The following post is based on a paper by Peter Smith, Managing Director, Spend Matters UK/Europe, titled Managing Complex Categories – Beware the Complexity of Standardisation! The paper is part of the free Spend Matters research library and is available for download with or without membership to Spend Matters Plus/PRO.
When it comes to demand management, one of the first steps that many procurement organizations take in driving to indirect category strategy (office products, MRO, etc.) is attempting to reduce the number of similar SKUs that the organization purchases. There are many reasons for this and such strategies are not just about driving unit cost savings (e.g., SKU rationalization can take into account green/CSR strategies, supplier diversity, supply risk management, balance of trade and many other factors). But at its core, standardization is certainly about leverage, if not savings directly.
As my colleague Peter Smith puts it in explaining why standardization matters – for both basic and complex categories:
There is a vital link between these factors. Standardization enables spend to be aggregated more easily and allows the buyer to put a potentially more attractive requirement to the market. Indeed, aggregation without some standardization often has little real value. Let’s consider an organization with 20 business units, each of which buys 1,000 laptop computers a year.
If the specification for each business unit is different, then approaching the market with a request to quote on 20,000 units, made up of 1,000 of each of 20 different types of machine, will get a certain response.
Alternatively, if the organization can standardize its requirement, and approach suppliers with a specification for a single machine and a requirement of 20,000 units, they would, without a doubt achieve some economies of scale on that model.
However, the whole business of standardization within complex spend categories is often not as easy as it looks. Some categories that don’t appear complex at all turn out to be more difficult to manage than might be expected – particularly when there is an international dimension to the spend.
What are the challenges for achieving standardization? Download Peter’s paper, Managing Complex Categories – Beware the Complexity of Standardisation!, and stay tuned for our additional analysis to come on Spend Matters.