Why SKU/Supplier Standardization is More Difficult Than It Looks: Harming Value
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.
My colleague Peter Smith argues that one of the more notable risks of SKU/supplier standardization in procurement is how such decisions can harm value. Peter asks that we consider the example of laptop computers.
Twenty different specifications may range from a very basic model to a super-powerful machine, used by engineers and able to withstand being dropped onto concrete. If the aim is to standardize on one model, in order to maximize that economic benefit of aggregation, where do we standardize?
If we standardize towards the top end, we may get a better price on the particular model (based on the higher quantity) but we may find our overall category spend has gone up, as our ‘light’ users are being over-provided. Now segmenting our requirements clearly mitigates this risk, so standardization on a small number of models would help. But even here, care must be taken not to end up with over-specified products or services.
There are many other things besides laptops we can point to as similar examples. The challenge in manufacturing/plant settings is even more challenging given personal preference in areas such as safety or cleaning supplies. What if, for example, we are dealing with facilities (warehouses or factories) in a part of the country where temperature variation is more significant? Such climate variation and internal temperature variation may affect the performance of specific product but not others – perhaps explaining a price premium because of material composition?
The issue of making sure that SKU/supplier standardization does not harm value is challenging to overcome – and one size does not fit all across categories. Get it wrong and you can almost guarantee non-compliance from centralized indirect sourcing efforts.
Curious about the topic? Download Peter’s paper, Managing Complex Categories – Beware the Complexity of Standardisation!, and stay tuned for our additional analysis to come on Spend Matters.