Josh Peacher, Procurement Practice, Archstone Consulting
Procurement groups are always trying to identify the next category savings opportunity. However, resources are often limited so initiatives must be strategically focused. The goal of the exercise then becomes to maximize return with minimal effort…( i.e. identify the low hanging fruit). This sounds basic enough, but it can be very challenging and many organizations struggle to achieve the results they are looking for. From my experience, the most common pitfall for procurement groups is a lack of structure in their approach. Too often, the decision is myopic and driven by a single variable such as overall spend within a category. By no means should this variable be ignored, but taking a more strategic approach creates greater results both now and in the future.
Let's start to break this problem down. As mentioned before, the issue is binary: to maximize savings while efficiently managing the required effort and resources. Therefore, there are two main components that require evaluation: 1) Overall savings opportunity; 2) Ease of category implementation. Both factors need to be evaluated. Otherwise, companies end up in a situation where they are chasing high potential categories but aren't making headwind because too many factors are working against them. Or the inverse, a small savings opportunity is being pursued with substantial opportunity costs from not deploying resources to a higher potential category. As you start to evaluate these two components, it helps to break each into their smaller, more manageable sub-components.
Savings Opportunity Factors
As mentioned, when evaluating a category for savings opportunities, more than just the overall spend of the category should be reviewed. Here are the other critical components that sourcing teams should consider:
- Aggregation of Spend - To what degree has buying been aggregated across the organization? If the base of suppliers is fragmented, there could be more opportunity to consolidate and leverage spend for better pricing. A common metric to check is percentage of suppliers that make up 80% of category spend. As a rule of thumb, if this is greater than 8%, there is likely opportunity available.
- Supply Market Trends - What significant changes have occurred in the market that could affect the balance of negotiation? If the market has been under sustained cost pressure due to macro factors such as commodity price increases, it may be more difficult to capture savings.
- Quality of Previous Sourcing Efforts - How rigorous was the previous sourcing process? Was it three bids and a cloud of dust or was a thorough step-by-step strategic sourcing process used? The level of rigor is highly correlated with the level of realized savings in most situations.
- Category Sourcing History - How long has it been since the category was sourced? If it was last year, there is probably less opportunity than if it was last sourced five years ago.
- Use of Spend Management Techniques - Have spend management techniques been fully leveraged? If techniques such as category management and demand management are not being fully utilized, there is likely a higher opportunity for future savings in the category.
- Supply Market Competitiveness - How competitive is the supply market for the category in question? The greater the degree of competitiveness amongst suppliers, the greater the leverage and potential savings opportunity for the buyer.
Ease of Implementation Factors
When evaluating a category for ease of implementation, a more qualitative approach must be employed. Below are the critical components that sourcing teams should consider:
- Degree of Control/Visibility - How much of the category spend is controlled centrally? How much of the spend is truly visible? The degree of visibility and control of the spend for a category is an extremely important factor in understanding whether negotiated savings will actually come to fruition or will even be measurable.
- Supplier Affinity - How attached are buyers to a particular supplier(s)? Employees can become dedicated to certain suppliers and changing behavior becomes extremely difficult at times. I once heard a client describe MRO as "My Relatives Organization" due to the high degree of maverick spend associated with non-preferred vendors.
- Resource Requirements - What level of resources will be required for implementation? If significant resources are required, it may make sense to position the category when other sourcing initiatives are not underway and additional resources are available.
- Change Management - What degree of change management will be required to implement category savings initiatives? The post-implementation impact on the business can vary by category and organization and can have lasting effects on potential savings opportunities if not effectively planned for.
I'm not saying that categories should not be addressed just because they may be difficult to implement. However, understanding what the opportunity is and the level of commitment required to achieve it can help an organization prioritize initiatives and design a phased approach that makes sense for their specific situation. At the end of the day, it's all about knowing where the fruit is and understanding whether it's the right time to climb up and pick it!
Josh has over 5 years of consulting and industry experience specializing in sourcing and supply chain optimization. Key client experiences include: Manufacturing Supply Chain Transformation, Global Business Services Roadmap and Implementation, Strategic Sourcing Assessment and Transformations, Packaging Development Process Improvement, Strategic Business Process Reengineering, and Savings Planning and Tracking Program Design and Implementation.