Category Management Savings Drying Up? Time to Cross-Optimize!

Leaders know that the best way to savings success, especially when the CFO and CEO demand savings today (even though this could sacrifice value tomorrow), is category management — a razor sharp focus on buying like products from like suppliers that allows for apples-to-apples comparison across products on key dimensions of price, quality, warranty, lead-time, etc. so that the best buy that meets the mandatory savings target can be made every time (and as much value preserved in the category as possible).

But Leaders also know, just like the third auction in a row increases costs, good category management sees savings fall rapidly as the fat is quickly squeezed out of the margin and the waste quickly squeezed out of the production, delivery, and inventory process as everything is optimized. This means that as soon as raw material costs go up, category costs go up, and not down.

This can be problematic when (unrealistic) expectations are placed on the Procurement department year after year and savings need to be found even when, apparently, none exist. But here’s the thing, while they don’t exist in the raw materials, or even the overhead, of production, they do exist in the distribution and inventory and still exist in the volume. But only in volume beyond what’s in the category.

This means that the only way to extract them is to increase the volume, which means that you need to simultaneously cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

This also works in CPG — a supplier may supply computer devices, audio devices, and home security devices — and while you may want to manage these separately, you want to source them simultaneously. And it will work across seemingly unrelated categories if you are buying from suppliers that are essentially distributors (like office supplies vendors, MRO vendors, etc.). All you need to do is find a set of categories where the majority of products come from the same supply base. How do you do this? Simple: use a modern spend analysis tool.

And how do you source multiple categories simultaneously and cross-optimize logistics, inventory, and discounts for the lowest overall total cost of ownership (while maintaining value)? Strategic sourcing decision optimization — the technology SI has been telling you to acquire for a decade. Which vendor? Whichever one suits your needs best. Coupa, Jaggaer ASO, Jaggaer Bravo, and Keelvar are all great. Determine is re-building the Iasta capability on the b-pack platform, and when complete, will join the A-list again … and BidMode is about to hit the scene. Just get one, so you’re not left behind.

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