starting in 2012 no new C.P.M.s will be issued, only CPSMs. The CPSM will have minimum requirements of 5 years of experience, a 4 year degree and passing 3 test modules. No life status will be possible. I estimate that fewer than 10% of supply chain’s full time practitioners will achieve this elite level of certification. The gold standard will give way to the platinum.

However, many other organizations provide industry specialized certifications that document knowledge that is necessary and vital to that industry. A platinum standard is not always required. AHRMM’s CMRP is one such process. Supply Chain professionals with the CMRP credential have shown they have an understanding of the nuances of healthcare’s unique needs and practices. In doing so, is it not reasonable to argue that any buyer or higher position in hospital supply chain should require a CMRP either as a condition of employment or to be achieved within 12 months of employment – regardless of other certifications? Let’s be honest, healthcare is woefully behind many industries in supply chain practices and a lack of a credentials requirement is at least partially to blame. If we were like other industries we would require the CMRP for all of our mid level staff. In large health systems where specialization of duties is possible certifications such as APICS’ CPIM can be helpful and should be recognized and rewarded. For those aspiring to be the chief supply chain officer (director, vice president, etc.) a C.P.M. should also be required.

The bottom line for certification is this: Demonstrating mastery of the technical aspects of your profession should hardly be an obstacle to anyone claiming to be competent to manage a supply chain measured in 10’s of millions and often hundreds of millions of dollars. And we owe it to ourselves to demonstrate that we actually have this knowledge – it’s one thing to claim it and another to document it. If your employer does not see the need to support this process via funding and time (shame on them if this is their position) do it yourself. The next big job opportunity may require it, and if they do they will most likely be that enlightened employer you’d really rather work for.

Autumn Leaves

Every once in a while I'm really happy that I live in the Northeast, that I get to experience the 4 seasons and that many of my clients are within driving distance of my home. Today was one of those days.

The leaves in the central Pennsylvania mountains are in full splendor. That coupled with a nice clear sunny day having indian summer type temperatures made for an unusually pleasant drive. And to think I get to do this for a living.

It's Alive!!

After much adieu http://www.sscm5.com/ is finally a live site. When we announced the new firm in April I promised a killer website to follow. I will admit that it took a lot more to make this happen than first anticipated. Be careful what you promise… However, I believe we have delivered on that promise. And I believe anyone who visits the site will agree.

Though, the “we” is a true editorial “we”.

I cannot overstate my appreciation to the team at Webpage FX (http://www.webpagefx.com/): the firm responsible for logo and web page development. It was a pleasant surprise to find such a qualified team so close to home. William Craig, President and Karie Shearer, Creative Consultant were (and are) easy to work with while providing all of the support the firm required (and will require).

Last, but not least, I have to thank the many members of the industry who served as members of our various focus groups that assisted in selecting colors, logo schemes, web layouts, etc. You are all a major part of the “we”.

It’s Alive!!

2007 Institute for Supply Management International Conference

Having just got back from Las Vegas and the 2007 conference my head is spinning. Overwhelming – there is simply no other word for it. 2100 of some of the world’s best supply chain management practitioners in one place – whew! And without doubt the best subject experts in the world as workshop presenters. Talk about a testosterone overload. And no, I’m not referring to a primitive male bonding experience, particularly since at least half, if not more, of the participants were female. Anyone who understands the assertive nature of supply chain folks (described by the less informed as aggressive) knows what I mean. One of the more “fun” workshops was a presentation on Mars vs. Venus negotiation styles and techniques. The next time I have to negotiate with a group of nurses I’m ready. No more pounding my fist on the table and screaming “If it’s good enough for the Navy, it’s good enough for you!” Nope – I’m now in touch with my Venus side.

When viewing our large numbers I’m humbled in the realization that this was only 5% of our membership. What would happen if we all showed up? Could Las Vegas accommodate us?

Coming from the healthcare side I find it so refreshing to hear my peers in myriad other industries voicing the same problems, concerns and frustrations that I so often hear in healthcare. Even more refreshing is hearing the many innovative ways industry has responded to these matters. I learn something new every time I attend one of these conferences. If fact I learn too much for one brain to remember more than 50% of it all. Candidly, if someone only attended to study a single track such as contracting or negotiations the entire trip was worth it. The educational offerings were so numerous that attendees were forced to pick a relative few and regrettably miss many others with equally attractive descriptions. I actually found myself flipping a coin at one point. In an ideal world an organization would send at least 5-6 participants, who all attend different sessions and then share the information among themselves upon their return home. I suspect some more enlightened (aka successful) firms did just that.

As usual, this year’s attendees included supply chain professionals from most of healthcare’s key suppliers: Zimmer, W. L. Gore, and Pfizer, just to name a few. But these were the few I personally met. More interesting was noticing how they were concerned with meeting supply chain professionals from their suppliers, and so on up the chain. The reality is you can learn so much more about an industry with this network than you can by only speaking with marketing professionals where a controlled message and image are conveyed. (The workshop dealing with this was entitled “Buying Under the Influence”). Knowing the upstream concerns of my suppliers is powerful information in managing my part of the chain. Market intelligence: yes, but so much more than that. Knowing the key supplier issues they face and which products are critical to them and what they are doing to mitigate risk gives me a much better handle on managing my supplier risk while predicting fair prices and availability. This is why we call it a supply “chain”. It is only at ISM that I can actually see the upstream links in the chain. I only wish more frontline healthcare practitioners were there. While some of the larger, more progressive, health systems and teaching medical centers had representation few, if any, small hospitals had anyone present. For the most part our industry continues to gravitate towards a myopic and parochial view – seeing no further than the sales rep in the lobby. Not on the part of the supply chain management personnel, but their superiors who don't see the ROI on sending staff to high level conferences. That’s a pity and it is one of the key reasons sellers tend to hold more influence over healthcare supply chains than the buyers.

For one of the speaker luncheons I have the good fortune to sit next to and make the acquaintance of James Schulze, the Director of Operations for the Council of Supply Chain Management Professionals (CSCMP), another of supply chain’s professional organizations. They will be holding their annual conference in Philadelphia in October. I wasn’t originally planning to attend, but after meeting James and hearing his description I’m reconsidering and leaning towards attending.

Speaker Malcolm Gladwell, author of “The Tipping Point” and more recently “blink”, was top rate and one of the best I have ever heard. His extemporaneous speaking style while staying on point - with great substance - is worth his fee. So much so I have obtained a copy of “blink” and it is now 3rd on my to-read list. I’ll get this done by the end of summer. On the other hand, speaker Gil Schwartz, who is billed as a “business humorist” and appears under his nom-de-plume Stanley Bing, is without question one of the worst speakers I have ever heard at a conference. He may have been having a bad day, but he had a really bad day. If a nonstop series of sophomoric “jokes” concerning poor management, drunkenness and other debaucheries, and a series of cheap shots spoken in a monotone with his head down while reading from papers on the podium is your idea of humor then you’ll love Stanley Bing. On the other hand, if your choice of entertainment has matured beyond “Animal House” I don’t recommend him. And I am not inspired to obtain any of his writings.

2008 – St. Louis here we come! Be there.

Thank You Vinny

Over the years consulting has given me the opportunity to meet many people. Some of them are quickly forgotten when you leave an engagement, but some of them will stay with you forever. Occasionally you bond so well during the engagement that the client staff throws you a going away party and even a gift.

I recently had the pleasure and honor to work with a group in a small community hospital in Northern New Jersey. I do believe we bonded well, though any thoughts of gathering prior to my departure were dashed by the suddenness the engagement ended (we hired the right permanent guy).

At the end of the new permanent Director’s first week I came in for one day to go over my report and tie up any loose ends. That’s when I had one of the proudest moments of my career.

Mr. Vincent Walker, Vinny, is a retired NYC police officer and pistol instructor at the NYC Police Academy. He is also the Storeroom / Receiving Coordinator for the client. While I worked there he and I had several good discussions about New York, small arms, retirement, etc. I knew Vinny and I liked each other, but what he did on this last day surprised a man who thought he could no longer be surprised. Vinny presented me with arm patches for the NYC Police and a Small Arms Instructor patch as a parting gift. Words cannot describe how this made me feel. After leaving the client I literally pulled over a couple of miles down the road and got choked up – the eyes were a little misty.

I know what these patches mean to Vinny and I recognize the enormity of the gift.

Vinny, all I can say is thank you and God bless you – and of the men and women who have ever worn these patches. They are being placed in a glass covered shadowbox in my home office where they will be treasured forever.

SSCM5

To my friends, colleagues and readers:

I am pleased to announce the launch of a new supply chain consulting firm: SSCM5.

For the past several years I have hung my shingle with American Healthcare Solutions, LLC in Pittsburgh. As one of the founding members of AHS I always have and continue to take great pride in the success of this organization: though clearly Jan Jennings is the driving force that made AHS what it is today. It was while working with Jan and the other members of AHS that I honed the high standard of ethics and extraordinary concern for the interest of a client that a good consultant must carry with them 24/7 - far more than the casual observer outside the profession could ever realize. For this I will be forever grateful. However, sometimes even with the best of organizations, with good, no make that great leadership, there comes an intersection where one must decide which direction to take. This is particularly true with smaller or mid-sized firms that simply cannot be all things to all people. With mixed feelings I came to that point with AHS and we will now head on slightly different courses.

Many shared the opinion that Supply Chain Management was never as fully developed within the AHS fold as it could and should be, needing more attention and resources - to be a core focus. By early May my associates and I will complete the launch of the new firm, to be headquartered in suburban Philadelphia, which will target the special needs of the healthcare supply chain market. Moving the business physically closer to home will allow me more time to focus on and expand a product line that will cover all of the needs an organization may have vis-a-vis supply chain management and related processes.

I hope you will all wish us luck with this new endeavor. With the obstacles faced by any new business, prayers are also appreciated.

PS - Killer website to follow.

Donate those old laptops. Our soldiers need them.

Do you or your organization have old laptops that you no longer use, or will be replacing soon? Here is the chance of a lifetime: donate them to Walter Reed Army Medical Center for injured soldiers to access the internet.

Laura Brown, the mother of a soldier who fought in Iraq has organized "Laptops for the Wounded". Read about her in the Houston Chronicle or visit her organization at her website.

Congress says NO to Drug Price Negotiations

Last week, the new Democratic Congress passed House Bill H.R.4 by a vote of 255-170. H.R.4 requires the Secretary of Health and Human Services to negotiate Medicare prescription drug prices. It changes the Medicare Part D drug benefit (PL108-173) - and bars the government from setting up a formulary, or restricting access to drugs as a way of leveraging lower prices. The new Congress deserves a c for chutzpah.

This is the most deceiving piece of doublespeak passed by the Congress in the past 20 years. It is also a blatant lie to the folks who elected them. Unfortunately, most of them will never know it. All they will hear is hype about how the Democrats fixed the Republican, i.e. Bush’s, drug bill by requiring price negotiations, thus “leveraging the bigness of Medicare”. Anyone who believes that the Secretary of Health and Human Services has a snowball’s chance of negotiating anything with this turkey is smoking something other than tobacco. This bill makes things worse, not better. Here’s why.

The art of negotiating – and I do mean art – is performed well by very few, because very few take the time to understand the underlying dynamics. In the 35 plus years that I’ve been in healthcare supply chain, I have been frustrated by the exploitation of this simple fact by those with hidden agendas. The most blatant example was by hospital group purchasing organization (GPO) executives who convinced the CEO’s of their member hospitals that bigger was always better, and that through sheer volume hospitals could drive a better price in the market. The hidden agenda here was expansive administrative fees controlled by the GPO executive and a larger membership where each individual voice was diluted, thus made ineffective, in affecting the bigger scheme. In essence, the hospitals gave away their control of the GPO and any market advantage they may have actually possessed to the benefit of the GPO executive staff.

A classic example of this is the Premier group. In the early 1990’s it had 50 or so members. This small group controlled something like 13-15% of the teaching residencies in the United States. Their leverage at the table was huge. High tech (aka high price) manufacturers wanted to place products in the hands of the members’ residents who would then, when they moved on to practice as physicians at community hospitals, demand those same products. Companies could (and did) give the Premier hospitals the products for next to nothing while charging high margins at the community hospitals. The prices were so low it was worth the while of hospital executives to convince their physicians to standardize on these products. It was a way of buying future market share at relatively low cost. Much to the glee and economic benefit of the then Premier membership, this is the contract strategy that was largely used by Johnson & Johnson to take over market dominance in endosurgicals from prior market leader US Surgical.

The CEO’s never saw it coming. They were convinced that bigger meant better. The rest is history. Premier went on a growth spurt through recruitment and mergers. Today Premier obtains me-too prices for all of its huge membership on a take-it-or-leave-it basis. Small to medium size health systems, with a savvy supply chain staff that are able to make and keep market share commitments, now routinely negotiate better deals than most GPOs. The largest individual health system still represents a small percentage of any average market. The supplier community translates extreme volume customers into being a large part of their average market - which is where profits reside. Since the goal here is making a profit they never give the average market any true long term advantage.

Without the threat of keeping drugs off a federal formulary, and thus limiting access to a firm’s products, what leverage does the Secretary have? This is the only economic clout available. What does the Secretary have to exchange for better pricing? In the world of government, if the leverage is not economic then it must be political. Does the average American really want the pharmaceutical manufacturers having more leverage in our political processes? I think not. But, this will be the result of House Bill H.R.4. And anyone who is looking for pricing equivalent to the Canadian experience is in for a rude shock.

The existing insurers and hospital GPO’s already have discounted prices with the drug firms. Any discounts given to the government will need to be extended to every other contractor. The drug companies know this. Some symbolic price concessions will be made to make the Secretary and the Congress look good – in exchange for something. Actual prices paid may be reduced by a few dollars to the individual while being reported in the press as tens of millions of dollars in aggregate.

In November, 2006 I wrote about my own displeasure in having the government negotiate prices (“$1.2 Billion”). Naturally, as a negotiator, I assumed a federal formulary that would limit choice with the well-intended, though misguided, goal to bring short term economic benefits to the consumers, i.e. voters. It was the impact of a huge restriction on markets that would limit long term R&D that I feared. As a negotiator I should know to never assume. Who envisioned a bill that would further engage deep pocket pharmaceutical firms in the political process (make that money to politicians and/or their pet causes) while offering no real economic impact to the voters? I never saw it coming.

Economic Boom, Boom, Boom (Post Script)

Last week’s article (Economic Boom, Boom, Boom) dealt with China’s burgeoning trade surplus, created in no small part by its central bank’s artificial suppression of the yuan’s exchange rate.
Bloomberg News reported today that China’s central bank governor, Zhou Xiaochuan, has stated that China may increase the flexibility of the yuan should the country’s trade surplus continue to expand this year.
Here the operative word is “may”.

The United States, specifically Treasury Secretary Henry Paulson, Jr., needs to continue pressure on the Chinese and accept no conditional control of the yuan. The price for using the West’s free markets must be a free Chinese economy.

Economic Boom, Boom, Boom

Throughout the 1980’s China emerged as a player: largely through the strength of its huge population and low wages. This was entirely acceptable to the West, and in many circles seen as highly desirable. The thought being that China could be engaged in basic trade first and then values second. With their primitive infrastructure they posed no threat to the “real” economic powers. However, while the Chinese Communist Party artificially controlled foreign exchange rates, they reinvested foreign currency reserves in industrial modernization and technology acquisitions through the 1990’s, leading to more modernization, and more technology, better efficiency, and bigger trade surpluses. In the process they created a Communist State unlike anything envisioned by Marx, Lenin or Mao: one having huge trade surpluses that has in turn created a middle class, and as recently reported, even a large number of billionaires. Milton Friedman is no doubt smiling from on high (and yes, if there is a heaven, Milton is there) saying “I told you so.”

All of this has not been without a price to the West. While China has been a keen producer of finished products, and a proven marketer of those goods, it has not been as efficient when it comes to producing raw materials. Basic energy reserves have eluded the Big Red Machine. Recent rises in oil prices were partially attributed to the new industrial powers vying with the old guard. Yes, demand exceeding supply continues to drive up prices.

All of this may change. Recently China announced plans to take advantage of its huge foreign exchange reserves to expand its stock of natural resources. The vice prime minister, Zeng Peiyan told leaders of the national legislature that the government planned to step up exploration for crucial resources like oil, gas and coal. Wow! (Boom!) China with its own stock of energy would be a competitor extraordinaire. A bigger Wow! (Boom! Boom!) - China expanding the world’s reserves could lower overall energy costs for everyone by reducing pressure on the supply side. But an even bigger Wow! (Here's the Boom! Boom! Boom!) – Communist China with a savvy knowledge of how free markets work, a population advantage (call that potentially the world's largest consumer market), coupled with a predisposition to central control now having the ability to strongly influence world energy prices while keeping its own domestic prices, and hence manufacturing advantage, artificially low. This could be the West’s worst nightmare coming true: economic warfare with the communists.

Nikita Krushev said “We will bury you economically.” By “we” he no doubt meant the Russian Communist Party. Little did he know that when the realizations of such prophesy at least had the potential to occur that the Soviet Union would no longer exist and that its former poor cousin, The Peoples Republic of China, would be The World Communist Party.

The time has come for the West to make some simple demands - that the playing field be leveled. We can no longer compete, nor should we, against controlled markets. The time has come for the yuan to float on world currency markets and that China's domestic markets become truly free. No central control. It makes great political rhetoric to talk about bringing China to the table through trade, but these guys have learned too well without paying the price of entry. Exxon, Toyota, Wal-Mart and GM together are no match for a fortress China.