BuyTrain News

April 2012

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Personal Safety Thought:

Now that spring is here and we are working outside - time to remember one of the first tenets of safety - teamwork. Working together or separately - doesn't matter. What matters is that you share your safety thoughts and concerns. It could be something as simple as " I bought you a pair of tinted  safety glasses to wear while mowing the lawn. "  It could be as overt as, "I want to hold the ladder next time you prune the trees."  In either case, the message, "I was thinking about your safety" is clear.

 


Education

Cost and Price Principles:

In April I'll be presenting this one-day seminar for our colleagues in San Fernando Valley.  

Buyers can improve their contracts by analyzing seller prices and cost elements. Understanding the relationship of cost to pricing can help when developing negotiation tactics and drafting more complete (and more cost effective) agreements.

Consider these possibilities:

  1. 1- A supplier’s cost for a product or service is almost always less than the selling price.
    * Thus an item purchased is more valuable to the buyer – than it is to the seller.
  2. The supplier’s cost almost always includes an indirect cost component which is added to the direct cost to when selling a product or service.
    * Thus the value of an item to a seller is less before it’s sold than it is when it is sold. (When a contractor “throws it away” they don’t write off the same cost as they would if they priced it and sold it to you).
  3. Indirect costs often relate to intangible elements that could enhance the transaction and if not itemized in the contract, can be lost-value to the buyer.
  4. *  Thus installation, regular maintenance checkups, service manuals, training, etc. are more expensive to the buyer as a separate items, than if they are included in the initial selling price and contract.
  5. Most contracts generally do not include all of the possible ways a seller can be of value to the buyer. Using aggressive marketing strategies sellers tout creative reasons a buyer should purchase from them instead of a competitor. Sellers offer many creative extras to differentiate themselves from their competitors.
    * Unfortunately these extra "values" are rarely included in the price list, offered as part of a sale or written in to our contracts.
  6. A seller can afford to give you one item at (or below) his cost if he makes up the difference or profit by selling other items. A baker can give away the 13th donut in a baker's dozen because he covers his cost (and probably makes a profit) on the other 12. The baker also gains a lot of intangible benefits.
  7. * Thus the 13th donut can be worth more to the buyer than it is to the baker.

When negotiating a purchase order or contract, the more we understand about the seller’s proposal the better the negotiated outcome can be. That is, by looking at the various cost elements involved in establishing the seller’s price, we can find opportunities to be creative in negotiating cost savings.

With direct cost elements, it is usually obvious how to improve the bottom line and lower the selling price. Changing the raw material, shipping terms, components, labor mix, schedule, etc. are common ways to improve the pricing structure. However, even when considering indirect costs, there are some negotiating strategies that can improve the negotiating outcome.

In our April program we’ll explore the concept of using cost information to negotiate a better contracts. We’ll talk about the kinds of cost & pricing information that can be useful to Buyers and explore some negotiating strategies based on that information.

Negotiating a better contract isn’t always about saving money. A more valuable, cost-effective and complete contract is also a much better contract.

Read the seminar outline:  Principles of Price and Cost Analysis  , Learning Curves

Sox Redux

This ISM article is a very good update and review of the current situation regarding SOX compliance and how it affects Supply Chain managers. http://www.ism.ws/pubs/ISMMag/ismarticle.cfm?ItemNumber=22213  [sorry the article is in the members only section of the web site]

There article raised several SOX-related issues I think are important:

1- The article points out that record of supply chain activities will need to be kept in order to demonstrate compliance. This comment should lead managers to establishing and implementing a comprehensive record identification and management plan. We should not panic and make the assumption that “all records should be kept forever” or even worse that contract records need only be kept long enough to support an annual SOX audit.

There are valid considerations for determining record retention requirements as well as record disposal processes. Many lawyers involved with the electronic discovery process will tell you that having a good records management process is the first line of defense in an audit or lawsuit. A good place for managers to start gathering information is with the NARA Records Management Guidelines. http://www.archives.gov/records-mgmt/policy/guidance-regulations.html 

2- The article focuses on SOX as it applies to public companies and might lead supply chain managers in the government sector to disregard the information. In fact, while provisions of the SOX act may not apply, the general principles of management accountability have been promulgated throughout the government by the GAO, OMB and FASAB. This OMB memo of December 21, 2004 does a good job of summing up the emphasis that was being added in response to SOX to OMB circular A-123. www.whitehouse.gov/omb/circulars/a123/a123_rev.pdf  Needless to say, countless regulations and policy changes for government agencies have followed the same path since then.

Read more about why I think Supply Chain managers should care about SOX. Link Here...

The article also raised several points I wanted to understand better. I think these issues could have an impact on negotiating complex and cost-type contracts:

What are off balance sheet transactions? [Does this company really own the equipment they are leasing us?}
http://www.investopedia.com/articles/stocks/04/102004.asp#axzz1nK6T7gum

Why would we be concerned about proposals that include uncompensated overtime? [Is the estimated labor realistic?]  
http://www.watkinsmeegan.com/expertise/resourcesandtools/Pages/UncompensatedOvertime.aspx 

Exempt vs. nonexempt employees. [Could a DOL audit stop our contract?]:
http://www.btlg.us/News_and_Press/articles/FLSA-overtime%20for%20exempt.html

 http://library.findlaw.com/1999/Jul/1/127569.html

"In our view, contractors performing labor-hour, time-and-material, or cost reimbursable contracts should avoid any timekeeping system that fails to accurately report the total time worked. Such a system under bills clients for work performed and thereby affects a company’s bottom line. Moreover, any timekeeping system that by its very design underreports actual hours worked invites labor mischarging and false claim allegations."

What do government auditors think about uncompensated overtime issues?
http://www.govcontractassoc.com/gca-report/gca-report-2002/basics-of-uncompensated-overtime-dcaa-guidance.html

National Contract management Association (NCMA) article
www.ncmahq.org/files/Articles/CM_Feb08_p26.pdf 

If we consider that how contractors account, estimate,  propose and track costs, directly affect contract pricing and performance, then this is just one of many cost-related issues important to Supply Chain managers.

What Does FOB Mean In This Contract?

A few weeks ago I was asked about the proposed amendment to the UCC and specifically about the change to articles about freight terms.

What do you know about the UCC changing Article 2 to remove FOB/FAS terms and go strictly with INCOTERMS? If we use FOB terms now do they still offer risk protection?  I think from my Google searches it appears they've been working on that since about 2004, but can't tell what the current status is.

Here is my answer. It's my opinion…. don’t take it to court.

Last time I looked, the amendment to drop the freight-term articles from the UCC had only been passed by 1 or 2 states. Thus, for most of us,  the UCC remains unchanged and still includes the sections like 2-319 which address FOB point.

The impetus for the proposed amendment was pre-empted when the International Convention adopted a code which essentially said that the UN international rules apply in transactions between adopting countries unless they specifically write them out of the contract.

That is, under the international code – unless you specifically say otherwise – the INCOTERMS will apply. This eliminated the push to get the UCC updated – it became a moot point.

 Thus: in a contract to purchase products from Canada, the definition of FOB point is NOT the UCC definition we are used to - but instead is the definition as described in the INCOTERMS.

Take a look at my conference notes on the subject here:
http://www.mltweb.com/tools/articles/PNW_conference.htm

and in this report here:
http://www.mltweb.com/tools/articles/92nd_conference.pdf 

Read more about the UNCISG in this ISM magazine article (United Nation Convention for International Sale of Goods) http://www.ism.ws/pubs/ISMMag/ismarticle.cfm?ItemNumber=12499  [sorry members only section of the ISM site]

Here is a cute diagram of the INCOTERMS
http://www.export911.com/e911/export/incoterm.htm  and  http://www.export911.com/e911/export/comTerm.htm

Bottom line – since US is signatory to the international law – INCOTERMS apply to your contracts outside the US with any other signatory country unless you and the contractor have specifically agree otherwise in the contract. Thus - if you have to ask the question - your contract probably is not structured to prevent the INCOTERMS from applying..

Termination & Breach Battles

We have had several discussions about terminations lately. Here are a couple of items to keep in mind when you are getting ready to terminate or cancel a contract:

  1. A cancellation or termination for convenience (TforC) often turns in to a major argument about cost. All too frequently the eventual settlement becomes more of a problem and nearly as costly as finishing the original contract. Of course, contractors will be very creative in claiming cost impacts and lost profits.

  2. If we are terminating for breach, contractors will be very creative in trying to find evidence in the administrative record (emails, correspondence, BTR direction, etc.) that the TforD is only a cover-up by the Buyer who would otherwise have to pay cancellation costs.  Mitigate contractor charges by getting as much of a breakdown of the proposed-project price as you can with the RFP .

  3. Contractors will claim everything - which could even include items or service that you thought had already been paid.  Be prepared to prove in writing what every penny paid for. Keep track of progress related to payments. 

Read more in this article.

Put a lock on it.

Words of wisdom I received from a lawyer:

When responding to a question or interrogatory, take your best shot first. Make it a complete, ‘slam-dunk’ answer. Don’t leave room for argument or rebuttal.

Why?

This isn’t bridge, saving a trump card until the last play could backfire. Starting with a weak answer invites rebuttal and argument. Starting with an overwhelming answer may preclude additional discussion. At the very least, starting with only a partial or incomplete answer will require having to answer the same question a second time to provide additional data neglected the first time.

If we are going to lose, (if the argument or the evidence is not good enough to win) we want to know that before we get to court and not be surprised. If I am going to lose the argument, I want to negotiate a settlement before I end up in court.

Email Quagmire

In the last newsletter we talked about avoiding legal problems with emails. February Newsletter Here are some more reasons why everyone in our business should understand the ramifications and risks associated with email messages (and electronic documents in general

Here is one case where emails were allowed to be erased – and the court ruled against them.
http://www.ediscoverylaw.com/2007/08/articles/case-summaries/rule-37f-safe-harbor-provision-requires-a-routine-system-in-place-and-some-affirmative-action-by-party-to-prevent-system-from-destroying-or-altering-information/ 

Here is a lawyer blog about providing documents. Interesting discussion about multiple attachments and linked documents which may or may not be found to b relevant by the court.
http://www.law.com/jsp/article.jsp?id=1202541610355&slreturn=1 

This is a great example:  Former Auditors filed a Fair Labor case against the parent audit company (KPMG). Judge ruled that KPMG had to preserve 2500 hard drives as evidence in the case until the drives could be search and determined to be free of incriminating evidence….[It’s nice to see some of our favorite people occupied with something other than auditing us.]
http://www.ediscoverylaw.com/2012/02/articles/case-summaries/on-appeal-kpmg-ordered-to-continue-preservation-of-more-than-2500-hard-drives/

That reminds me. Are you prepared for an investigator to walk in to the office and remove all of your computers? What record backups are you keeping and where are they?

Personal Development

Professionals develop their own professional development programs! No one would want to use a doctor or a tax attorney who hasn't kept up with the latest advancements. If you doctor said " I don't keep up with current medicines because my manager won't pay for it," would you stop using that doctor?  Is our profession any different? Are we prima donnas who only learn what our managers require and pay for? Are we willing to let someone else will take responsibility for our professional development.  Read more....  Here is sample strategy .

Do You Know Where Your Supply Chain Leads?

I'm just asking... Interesting news today;  Apple Computer apparently decided to ask that same question. They traced their supply chain and ended up demanding some changes.  Here are two related articles that might cause some people to lose some sleep.

London 2012 organizers to 'get tough' on supply chain
 Procurement Leaders

Producers of merchandise for the London 2012 Olympic games are set to introduce new measures to protect workers after an investigation found evidence of exploitation in Chinese factories. The investigation found evidence of child labor, excessive hours, poverty pay, dangerous working conditions and no trade unions at factories producing badges and the Games' mascots Wenlock and Mandeville.  MORE

US busts 29 for $325 million in Chinese knockoffs
Bloomberg Share

U.S. authorities charged 29 people with smuggling $325 million in counterfeit consumer goods from China, including phony Nike sneakers and Coach handbags, through a New Jersey port. The bust was one of the largest counterfeiting probes in U.S. history, and it involved smuggling cigarettes, handbags and sneakers through the Port Newark-Elizabeth Marine Terminal as U.S. agents secretly watched and listened, U.S. Attorney Paul Fishman said. Agents infiltrated two overlapping criminal rings and lured them to use a front company run by the government. MORE

So what do you think a Contracting Officer's due diligence responsibilities entail, and where do they stop?

Seven Steps to Performance Based Acquisition

Guide posted on the government acquisition web portal. Describes the major steps in developing and using performance based criteria in government acquisition. Includes information and description of each step as well as links to more information and other available training opportunities. Some of these principles could be helpful in writing a contract in a way that incentivizes the contractor to perform. What a great idea!

https://www.acquisition.gov/comp/seven_steps/introduction.html

PDF Executive summary: https://www.acquisition.gov/comp/seven_steps/library/SevenSteps_execversion.pdf 
 

What’s in it for me? Here is an example:

Step 5: Decide how to measure performance. Includes a discussion about typical tasks and best practices when developing an approach to performance measurement in a contract. Among other recommendations there is a separate discussion about using “profit” as a motivator. Excerpt: “Put more simply:  Set up the acquisition so that a contractor and the government can benefit from economies, efficiencies, and innovations delivered in contract performance.”

META DATA - need to know.

A recent article in Internet Law News discussed the legal implications of inadvertently transmitting document metadata in a legal case or during legal discovery. It’s a good article and worth reading. What is metadata? Think of it like the cover of a book. Metadata is not the story, it’s the information on the outside about the document inside. Information, which in some cases, could be something you’d rather not share in court [like the stamp on the inside cover that says Property of Marina High School Library].

Everyone processing contract documents should understand metadata, how it gets attached to documents and how to control it. I’ll add a few suggestions to my next newsletter. I also have several older articles in previous newsletters on the site about hidden data, legal discovery and metadata in documents.  Here is a presentation where we discussed meta data

My Resume... Note to Self:

Try reading a few professional newsletters as a distraction and not thinking about it as work. think about describing why they are interesting to your relatives at Thanksgiving. At least the thought will add some humor to the reading. Alternatively, change hats and read professional articles as though you were going to set company policy. Think about how each article might cause an impact to procedures or processes.  Then in a job interview, the new insight could prove to be the differentiator between you and the competition.

ISM News

ISM Web Site - Rosetta stone

The ISM web site is full of information and  resources for supply chain managers. Unfortunately, many people find it hard to locate information on the ISM web site ( trust me - it's not because ISM hasn't tried to keep it organized - it's hard to find specific items, because here is so much there. A great affiliate program is a live tour of the web site showing people how to find helpful professional and career information. Here is an updated handout with 4 pages of links to help you in your search.

Mining the ISM Web Site for information - hyperlinks and navigation to just some ISM resources. link here

Invitation to Join

Are you already a member? If not, you are invited to join our local affiliate.  Invitation to Join

 If you are outside our area, there are over 160 other affiliates in the U.S. and several foreign countries.  Check out this list of affiliate web sites: http://www.ism.ws/about/AffiliateWebsitesList.cfm?navItemNumber=5454 

Software Tips

Try this web site for Microsoft help,
http://answers.microsoft.com/en-us

Hotlinks 

Weighted Guidelines

How much profit is reasonable for this contract? The Fed uses various forms to estimate a reasonable profit. You can find them on the web if you know the trick. The Fed. calls this process weighted guidelines"  Here is one, DOE Guide for determining appropriate contractor fee www.energy.gov/sites/prod/files/15.4-2_Weighted_Guidelines_0.pdf  

CCR, ORCA, EPLS moving soon!

Note: Even thought this information primarily affects people who place contracts with government funding - I think all buyers should be familiar with CCR. It's a central database of contractors used by government agencies and government contractors. It's a handy place to check the legal name and detailed information about potential suppliers.

SAM= GSA initiative to combine multiple acquisition-related systems into one portal. To wit:

Initial phase in the implementation process. Acceptance testing due to start in the next few months ETA this year. 2-page overview:
https://acquisition.gov/SAM/SAM%20Flier%20-%20Dec%202011-2pg.pdf

Benefits, one-stop shopping for CCR, ORCA, EPLS information.
https://acquisition.gov/SAM/SAM_Overview_Expanded--February_2012.pdf

Also new electronic interface intended to facilitate data transfer to local systems.
https://acquisition.gov/SAM/SAM-Interfaces-Overview-Feb2012.pdf

Web site:
https://www.acquisition.gov/SAM/sam.html

Where have all the pennies gone?

A really fun place for taxpayers: http://www.usaspending.gov/ 

Career web site run by non profits

http://www.careerxroads.com/news/cxr02/c02_1.asp

Repurposed materials

One of my favorite newsletters. Well worth sharing for the environment!
http://repurposedmaterialsinc.com/

Contract Type Comparison

I was asked to provide a reference for determining contract types.

The type of contract used directly affects the cost risks and performance incentives for both the buyer and seller. As a result, determining the correct contract type is one of the most important tasks that a buyer performs during the acquisition process. It’s a teamwork process with the Buyer in the lead, coordinating with the Technical Representative, based on the work required and completeness of the Scope of Work with analysis of the cost risks, cognizance of the Federal regulations about contract types and contract financing.

The rationale for the contract type and associated controls placed in the contract is a material part of the contract award process and file summary. It’s an auditable issue, particularly if the auditor thinks that we might have overspent the contract because we selected the wrong contract type.

Here are some training materials discussing contract types and the issues to consider when selecting a contract type:

DOE manual about contract types
 

Do you know what a Klien bottle is (hint: think mobius strip)

Thought you’d like to see the web site – one of the funniest I’ve seen in a long time
http://www.kleinbottle.com/  the pictures are good – but there are also some very funny comments in the text on the various sub pages. http://www.kleinbottle.com/Tantalus.html http://www.kleinbottle.com/sliced_klein_bottles.htm

Provide Feedback and suggestions for future newsletters at any time. I'll try and use what I can.

I really do appreciate those of you who take the time to write and comment on this newsletter! As always, you are welcome to use my articles or presentations for educational purposes. Just as long as you are not charging for the materials and credit the source.  

TTFN, 

Mt


Read more articles in the Purchasing Toolbox at http://www.mltweb.com/prof/tools.htm
and in the BuyTrain news article archive at http://www.mltweb.com/tools/buytrain/index.htm

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