Daily Archives: January 19, 2009

Working with Your Users II: Creating Commodity Structures (in Your Spend Analysis System)

A few basic rules makes it easier than you think.

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

A key framework for your spend analysis system is your commodity structure. Making decisions about that commodity structure is the perfect opportunity to begin working with users. The process will get them engaged with the system, and give you the information you need to improve the quality of your structure.

Inevitably, there will be different ideas about what makes sense when building the commodity structure. Making decisions is easier if you filter the alternatives through three criteria: increased buying leverage, improved controls, and better user communication. Generally, if the first two criteria aren’t compromised, it won’t hurt to give users what they want. Let’s look at a typical example.

There are basic templates for the structure of commodities in each industry. These will give you a starting point, but they need to be modified for your organization. For example, in banking, the top level structure might look like:

  • Facilities
  • Information Technology
  • Marketing
  • Professional Services
  • HR
  • Travel
  • Office Support
  • Exempt (taxes, intercompany, etc)

This sounds reasonable at the start, but it still requires decisions on where certain items should go. For example,

  • Should IT Labor go under “IT” or “Professional Services”?
  • Should Commercial Print be under “Marketing” or “Office Support”?
  • Should there be a separate top level category for “Operations”?
  • Should the outsourcing arrangement for your student loan processing be in “IT”, “Operations” or “Professional Services”?
  • Should market data go in “IT”, “Office Support” or “Professional Services”?

For each of these questions, there are bound to be disagreements because there is no absolute right or wrong answer. When you reach a decision point, it’s important to ask:

  • Will doing it this way increase or diminish Procurement’s leverage with internal users and /or the external market?
  • Will doing it this way make the management of major spend areas more or less difficult?

If the changes don’t hurt Procurement’s objectives, you will probably come out ahead by doing it the way the business line wants.

From a procurement point of view, the key concern when building a commodity structure is that the commodity exists (e.g. “IT Labor”) and it brings together all the vendors for this type of spending. Where it is within the hierarchy is not as important as having the spending for IT labor consolidated. If the Technology Group wants the “IT Labor” spending in the IT category, put it there. It may move over time to “Professional Services” or it may not. It really doesn’t matter. The more Purchasing engages with the business lines, and gets them to start caring about the quality and organization of their purchasing information, the more Purchasing will ultimately succeed.