Why SKU/Supplier Standardization is More Difficult Than It Looks: Choosing the Wrong Products
Categories: Category Management, Learning / Research, Sourcing, Supplier Management | Tags: Process and Best Practice
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.
Another related risk of standardization my colleague Peter Smith discusses is that after going through a rationalization exercise, the selected product ends up not meeting the needs. In this area, Peter explains that we observe:
“… over-optimistic approaches to standardization … which results in a standard product or service being purchased that does not actually meet the needs of the users, whether they are internal stakeholders or ultimate consumers. In the laptop example [see previous post], if we standardize at the bottom end of the range, the users who presumably need the strong, powerful model may not be impressed.
This issue can be triggered by a procurement assumption that internal users will find a standardized product or service acceptable. And it is not just true for products; it happens in professional services, where procurement makes assumptions that a lower priced consultant, lawyer or graphic designer is just as good as the premium provider, only to find that the budget holder thinks very differently!
This optimism may also arise from a lack of understanding of geographic or national preferences, regulations or culture. Imposing an unsuitable supplier on a business unit in another country will quickly affect the reputation of a procurement function (or a central marketing, IT or other functional team if they are involved in the decision).
In the worst cases, we have seen contractual commitments made and products bought which then could not be used, leading to financial write-offs. If that is because of a lack of understanding of national legislation, then that can be very costly and embarrassing.
Centralized category and sourcing strategy that glosses over business and localization requirements can be a significant (and costly) risk when the business ends up buying items, based on the guidance of procurement, that are not fit for the purpose. Yet there are ways of overcoming this challenge. Download Peter’s paper, Managing Complex Categories – Beware the Complexity of Standardisation!, to learn more. And tune in for additional coverage and commentary on Peter’s paper in our additional analysis.