Market-informed sourcing: the death of traditional category management?

We wrote last week about our new White Paper which explains our views on what we’re calling “market informed sourcing” – it is available now to download, free of charge on registration via the link under the "research information" box on our home page or indeed here. 

We said it raises some fundamental questions about Category Management processes – today we’ll explain why.  First, we need to look at why those processes might not always give us the best outcomes.

Imagine you’re the category manager for Facilities Management, in a large multi-site organisation. Then in a rather larger leap of imagination, let’s pretend that the Oracle (the Greek source of all knowledge, not the software firm) is based in Hounslow.  For a small fee, you can go and ask it any procurement question.  I suspect you would go to the Oracle and say something like this.

“Hello Oracle. Here are, in very broad terms, our requirements for Facilities Management.  A list of our facilities, their size, and the type of services we need for each. These are essential services,  here are the nice-to-haves.  Here are our minimum service levels and we might pay a little more if someone can beat those significantly. We have a few preferences about the sort of suppliers we want to work with as well, but we don’t really mind how many suppliers we have, or whether we follow a Total Facilities Management route or buy each service separately. Please Oracle, tell me the best solution to my needs - which suppliers should carry out which services to give me the best overall value”?

The Oracle would put down their Kebab and pint of Stella, and reply.

“Right mate. There’s a great small security firm in Scotland who will do your work there, but for the rest of Europe, you should use this lot, except in France where a “total facilities management” (TFM) deal with this firm is the best option.  Catering should be split between these 3 firms, one of whom can also do cleaning in Southern Europe.  Agreeing 3 year contracts gives you the best deal, and I reckon locking into fixed prices beats inflation linking, even though you’ll pay a bit more in year one. And if you want the higher service levels it’ll cost you another 8.7% - but that doesn’t change the selection of suppliers much. You decide it that’s worth it”.

Thanks Oracle.

Without the Hounslow Oracle, we think about how best to structure our approach to the market, through the category strategy and planning process.  We think about how many suppliers we want, the structure of the supply (in this case TFM, or individual facilities services), the length of contract, the commercial mechanisms, and so on.

But why don’t we ask the market how it would like to meet our needs? After all, it must be true that suppliers know better than us what is most economic for them (and therefore us) and how they could best structure their supply for mutual economic benefit.  So why don’t we do that?

Because historically, we couldn’t cope with the responses we would get from the market. Imagine going to the market for that FM contract in the way we described it to the Oracle, and getting back all sorts of options from hundreds of suppliers – how could we possibly compare them and reach a decision that optimised value for us, and was demonstrably fair and transparent to the market  and colleagues?

We had to narrow down our requirement to something pretty defined, because that was the only way we could run a manageable and fair procurement process – we had to ask the suppliers to bid against a fairly narrow requirement so we could evaluate which of them should win the business.

So, driven largely by that need, what we then do is go through a process that in the White Paper I liken to a funnel. We start with our internal requirements, and our views of the markets and the suppliers within it.  We narrow down our requirement until we have a nice package that we can take to market.  We put a lot of work into this stage – trying to work out what is the best way of approaching the market. How many suppliers, what supply profile, the precise specification etc.

And really, when you thing about it, we are trying to second guess the market. We’re trying to best determine how to structure the supply that we need – when we’re never going to be as well placed as the market itself to do this. So, in most cases, that is the fundamental weakness of category management.

We’ll have more tomorrow on how market-informed sourcing allows us to take a radically different approach – but do download the White Paper and read much more.

Voices (2)

  1. Huhh?:

    Surely this is the procurement version of crowd sourcing? But supplier-sourcing?

    There’s an even better next step: check out http://www.topcoder.com – it works like a community and organisations can “sponsor” competitions and battles between top coders (geddit?) who battle to write the best piece of code/programme to meet the spec. The company pays the winner and flounces off into the sunset with their solution, formed in the white heat of battle…

    Why not do the same to procurement world – post requirements online and let suppliers “battle” to suggest the best and most cost effective solutions.

    Like cool japanese battle droids, with nylon suits.

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