Catalog This: How Developing the Right Spend Criteria can Optimize your Catalog Rollout
Categories: Category Management, Guest Post, Sourcing, Spend Management | Tags: Sourcing and Categories, The Hackett Group
Spend Matters welcomes a guest post from Pawan Thakkar of The Hackett Group.
An organization is going through the process of determining how best to improve supplier contract compliance and protect negotiated savings, and it decides that implementing e-catalogs is a key piece of this initiative. While the management of these catalogs and the content contained therein is another issue entirely, the basic premise is to ensure that the usage of these catalogs results in increasing compliance to active contracts and simplifies buying for end users.
Once the decision is made to take this route, the organization then moves to find an appropriate third party to manage the catalog interface and content (if applicable) and conducts the due diligence and necessary changes to ensure that, internally, the organization can handle the impending changes smoothly. After these events take place (the above description is very abridged, as these events can be quite involved and complex based on the maturity of the organization's catalog enablement capabilities), the burning question still remains: What is going to be put into these catalogs?
Prior to answering this question, it is important to consider the potential variations of catalog management that are available. Catalog content can be managed internally. This would entail collecting items and pricing data from a supplier and then managing that data regularly to ensure current validity. Content can also be managed by the supplier itself, and a buyer could access this content via punch-out. Lastly, content can be managed by a third party, which can aggregate multiple suppliers' worth of catalog data and present it to a buyer through a proprietary interface. All of these methods have their own merits, some of which are more or less applicable based on other factors that can be gleaned from applying the appropriate spend criteria.
Now, to address the key question, a comprehensive and defined set of criteria must be used to determine which spend areas (categories) and ultimately suppliers are ideal candidates to consider when rolling out the program. Typically, there are three sets of criteria that are applied to the categories and suppliers being reviewed, and they revolve around the transactional activity of the category, the nature of items contained within the category, and the nature of the suppliers and the overall industry that provides inputs in the category.
The most concrete piece of criteria (but certainly not the most important) is based on transactional activity, as this can be discretely measured. An analysis of an organization's spend data – assuming line level data has the necessary fields (supplier, date, categorization, line item amount, etc.) – can provide a clear picture on where transactions and spend are allocated. This knowledge is critical, as going after categories which have low transaction volume and/or spend would not likely result in commensurate return value for the effort spent on discovery and enablement. Also, this analysis can help narrow the scope of which categories to dive deeper into.
The next set of criteria to apply to the limited scope of categories still in play (based on the transactional analysis) is predicated on the nature of the goods/services that are being purchased. Generally, goods/services that are standard and repeatable, with a reasonable expectation of price stability, are good candidates for catalog consideration. This is why MRO, IT equipment, and office supplies are popular choices for categories to be purchased via catalog (unique situations among different organizations may result in different categories for consideration). On the other hand, custom or one-off purchases – custom-built parts, scoped consulting projects, large capital equipment – and the categories in which they are classified would not be appealing candidates for catalogs.
Despite that suppliers will be the ones who will eventually be enabled onto a catalog, an exploration of the last set of criteria will uncover why it is prudent to follow a top-down approach from the category level. In keeping with the condition of an expectation of price stability, it would be very difficult to catalog items, or suppliers of items, which are highly market-sensitive. This could include any item including, or tied to, precious metals, gems, oil, livestock, etc., as pricing for such volatile commodities is rarely pre-negotiated or fixed. In that same vein, categories that have an abundance of different items that are standard and have price-stability are prime catalog candidates.
Beyond this, suppliers within these categories that can provide multiple “catalog-ready” items are strong candidates, which is where the importance of the top-down approach comes in. Using a category-by-category analysis to understand the disparity and frequency of items purchased within each category will provide more certainty around the best suppliers to enable during the rollout phases of a catalog implementation.
This is also a key consideration when determining the method of catalog management that may be used for these suppliers. Generally, suppliers from which a limited number of different items are purchased, and whose items have characteristics and pricing which do not often change, are good candidates for internal catalog management. The effort to maintain content in this situation is minimal, and would likely outweigh the cost of pushing it to the supplier or a third-party. However, as the variety of items and the activity among them increases, it becomes more difficult to manage content internally, and the other options become more appealing.
Once these factors are established, an organization can discover how to get the biggest "bang-for-the-buck" at the beginning of the catalog enablement process, gradually easing the process as returns diminish to maintain a balance of effort versus reward.