This course covers the material on Procurement and Acquisition of Equipment, from the AEMP Career Equipment Fleet Manager handbook.

Transcription

1 This course covers the material on Procurement and Acquisition of Equipment, from the AEMP Career Equipment Fleet Manager handbook. This course will cover the key material included in the EMS certification exam. 1

2 With the changes in the economic climate, most companies prefer not to raise prices on core business products and services unless absolutely necessary. Therefore, reducing costs is the major focus, whether in a private sector or public sector equipment fleet. Paying high prices for vehicles, equipment, rentals, parts, services, funding, etc., jeopardizes any company's future revenues and profits because some competitors may be paying significantly lower prices and, therefore, can underbid your company's products and services. Adopting negotiation techniques presented in this section can result in dramatic reductions in costs and risks. In the long term, achieving lowest cost with highest-quality producer status is a prerequisite for success in the 21st century. Equipment managers can reduce fleet owning and operating costs and improve the quality of fleet services delivered by implementing the negotiation skills presented in this section. 2

3 There was a time when customers would pay more to get the product more quickly. Or they would wait a little longer if they could get the product at a reduced cost. Or they would sacrifice a small margin on quality if they could get a lower price. Today, customers want all three: low price, fast delivery, and high quality. Most are not willing to compromise on any of these items, making it the equipment manager's job to ensure his/her employer gets all three. 3

4 Well trained equipment managers can reduce fleet owning and operating costs substantially while simultaneously increasing the quality of fleet services delivered. Cost reductions do not necessarily mean service reductions. Reducing fleet and shop costs using a well developed negotiation strategy has the ability to streamline bureaucratic procedures, outsource weaknesses, "kill sacred cows," train personnel, track service quality using statistical measures and introduce customer-driven management techniques. 4

5 In the 21st century, U.S. companies are competing in these five dimensions: Labor. Companies are competing for top management, skilled labor, general labor, etc. Price. Companies must provide core business products and services offered at competitive prices achieving lowest-cost-producer status. Quality. Companies must provide high-quality products and services to compete. Time. Companies must reduce the time required to identify a need or want in a market and delivery of necessary products and services that satisfy the customer and must assure quick response times to customer requests. And finally, companies must incorporate state-of-the-art technology used in all phases of operations, including manufacturing, marketing, operations, administration, etc. 5

6 Most equipment managers are on the cost side of the company, not the revenue generating side. From the equipment manager's perspective, cost reduction is the major skill set that favorably impacts the bottom line. Knowledge of maintenance and repair outsourcing plus negotiation skills can assist in coping with technician skills shortages. Negotiation skills are the manager's demonstrated ability to improve fleet and shop costs and reduce shop risks, while increasing quality of fleet and shop services received and delivered. If managers can improve supplier rental rates and supplier technician man-hour rates, then more asset ownership and employer costs and risks can be shifted to suppliers. 6

7 Strong negotiation skills can assist managers to do more with less within a partnership mindset and management style of trust but verify. So why don't managers negotiate effectively? Sometimes, they lack the training and knowledge necessary and feel they do not have enough time to learn to develop their negotiating skills. Others prefer to negotiate using a "good old boy" attitude with suppliers. There are natural negotiators and there are negotiators that learn from experience. 7

8 The concept of the Equipment Triangle was developed in 2005 by the Association of Equipment Management Professionals (AEMP) and is best defined as the continuing relationship between the end user, manufacturer/supplier and the local distributor through a product's life cycle. From the end user s perspective the Equipment Triangle represents the OEM/distributor product support programs that enable the end user to achieve the highest possible availability at the lowest life cycle cost. This is fundamental in fleet management, not a responsibility to be born exclusively by the vendor but as an overall goal of the fleet management process. 8

9 From the OEM / Supplier s perspective the Equipment Triangle relationship rests upon a foundation of trust and mutual respect for each party's proprietary information. In such a relationship, open and honest communication between all parties gives the OEM a unique opportunity to understand the end-user's needs and thus develop products and support programs that are best suited to meet those needs, thereby gaining or strengthening competitive advantage for all three sides of the triangle. 9

10 From the distributor s perspective the Equipment Triangle represents the opportunity for a sustained business relationship, differentiating them through problem solving and value-added product support services, ensuring that customers achieve the highest possible availability at the lowest life cycle cost. Many distributors desire to be in a partnership and encourage the trust but verify management style of a fleet manager. 10

11 The Equipment Triangle moves the parties involved in negotiation from a potentially adversarial relationship to one of mutual benefit to one another. In other words, the players move from being across from each other at the negotiations table to side-byside. 11

12 According to Merriam-Webster, negotiation is defined as: to confer with another so as to arrive at the settlement of some matter; to deal with some matter or affair that requires ability for its successful handling; to arrange for or bring about through conference, discussion and compromise. Each of the actions mentioned are truly critical to successful negotiation of your contracts whether with a vendor, an employee or a union. The more people there are who want your money, the more your money will buy. How do you get people to bid for that money? You generate competition for it. - Herb Cohen, the world's best negotiator. 12

13 Most negotiation perspective tends to place the buyer and seller in direct opposition to each other. The following list shows some of the ways the objectives of the buyer and the seller create that opposition. For example, the buyer may have the objective of minimizing costs, while the seller s objective is to maximize profits. Take a look at the rest of the examples before continuing in the course. 13

14 The negotiation points listed in the previous diagram tend to result in either the buyer winning additional concessions, which costs the seller profit dollars and additional risk, or the buyer losing concessions, which costs the buyer more money and additional risk. In other words, negotiator A wins as negotiator B loses and vice versa. Both buyers and sellers are motivated to reduce transaction costs, including the time and cost to complete each transaction. There are three possible outcomes to negotiations: Win-Lose: Negotiator A wins and negotiator B loses. Example: If the buyer is able to win additional price discount concessions, then the seller loses that amount of profit. Sellers should walk away from this scenario. Lose-Lose: Negotiators A and B both lose. Example: If the buyer purchases a vehicle poorly suited to task, then both the buyer and seller lose. The buyer loses productivity and the seller incurs extra warranty costs to correct the problems caused by performing a task the vehicle is poorly suited to perform. As a result, both the seller's and buyer s reputation may be affected. Win-Win: Negotiators A and B both win. Example: If buyer A purchases a maintenance contract for a piece of equipment, the buyer wins by allocating scarce man-hour resources to more productive activities, and the seller wins additional parts and labor revenues. This is a partnership. With AEMP's Equipment Triangle in place, the negotiator's goal will always be a Win-Win for all parties involved in the negotiations process. 14

15 Equipment managers can reduce fleet- and shop-related costs and risks by allowing their negotiations with suppliers to assist them in avoiding, reducing and shifting costs and risks to their suppliers. A successful negotiation achieves one or more of the following objectives. Improve total cost of a given function or activity Increase quality of a given function or activity Reduce assets owned that are associated with a given function or activity Reduce full-time employees associated with a given function or activity Reduce liabilities and risks associated with a given function or activity The greater the number of objectives met within a given negotiation, the greater the cost and risk-reduction impact. Negotiations with suppliers help managers make significant contributions to the company's bottom line. Let s look at two examples. 15

16 Applying these negotiation objectives can: Improve vehicle and equipment costs and risks, which helps the company in pricing core business products and services and win more business. Increase quality of fleet and shop support services delivered to vehicle and equipment users, which increases productivity and helps the company aggressively price core business products and services and win more business. The easiest cost and risk reductions are achieved with suppliers at negotiating tables. Equipment managers who lack the business and negotiation skills will not gain senior management's confidence. Fragmented decision-making occurs when senior management and accountants recognize that fleet personnel lack the skills required to conduct negotiations alone. 16

17 Is not born but is a student of the negotiating process and practices the skills associated with that process he or she learns by experience and studying the process. Develops a responsible level of subject knowledge. Has general knowledge of business practices, including accounting and finance. Understands his/her strengths and weaknesses. Uses preplanned objectives and well thought out strategies to achieve those objectives - a Needs Assessment is an appropriate tool for this purpose. Understands seller's history, the current situation and future outlook. Understands the other participants objectives and paints a picture as to how they can achieve those objectives. 17

18 The effective negotiator is a good salesperson. The effective negotiator sells the seller on the reasons why his / her company should be given a better deal. Understands the power of persistence and patience. Sets a date and sticks to it rather than using a passage of time style. Has well developed listening skills, takes notes and reconfirms all agreements - the talk-listen ratio favors listening and using the information gathered to negotiate a better deal. Must demonstrate a willingness to purchase from secondary sellers if factors, such as level of new training, parts inventory, etc., are equal. Has excellent character - others may consider the negotiator to be "tough" but must perceive that the negotiator's word will be kept. 17

19 Is not born but is a student of the negotiating process and practices the skills associated with that process he or she learns by experience and studying the process. Develops a responsible level of subject knowledge. Has general knowledge of business practices, including accounting and finance. Understands his/her strengths and weaknesses. Uses preplanned objectives and well thought out strategies to achieve those objectives - a Needs Assessment is an appropriate tool for this purpose. Understands seller's history, the current situation and future outlook. Understands the other participants objectives and paints a picture as to how they can achieve those objectives. 18

20 The effective negotiator is a good salesperson. The effective negotiator sells the seller on the reasons why his / her company should be given a better deal. Understands the power of persistence and patience. Sets a date and sticks to it rather than using a passage of time style. Has well developed listening skills, takes notes and reconfirms all agreements - the talk-listen ratio favors listening and using the information gathered to negotiate a better deal. Must demonstrate a willingness to purchase from secondary sellers if factors, such as level of new training, parts inventory, etc., are equal. Has excellent character - others may consider the negotiator to be "tough" but must perceive that the negotiator's word will be kept. 18

21 Is not born but is a student of the negotiating process and practices the skills associated with that process he or she learns by experience and studying the process. Develops a responsible level of subject knowledge. Has general knowledge of business practices, including accounting and finance. Understands his/her strengths and weaknesses. Uses preplanned objectives and well thought out strategies to achieve those objectives - a Needs Assessment is an appropriate tool for this purpose. Understands seller's history, the current situation and future outlook. Understands the other participants objectives and paints a picture as to how they can achieve those objectives. 19

22 The effective negotiator is a good salesperson. The effective negotiator sells the seller on the reasons why his / her company should be given a better deal. Understands the power of persistence and patience. Sets a date and sticks to it rather than using a passage of time style. Has well developed listening skills, takes notes and reconfirms all agreements - the talk-listen ratio favors listening and using the information gathered to negotiate a better deal. Must demonstrate a willingness to purchase from secondary sellers if factors, such as level of new training, parts inventory, etc., are equal. Has excellent character - others may consider the negotiator to be "tough" but must perceive that the negotiator's word will be kept. 19

23 The following are considered to be strong general guidelines to keep in mind when you are involved in negotiation: Everything is negotiable before the sale. Never become emotionally involved. Take your time. Resist the perks. Always control the process Never negotiate by yourself. Put everything in writing. 20

24 In most cases, being well prepared for negotiating can be as important as the time actually spent in negotiation. Following are some key issues to help prepare for effective negotiations: Have a well-documented, good-to-excellent credit rating with all major credit rating services. This documents your company's capacity and willingness to pay its bills in a timely manner, showing the suppliers they have minimum risk of non-payment. Credit rating is a very powerful negotiating tool. Yet many companies have belowaverage credit ratings and therefore receive fewer price discounts. Equipment managers should request copies of all third-party-produced credit reports. The accounting, purchasing and accounts payable departments should maximize the company's credit ratings with all credit reporting agencies. 21

25 The Six C's of credit define the company s credit worthiness. All equipment managers should be fully familiar with the Six C's and their definitions. Character is the integrity and responsible nature of the owners and officers. Collateral is something of value pledged by the borrower as security for the repayment of debt to lenders and suppliers. Capacity is the borrower s general financial health. Cash flow is the funds which have become available from earnings in the operation of the business and can then be used to repay current debt. Conditions are the general economic health of the industry and geography where the borrower sells core business products and services. Common sense is the last C of credit. Does it make sense to extend credit based on an analytical evaluation of the facts? 22

26 The Six C's of credit define the company s credit worthiness. All equipment managers should be fully familiar with the Six C's and their definitions. Character is the integrity and responsible nature of the owners and officers. Collateral is something of value pledged by the borrower as security for the repayment of debt to lenders and suppliers. Capacity is the borrower s general financial health. Cash flow is the funds which have become available from earnings in the operation of the business and can then be used to repay current debt. Conditions are the general economic health of the industry and geography where the borrower sells core business products and services. Common sense is the last C of credit. Does it make sense to extend credit based on an analytical evaluation of the facts? 23

27 Know your business' annual purchasing volume by commodity and be prepared to provide it to suppliers although the professional salesman will know this information. This demonstrates the company's volume and potential profit opportunities to suppliers. Ensure that three to five low-cost/high-quality suppliers are available to bid. Each supplier recognizes that no one vendor has monopoly control and therefore is motivated to improve prices and non-price offers. These suppliers should be identified through the Needs Assessment process. Establish a strong maintenance reputation with preferred suppliers. This documentation gives suppliers confidence to offer warranties, performance guarantees, higher residuals, reimburse warranty claims, make policy adjustments, etc. 24

28 Have well documented cost information regarding your shop operation to determine how it compares to the suppliers' rates. The suppliers' No. 1 competitor is the Fleet Shop, and its ability to service and maintain their existing units. It is important to document in-house costs that are less than supplier's costs. Suppliers understand their market, labor rate, labor availability, etc. The equipment/fleet manager must be knowledgeable as well. Ensure that suppliers know that the fleet and shop are managed using highperformance fleet and shop management models. Document the company s volume and profit opportunities to specific asset and labor oriented suppliers by commodity. Utilize well written company-supplier contracts. These contracts should be used to legally document suppliers' contracted items to be provided. 25

29 Know your subject as well or better than your supplier. Each negotiator must know their strengths and weaknesses. Have a reputation for ethical and fair dealings when conducting negotiations. Remember there is no such thing as business ethics, only ethics. Treat others as you would like to be treated. The equipment manager controls purse strings, awards bids to suppliers and authorizes payment of supplier invoices. 26

30 Use well-written bid formats as the basis for all negotiations. Bid summaries of each supplier's bid are applied to improve price and non-price offers during negotiations. 27

31 The greater the number of lower-price with high-quality suppliers a company has on its team, the greater the probability that company will be a low-cost producer in core business products and services. Lowest-cost producers have the highest probability of surviving price wars, winning bids and maximizing profits. Successful negotiators maximize the number of lower-cost with high-quality suppliers. The four basic types of suppliers available are: High price with low quality - the worst case scenario. Low price with low quality - at least you get what you pay for. High price with high quality - can you afford it? The highest quality demands a higher price. Low price with high quality - the optimum supplier! Low price in this scenario bares careful scrutiny. Sometimes there is only the appearance of high quality. 28

32 The optimum supplier is found in No. 4. The optimum supplier offers lower prices with high-quality vehicles, equipment, parts and service support. Successful negotiators move Quadrant 3 suppliers, high-price with high-quality, usually authorized dealers, into Quadrant 4, lower-price with higher-quality. Moving Quadrant 3 suppliers into Quadrant 4 maximizes the number of suppliers offering lower-cost with higher-quality products and services. Remember, the greater the number of lower-cost with higher-quality sellers, the greater the buyer's position to negotiate price and non-price concessions. Likewise, the fewer the number of lowercost with higher-quality sellers, the weaker the buyer's position to negotiate price and non-price concessions. 29

33 If the company's shop is the "Rodney Dangerfield" of maintenance (i.e., has no respect), then you have less negotiating power with suppliers. If the company's shop has a world-class maintenance reputation with suppliers, then equipment managers have increased negotiating power to improve cost and risk. Owning cost is improved by increasing resale prices and improving funding costs via higher residual value assumptions in operating leases. Operating cost is improved by improving non-price offers, including warranties and performance guarantees. 30

34 If the company's shop is the "Rodney Dangerfield" of maintenance (i.e., has no respect), then you have less negotiating power with suppliers. If the company's shop has a world-class maintenance reputation with suppliers, then equipment managers have increased negotiating power to improve cost and risk. Owning cost is improved by increasing resale prices and improving funding costs via higher residual value assumptions in operating leases. Operating cost is improved by improving non-price offers, including warranties and performance guarantees. 31

35 There are a number of benefits of having a good maintenance relationship with your suppliers. 1. Improves negotiating power to maximize warranty coverage on vehicles, equipment, components, parts, repairs, etc. If suppliers believe a fleet is well maintained, then suppliers are more willing to offer warranties. 2. Improves negotiating power to maximize performance guarantees. If suppliers believe a fleet is well maintained, then suppliers are more willing to offer performance guarantees. 3. Improves negotiating power to maximize warranty, performance guarantee and policy reimbursements. If suppliers believe a fleet is well maintained, the suppliers are more willing to cover and reimburse claims. 4. Improves negotiating power to improve funding option costs. Improves rental rates because suppliers recognize rental units will be well maintained. Improves monthly payments on tax-oriented leases because suppliers recognize well maintained assets have higher residual values. 32

36 5. Improves negotiating power to maximize disposal prices. Fleets with excellent maintenance reputations and documented vehicle and equipment maintenance histories can usually negotiate disposal prices which are 10 to 20 percent higher than average auction prices. 6. Improves general negotiating power because suppliers recognize the marketing value of having their products and services associated with well-maintained fleets. 7. Decreases risk exposures to product liability and negligence lawsuits. Effective maintenance programs and well-documented maintenance histories help equipment managers improve liability exposures. Properly maintaining all safety devices that were originally on vehicles, equipment and small tools, reduces the risk of liability law suits from technicians, operators, other employees and third parties. 32

37 There are a number of benefits of having a good maintenance relationship with your suppliers. 1. Improves negotiating power to maximize warranty coverage on vehicles, equipment, components, parts, repairs, etc. If suppliers believe a fleet is well maintained, then suppliers are more willing to offer warranties. 2. Improves negotiating power to maximize performance guarantees. If suppliers believe a fleet is well maintained, then suppliers are more willing to offer performance guarantees. 3. Improves negotiating power to maximize warranty, performance guarantee and policy reimbursements. If suppliers believe a fleet is well maintained, the suppliers are more willing to cover and reimburse claims. 4. Improves negotiating power to improve funding option costs. Improves rental rates because suppliers recognize rental units will be well maintained. Improves monthly payments on tax-oriented leases because suppliers recognize well maintained assets have higher residual values. 33

38 5. Improves negotiating power to maximize disposal prices. Fleets with excellent maintenance reputations and documented vehicle and equipment maintenance histories can usually negotiate disposal prices which are 10 to 20 percent higher than average auction prices. 6. Improves general negotiating power because suppliers recognize the marketing value of having their products and services associated with well-maintained fleets. 7. Decreases risk exposures to product liability and negligence lawsuits. Effective maintenance programs and well-documented maintenance histories help equipment managers improve liability exposures. Properly maintaining all safety devices that were originally on vehicles, equipment and small tools, reduces the risk of liability law suits from technicians, operators, other employees and third parties. 33

39 Detailed written contracts document finalized prices, terms, and conditions negotiated between buyer and seller. In general, the contract's author has power to shift cost and risk to the other party. In a world full of litigation, make sure the contract accurately reflects agreed prices and terms and conditions. Equipment managers can utilize a wide range of contracts to gain access to a wide range of supplier products and services. Two frequently utilized contracts include the purchase order and work order. In general, purchase orders and work orders document one-time-only transactions with suppliers. 34

40 The following is a list of contract options and compensation options which are available to equipment managers to negotiate both one-time-only transactions and annual purchase agreements. 1. One-time-only transactions with suppliers, including purchase orders, work orders, sales orders, etc. 2. Annual supply agreements 3. Few-source agreements 4. Sole-source agreements 5. Partnering agreements 6. Warranty agreements 7. Performance guarantees agreements 8. Fleet management agreements 9. Consignment parts agreements 10. Consignment labor agreements 11. Labor services agreements 12. Onsite store agreements 13. Subcontract-out agreements 14. Total life cycle cost agreements 15. Union contracts between company and trade or craft unions 16. Employer-employee employment agreements 17. Indefinite quantities of products and services at fixed price agreements 35

41 The following list gives examples of Supplier Bid options and Compensation options. Briefly review these to get an idea of the wide range of options that are available. It is important to note that these contract options and compensation options can be mixed and matched to create hybrids. A detailed written contract signed by both buyer and seller assists in keeping the buyer in control of price points and non-price offers. 1. Firm fixed price 2. Target bid price with or without incentives 3. Cost (time and materials) plus fixed fee or percentage with or without incentives 4. Cost per service with or without incentives 5. Cost per vehicle, equipment, etc., with or without incentives 6. Cost per vehicle mile, equipment hour 7. Fixed man-hour cost for infinite labor quantities with or without volume discount incentives 8. Total life cycle cost 9. Performance based fee 10. A + B = C bid price. 11. Design, fund, build, own, manage, operate, maintain, repair, upgrade, and turnover to buyer, provide long-term assistance. 36

42 The following provides a list of information which should be included in every purchase order between the equipment manager and supplier. 1. Purchase order number (for control, identification, and data processing) 2. Date purchase order issued 3. Purchaser s name, address, person to contact, telephone number 4. Date required onsite 5. Item number 6. Quantity of each item 7. Item description 8. Unit price 9. Extended amount (the result of quantity times price) 10. A summary showing the total value of the purchase order, including taxes, fees and other applicable costs 11. Serial number identification on base machine, attachments and up-fit items 12. Explanation of requirements for special paint, attachments, options, accessories, etc. 13. Point of shipment/delivery 14. Shipping method 15. Shipping instructions, name, address, exact location and person to contact The acknowledgment copy of the purchase order signed by the supplier can be an important document if the equipment is not delivered on time or the price changes. 37

43 Apply in-house work orders and signed supplier work orders (i.e., contracts) to increase operational and financial control over inspection, maintenance, repair and compliance activities. The work order is the back bone for controlling shopperformed activities and supplier-performed activities. The signed work order with spending limits keeps negotiating power with equipment, fleet and shop managers. The work order is the financial and operational control mechanism for all shop activities performed in-house or outsourced. The work order in combination with each asset s history folder is the backbone of all inspection, maintenance, repair and compliance activities performed in-house or outsourced. 38

44 For each asset, preventive maintenance levels 1, 2, 3 or A, B, C work order information should include the following information. Most items listed in the previous illustration, Purchase Order Content plus... PM levels 1, 2, 3 or A, B, C performance intervals based on time or usage. Printout of PM levels 1, 2, 3 or A, B, C, checklists of maintenance and compliance activities to be performed. Printout of materials and supplies to be used for each level. Time-to-complete expectations for checklist activities for each level. Minimum technician certification/skill levels required to perform each PM level and compliance checklist. 39

45 Governmental agencies effectively use the open bid process, but legally they must often accept the lowest qualified bidder. Privately owned companies can adopt the open bid process, as well as Round 2 negotiations. The Bid Summary Format provides equipment managers the negotiating power to gain further concessions from sellers. The four-step open bid process using bid formats and Round 2 negotiations looks like this: Buyer initiates planning and preparation Buyer invites three (3) to five (5) lower-cost with high-quality sellers to bid using buyer-authored bid format Buyer initiates Round 2 of negotiations using the bid summary Buyer feedback to suppliers improves overall level of future bids 40

46 There are other concepts that, when applied correctly, can increase the equipment manager's negotiating power. These include: The passage of time Perceived risks Exhibiting generic attitudes Purchasing volume 41

47 In a partnership, bid documents should have an absolute close and award date. The practice of using the passage of time to gain additional concessions from the seller does not develop a buyer-seller relationship based on trust but verify. 42

48 If the negotiation breaks down, which party at the negotiating table has the highest perceived risk of loss? The negotiator with the higher perceived risk of loss is at a negotiating power disadvantage. If the buyer's perceived risk of buying an alternative is greater than the seller's perceived risk of losing the buyer's business, then the seller has more power to control the negotiation process. If the buyer's perceived risk of buying an alternative is less than the seller's perceived risk of losing the buyer's business, then the buyer has more power to control the negotiation process. 43

49 The greater the number of quality alternatives the buyer has developed, the lower the buyer's risk of purchasing alternatives. Many quality alternatives give buyers negotiation power while few alternatives give sellers negotiation power. A buyer has power when sellers perceive the buyer has power. If buyers act like they have power and can document that power (i.e., credit rating, purchasing volume, multiple suppliers, etc.), then and only then will they have power over sellers. Buyers who merchandise and flaunt their creditworthiness and purchasing power with multiple sellers can favorably influence seller perceptions of that buyer's power. 44

50 Buyers should be aware of the sellers' perceived risks of losing the buyer's business. Four seller perceived risks associated with losing a new equipment purchase are listed below. Risk of losing the initial profit from sale Risk of losing future parts and service revenues: over a five to seven year period, a piece of equipment will consume over 50% of the selling price in parts and services depending on the usage of the machine Risk of losing share of market percentage points: manufacturers measure dealer performance based on market share. Many dealers fear cancellation from manufacturers due to below-average market share Risk of losing the buyer's future business. Sellers fear the possibility that once a buyer gains experience with an alternative, the buyer will prefer that alternative in the future. 45

51 The buyer s perceived risk advantage is primarily due to the availability of many quality sellers aggressively competing for the buyer s business. The financial impact of a seller losing a new equipment purchase is computed in the following illustration. This is the financial impact a seller experiences if they lose the sale of a $100,000 piece of equipment. First is the initial lost profit = 10% x $100,000 = $10,000 The seller then loses the five to seven years parts profit = 25% x $50,000 = $12,500 And the seller loses the five to seven years service profit = 15% x $30,000 = $4,500 Overall, if they lose the sale, the seller faces a total loss amounting to $27,

52 How do buyers demonstrate that their perceived risk of purchasing an alternative is lower than the seller's perceived risk of losing the buyer's business? In the short term, buyers who exhibit generic attitudes, that is, the top three to five sellers are interchangeable, will demonstrate lower perceived risk. In the longer term, buyers who exhibit generic actions, that is, the spreading of purchases among three to five sellers, demonstrate lower perceived risk through actions, not words. Buyers who standardize on one dealer do not necessarily enter every negotiation with the power of perceived risk on the seller's side of the negotiating table. OEMs, dealers and suppliers understand the trust exhibited in this kind of relationship and do not want to be caught gouging prices. In today s economic environment a partner relationship might be a more advantageous way to go. A company can have more than one partner. 47

53 Most equipment managers believe purchase volume is their most powerful negotiating tool. A company's purchasing volume has value to suppliers only if the company pays its bills in a prompt manner. Therefore, credit rating, along with the annual purchase volume, is the most powerful negotiating tool. The company's negotiating power can be maximized by computing annual unit and dollar volume opportunity available to suppliers by commodity. Suppliers are motivated by the level of unit and dollar volumes of each commodity the company purchases that matches suppliers' products and services offered. Therefore, the company's purchasing volumes should be computed with an eye to the targeted supplier universe that will be invited to bid and target suppliers' products and services. In order for equipment managers to compute their annual expenditures in each commodity, an accurate, financial accounting system must be in place. Assigning commodity codes to each line item on each invoice is a prerequisite to easily computing annual purchasing volumes by commodity. 48

54 The following illustration suggests the minimum level of commodity volume breakouts that should be computed to document and prove the company's purchasing volumes. Having data on the total units purchases and total dollars spent on purchases for each of these commodities will be valuable in negotiations. 49

55 If the company does not utilize a world-class fleet and shop management software system and commodity codes on all invoices, then detailed commodity volume breakouts are not practical. The following list of documents can be utilized by equipment managers to prove purchasing volume by commodity even though the professional salesman will know some of this information. Computer generated summary of purchases or seller invoices in units and dollars for each commodity - one to three year volume history is optimum. Stacks of paid supplier invoices by commodity - one to three year volume history is optimum. Current year's capital budget by commodity (i.e., 10 pickups, one 50 ton crane, one 100 hp crawler dozer, etc.). One to three year projected capital budgets by commodity is optimum. Current year's operating budget by commodity (i.e., tires, less than 100 hp equipment rentals, fuel, oil, etc.). One to three year projected operating budgets by commodity are optimum. Computer generated fleet master list. List of core business work in progress, with approximate job durations and locations. List of core business work awarded but not started, with approximate job durations and locations. 50

56 All areas of equipment management need to be reviewed for cost savings through negotiations. For purposes of this discussion we will examine the three phases in the life cycle of vehicles and equipment: Acquisition phase Operation phase Disposition phase 51

57 Equipment managers must minimize fleet owning and operating costs by integrating the management of the three vehicle and equipment phases. Improving equipment costs should be based on taking specific pre-emptive actions, not by reacting to problems after the fact. Equipment managers can use information learned in this section to develop a fleet and shop cost reduction action plan. If equipment managers implement well conceived supplier negotiation strategies, thousands of dollars of savings per year and significant increases in customer service levels can result. 52

58 Each of the three phases of equipment ownership has unique areas of negotiation. We will begin by looking at areas of negotiation during the Acquisition phase. Equipment purchases and leases must be structured correctly. Equipment managers with demonstrated skills to negotiate optimum purchase and lease structures are more valuable in employment markets. Each vehicle and equipment purchase and lease negotiated should include the following 10 negotiating points. Manufacturer/model/attachments/options Acquisition price Warranties Performance guarantees Rental terms Interest rate/apr Funding option Risk exposure Flexibility Total life cycle cost bid 53

59 Each of the three phases of equipment ownership has unique areas of negotiation. We will begin by looking at areas of negotiation during the Acquisition phase. Equipment purchases and leases must be structured correctly. Equipment managers with demonstrated skills to negotiate optimum purchase and lease structures are more valuable in employment markets. Each vehicle and equipment purchase and lease negotiated should include the following 10 negotiating points. Manufacturer/model/attachments/options Acquisition price Warranties Performance guarantees Rental terms Interest rate/apr Funding option Risk exposure Flexibility Total life cycle cost bid 54

60 During the operation phase of equipment ownership, world-class equipment managers minimize major repair costs and maximize warranty coverage by negotiating the following: Types of components and parts utilized (ex: new genuine, new will-fit, used, rebuilt, remanufactured) Discount on parts Discount on labor Warranty on parts Warranty on labor Guaranteed turnaround time Guaranteed price Removal and installation charges Freight-in and freight-back charges Loaner charges Flexible payback terms and interest rate Select supplier personnel performing activities, such as selecting the technician to perform repairs 55

61 Component and part-sourcing skills are critical to minimizing the total cost of fleet and shop maintenance and repair activities. Unlike vehicle markets, manufacturers and authorized dealers of construction and mine equipment have effectively hidden the name of the real manufacturer of components and parts. Frequently, it is difficult for equipment managers to find high-quality, lower-cost components and parts for these asset categories. Parts' sourcing is critical to achieving lowest-cost per mile and hour for vehicles and equipment. Parts can cost 20 to 50 percent of asset original acquisition price over construction and mine equipment operating life expectancies. Purchasing genuine parts in genuine boxes from the asset manufacturer and authorized dealer is the easiest but highest-cost parts sourcing strategy. Purchasing "same as" and "equal to" parts from alternative sources at 10 percent to 30 percent savings is feasible with some effort placed on parts sourcing activities. But, be careful of voiding manufacturer s warranty with will fit parts. 56

62 We will now look at three basic types of components and parts price discounts to be negotiated. Negotiating Parts Price Discounts could include: One-time-only (OTO) discounts on each parts purchase Standard discounts on each parts purchase Annual volume discounts on net parts purchases 57

63 Some important issues relating to negotiating parts non-price points include: Component exchange Consignments Freight costs Guaranteed parts availability Loaners during downtime caused by part sourcing waiting time Parts warranties Payback terms Prepackaged preventive maintenance kits, prepackaged rebuild kits Restocking charges Return policies 58

64 Total life cycle price is arguably the optimum price point for equipment managers to compare when selecting vehicles and equipment. Life cycle pricing recognizes that initial acquisition price is not an accurate criterion for evaluating the true costs of owning, operating and disposing of vehicles and equipment. In fact, initial price can be a small percentage of construction equipment owning, operating and disposing cost. Over a three- to five-year period, excessive operating costs and downtime combined with below-average resale price will rapidly surpass any initial price savings. The total life cycle price bid enables equipment managers to evaluate the total price of each asset. Before making the final selection decision, managers have all owning, operating and disposing costs computed and perhaps guaranteed in writing. If owning, operating and disposing costs exceed the guaranteed maximum, then suppliers including manufacturers, dealers, full-service lessors, etc., pay the excess cost. If owning, operating and disposing costs are under the guaranteed price maximum, then the company pays less. 59

65 The following illustration presents the total life cycle price bid format. Begin with the acquisition price. Subtract any trade-in total Add interest charges and fees Subtract any guaranteed buyback price This gives the maximum total owning cost for the asset Next add the guaranteed maximum operating cost The result is the maximum total life cycle price for the asset 60

66 If a minimum production performance guarantee is included, then a guaranteed minimum profit can be computed using the following example Begin with the minimum production guarantee Multiply times the number of working hours Multiple that times the revenue per cubic yard This is the guaranteed minimum total revenue for the asset Now subtract the guaranteed maximum total life cycle price And the result is the guaranteed minimum profit for the asset 61

67 A total life cycle price guarantee combined with a minimum production performance guarantee is one of the ultimate asset risk management tools available to equipment managers because the combination implies that the company will make a guaranteed minimum profit before taxes on the asset investment. Manufacturers, dealers, fullservice lessors, etc., may elect not to offer total life cycle price guarantees. However, some suppliers effectively use the total cycle price concept to justify higher initial prices. 62

68 Equipment managers applying the total life cycle price vehicle and equipment selection process receive five major benefits. Total life cycle price performance guarantees offer equipment managers an excellent tool for evaluating manufacturers, dealers, resellers and models using the following criteria. Let s briefly look at those five benefits. Lowest initial price method of asset selection exposes the company to the risk of purchasing low-quality assets with above-average operating costs and below-average resale price. Life cycle pricing puts total owning, operating and disposal costs into dollars which can be easily compared. Selecting the lowest total life cycle bid is a logical extension of buying on lowest initial price. The equipment manager's selection process is focused on the lowest total price rather than the lowest initial price. Since asset owning, operating and disposing costs are computed in dollars, selecting the optimum value is relatively easy. Total life cycle price guarantees are one of the bottom-line evaluations of a manufacturer, dealer, full-service lessor, etc., demonstrating confidence in the following: quality of their products, parts and service support capabilities and resale price performances. 63

69 Total life cycle price guarantees test manufacturer, dealer and reseller financial strength. Usually, financially weak bidders cannot afford to offer this type of performance guarantee. Total life cycle price guarantees offer equipment managers the flexibility to select from a menu of warranties, performance guarantees and funding options to achieve an overall operating risk level. Managers can mix and match menus of alternatives to obtain the optimum total life cycle price guarantee which meets their specific operational and financial risk management objectives. Total life cycle price guarantees usually offer equipment managers tighter control over their vehicle and equipment budgets. Guesswork is removed from budgeting, and maximum owning, operating and disposing costs are guaranteed. 64

70 Total life cycle price guarantees may offer equipment managers the opportunity to downsize maintenance department overhead costs. Increasing complexity of vehicles and equipment is making it impractical for fleets and shops to train mechanics and buy expensive shop manuals and special tools. Total life cycle price provides equipment managers the flexibility to let the dealer perform preventive maintenance, minor repairs and major repairs at a predetermined cost. Uptime/availability guarantees may enable equipment managers to reduce the number of standby vehicles and equipment in their fleets. Total life cycle price guarantees are equipment managers' ultimate asset risk management tool. Total owning and disposing costs are fixed and guaranteed. Total operating costs are fixed and guaranteed. Minimum production levels are fixed and guaranteed. Minimum profit levels are implied. All guarantees are backed by performance bonds. 65

71 Other possible uses of bid formats during the Operation Phase include the ability to: Reduce major repair costs And to compute major negotiating points of a new equipment and vehicle purchase. 66

72 Equipment managers must determine the best possible time to dispose of assets. The three basic considerations are: Age, Mileage/Hours, and Life to Date Maintenance and Repair costs. For example, the replacement criteria for a half ton pickup truck might be 10 years, 100,000 miles and repairs totaling 50 percent of the purchase price. Replacement criteria should be established for each class of vehicle or type of equipment. Negotiations at the disposal or replacement stage might include: Method of Disposal - direct sale, competitive dealer only auction, public auction, or closed bid Auctioneer fee - usually based on a percentage of the sale price Other methods usually negotiated as part of the purchase (guaranteed buy back etc.) 67

73 Negotiating is not for the faint of heart. You must have clear cut goals and objectives from the start. Without a plan, you will fail miserably. As we end this course on Procurement and Acquisition, there are two very important points to remember: Everything is negotiable before the contract is signed. Never take no for an answer from someone who can't give you a yes. 68

74 This is the end of this course for level one training on Procurement and Acquisition. 69