Don’t Forget About Benchmarking – A Simple Sourcing Strategy

Whenever I hear stories about companies doing category benchmarking correctly, there's usually savings associated with the process. And at the least, incumbent supplier relationships are never damaged. For those who are new to benchmarking, the essential strategy is simple: continuously -- well, as continuously as possible -- talk to alternative suppliers for a given category to better understand what the market price of a part, component or service should be (versus simply what your supplier is telling you). Especially in rising price markets, benchmarking efforts can yield significant savings by allowing an organization to go back to their suppliers and tell them they've got to at least stay competitive with the market -- saying: "Oh by the way, here are the market benchmarks." I've seen this work time and time again for the likes of the Japanese automotive OEMs and I know this strategy can work across industries.

The Strategic Sourcerer recently outlined another form of price benchmarking. In their definition, benchmarking is really about determining a baseline commodity price for raw material inputs in a sourcing process. As I look at it, this is excellent advice, but I'm not sure I’d call it benchmarking. Regardless, with a baseline "benchmark" in hand, you'll be better prepared to identify savings on the value-added portion of what a supplier is offering by allowing them to sharpen their pencils in areas where they're not impacted by price volatility. In addition, it can allow more advanced sourcing organizations to hedge commodity price risk in certain markets, not to mention providing triggers for investigating substitute materials or products if underlying commodity prices reach specified points. Whether you do this type of benchmarking or not, one things for sure: It is good Spend Management business practice even if it appears, as the Sourcerer suggests, to be impossible at first.

- Jason Busch

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