Category Archives: Best Practices

Comprehensive Category Management: Are You Still Doing it Wrong?

As we said five years ago (and probably even earlier than that), spot buying individual categories at market lows or evening running reverse auctions at opportune times is NOT category management. And for that matter, neither is a strategic sourcing event that throws everything in the category into a strategic negotiation, especially if the category is metals and you are including the kitchen sink.

And you might be thinking that the doctor needs a psychiatrist because how could it not be category management if you are addressing the whole category? Category Management isn’t just about grouping all seemingly related items and running an event. Category management is about grouping items that have related characteristics that allow the items to be sourced effectively under the same strategy.

For example, while it might make theoretical sense to group printers, ink, and paper together —- because you use them together, from a sourcing point of view, ink and paper often go better with office supplies and printers with hardware. You can probably get them thrown in for free with a server purchase. But that’s just the start.

For example, if you source a lot of metal parts, you should probably start by grouping them by primary metal, since the price of steel, aluminum, etc. will largely dictate the price of those parts. Furthermore, it might even make sense to not only source all of the parts from the same supplier but even buy the metal on behalf of the supplier with your better negotiating power and/or credit rating.

But that’s just the start. Then you have to make sure the parts are (best) produced using similar processes, because giving a part to a supplier that is only easily produced by laser cutting when the supplier only has traditional machining / cutting is not going to be a good decision. Even though the volume will lower their cost of metal, the extra work will increase the cost per unit.

So sometimes you will need to group the category into sub-category by metal and production style and get bids separately and together (from any supplier that can offer both) and do a multi-level analysis to find out the best approach. (And this is yet a another reason that SI has been telling you since DAY ONE that you need an optimization-backed sourcing platform as this is the only way you can effectively analyze all the options.)

And sometimes you will have to ignore items with a large demand or core material component because they are cheaper when sourced as part of a different category buy as they can be produced by other suppliers or bundled for a larger volume-based discount.

For example, consider an organization-wide UPS replacement. They are technically a power transformer with a battery, but you wouldn’t source them from the manufacturer that manufactures custom transformers for your on-site renewable solar and wind farm since you’d source them from your hardware supplier who supplies you with the rest of your office electronics as they would be buying such units in bulk from a manufacturer who produces them in bulk and gives you a better deal.

Comprehensive category management is looking at a category from a holistic perspective and finding the right segmentation to get the best overall value through the right sourcing method at the right time.

It’s not just a one-time slice-and-dice, it’s a continual analysis of the category from a multi-dimensional and current market perspective to make sure each time an event is run, the right strategy is used across the right sub-category of products and services which are offered to the right prospective supply base.

And it requires up-front market analysis before the event as well as optimization-backed analysis during. So you need a good analytics platform, preferably with some automation that can constantly pull in market data, analyze it to current cost, plot and predict the trends, and provide the necessary market intelligence that can be compared to a best-practice knowledge base that will indicate the event type that has been the most historically successful under current conditions. (And in the spirit of our recent Applied Indirection series, this is not AI, this is RPA with parameterized suggestion look-up.)

Sourcing Talent Is Rare, Especially Since They Also Have to Manage Risk

Yesterday we told you that Sourcing, like the many facets of Supply Management, is not as easy as it seems as the skills required to go from RFI to award are numerous and compose up a laundry list that is rare to find even in most sourcing teams, yet alone individuals, including:

  • (Cost) Analysis / Market Analysis
  • Logistics
  • Needs Identification
  • Negotiation
  • Project Management
  • Resource Management
  • Supplier Identification
  • Trend Identification
  • … and …
  • Risk Management

The last of which we left off of yesterday’s list because this is a list in itself. You see, in today’s Sourcing landscape, turbulence is not just what you experience in an airplane on your way to a site visit – it’s what you experience trying to manage your supply chains on a daily basis. Just like fluid flows can become highly irregular with the slightest perturbation, so can the flow of goods in today’s ultra-outsourced ulta-global supply chains.

Turbulence is a hidden risk in every supply chain, and one most organizations are never prepared for because, when a risk assessment is done, it is always focussed on easy-to-identify technological, economic, market, financial, organization, environmental and social risks — not random events that can temporarily interrupt your supply chain and cause temporary disruptions with serious financial or brand consequences. Temporary disruptions which, if regular in nature, can put your organization in real jeopardy and temporary disruptions, which, by their very nature cannot be planned for or even identified in an up-front risk assessment.

For example, when buying product components from China, an experienced risk team is going to identify:

  • Supplier Risk
    Are they financially stable? Will they adequately protect your IP? etc.
  • Factory Risk
    Is the quality acceptable? Are there workplace or safety hazards that could shut it down?
  • Port Risk
    Will the product be safe? Is there any danger of strike or overcapacity? On both sides …
  • Export and Import Risk
    Are all regulations adhered to? RoHS? WEEE? Has all the paperwork been completed and submitted on time?
  • Technology Risk
    Is the real-time product tracking and distribution system reliable? Backed Up? Integrated properly with all parties?
  • Environmental
    Is the product being made or stored in areas subject to regular natural disasters such as hurricanes, typhoons, earthquakes, etc.?
  • Social Responsibility
    Is the product conflict / slave labour free? Are all employees of all partners treated equitably? Is the product, and its production, environmentally friendly or at least environmentally safe? Can the product be safely disposed of?
  • Market
    Will the market still want your product when it is available? Is a competitor going to beat you to the market?
  • Economic
    Will the economy maintain or improve? Or will it worsen, leading to reduced demand across the board? What is the job forecast looking like in target markets – job loss in those areas can weaken consumer demand.

and a few dozen other common risks from the risk identification and management playbook.

But it’s not going to identify one-time random events such as:

  • Unlikely Terrorist Attack by a random civilian who goes postal and, when trying to go postal, thanks to a gas leak, accidentally blows up a building due near the docks and causes the port to become unaccessible for 3 days
  • Delayed Delivery due to Paperwork Mix-Up
    One truck is scheduled for delivery of your product to your distribution warehouse, another for mid-term storage at a competitors warehouse on the other side of the continent. And because the small carrier you’re using doesn’t have real-time inventory tracking, and your product is scheduled for JIT delivery, the mix-up isn’t detected until the expected delivery date when your product is half-way across the country.
  • False Stock-Out due to Inventory Mis-Key
    The clerk enters 8,000 units instead of 80,000 into the system, stores exactly 8,000 in the proper location in the ware-house, and puts the other 72,000 units of your hottest selling product at the back of the warehouse reserved for discontinued inventory.

Each of these events can happen, and each can cause a real, unexpected, and unpredictable turbulent impact to your supply chain. Are you ready for it? Can you sourcing team react and adapt when it does?

Your Tail Spend Should be Vanishingly Small …

Not the 30% to 40% of spend that it probably is (as this is the amount of tail spend in the average organization)!

The reason it’s so large is that, in most companies, there is strategically sourced spend and tail spend when, in fact, there should be (at least) three categories of spend: strategic, managed, and tail — and, if the managed spend is large enough, you can break out a 4th category of tactically procured spend. Each of these categories is defined as follows:

Strategically Sourced
This is the spend that is high volume, high dollar, or strategic to your organization. While there will usually be a dollar minimum relative to your total spend (i.e. 5M to 50M depending on organizational size), if the part is critical to production of a primary product or service, if it can only be sourced from one supplier (hopefully split across multiple locations), and if its absence would bring an entire multi-million production line to a halt, then it would be include, even if it was only 1M annual spend).

More generally speaking, a product or service fits in this category if the return expected from a strategic sourcing exercise (which costs manpower and technology) will be considerable relative to the cost. (I.E. an ROI of 3X to 5X.)

Managed
This is where you put the categories or buckets of spend that are not quite big enough to undergo a strategic sourcing event (as the expected return is low relative to the effort of a manual strategic sourcing event) but where not managing the spend leads to a considerable loss when you look at an average of 15% or more overspend in tail spend.

For example, in a big multi-national, 1M is not large when there are 100M categories, but 15% overspend on 1M is 150K, that’s enough to pay the salary and overhead of another junior buyer.

This is where you do mini-events and/or take steps to make sure Procurement is efficient and cost-effective throughout the category.

Good examples are

  • low-value non-electronic office supplies and MOR, where you can integrate the punch-outs of two or three leading, generally cost-efficient vendors, into a federated search catalog which forces the organizational buyers to procure the lowest cost item in stock that meets the requirement without supervisor oversight (and keeps costs close to market, vs. 15% above)
  • recurring tech-support services, where you can integrate master rate cards from local vendors and just have the users select a vendor with an approved rate card to perform the service (and push all spend through the system)
  • one-time event spend, where you bundle up as much of the spend as possible and push out a standardized RFI to an event organization firm who makes money by aggregating event-related spend across their clients, negotiating sizeable discounts from venues and services providers, and passing those savings on to their clients in exchange for management fees … while you won’t see the full 20% they negotiate once you deduct the management fee, you might still see 10% of it, and that’s savings to you

Tactically Procured
If a category of spend is large enough that an auction or (multi-round) RFI will save money, but not so large that the savings are enough to waste a buyer’s time on a strategic sourcing event or tactical procurement event, then you can push that spend to a platform with modern automation and assisted intelligence that can automate the RFI or auction for standardized goods and services.

If the goods and services are market standard, or you have fully defined specifications that have been vetted and manufactured multiple times without issue, if you have a set of pre-approved suppliers, if you have price history and market data, why not just automate the entire process with bounds and checks?

New providers like Keelvar, Levadata, and Xeeva are realizing this and this is a great way to manage what was tail spend and keep costs down.

True Tail
These are true small, one-off, purchases that can’t be combined into a managed (or tactically procured) category and are truly not big enough to waste the valuable time of even a junior buyer on.

This should be less than 10% of your spend at most, and, in reality, with the low-cost, low-effort of automated tactical procurement in newer platforms, as well as the guided buying features of modern federated catalog platforms, should be less than 5% of your spend. A modern organization should not be overspending by more than 0.5% of its total spend (which is an acceptable margin of spend error), not the 4.5% to 6% or more it is typically overspending on the tail when 30% to 40% of the organizational spend is unmanaged.

Don’t Forget The Big Four Questions to Ask During Any Mega-Acquisition

Four years ago, during the last big M&A Frenzy, SI published a post on The First Four Questions to Ask During Any Mega-Acquisition, that is still just as relevant today as it was four years ago.

And while it was direct, it’s a good idea to be direct because sometimes you need to let the vendor know you’re not in the mood for any shenanigans and if they bought your former vendor for the sole purpose of playing such shenanigans with you, you’re ready to walk (and execute that change of control agreement in your contract tomorrow).

1. How will you screw us over on price?

As we said before, every acquisition brings with it the promise of economy of scale and lower price, but it typically takes years to understand and take advantage of platform overlap, redefine responsibilities and organizational boundaries, and identify staff re-assignments. And since, in the interim, change management experts, process consultants, and other resources need to be brought on board, overhead goes up and costs go up accordingly.

Or, the mega vendor bought your vendor just to retire its solution and migrate your vendor’s client base to its more expensive solution. Even if the solution is superior, it’s not necessarily superior for you and you don’t necessarily want it or the higher price tag.

2. How will we get screwed over on quality of service?

As we said before, the biggest fish in the combined company gets the best resources. And even if your current organization was a big fish in the old company, that does not mean your company will be a big fish in the merged company. Your company might just be a medium sized fish that gets the “B” Team, if it is lucky.

The fact of the matter is your current support team could be re-assigned or let go, the new team might not know anything about your solution, and without the current team your service levels might not be met. And make sure to point out the service levels the new vendor is committed to during the conversation so both parties can be on the same page about expectations from day one.

3. How will we get screwed out of innovation?

As per our last post, will the merged company continue to develop the platform your company is dependent on or will you remain locked in to a multi-year deal as the technology platform you bought withers and dies?

If the company is not going to support the platform, make sure that they are aware of the “full data export in standardized format” clause you included in the contract (and that you expect it to be honoured when the time comes) and that you expect full integration support so you can augment what you have where your platform is lacking.

4. What new and interesting ways will we get screwed in the future?

What additional layers of complexity and confusion will the new, combined, legal team try to weasel into the contract renewal and how will that bite your organization in its backside down the road?

Longer contractual terms? Non-disparagement clauses? No ability to discuss platform shortcomings when trying to find a best-of-breed solution to plug the holes. No ability to buy a non-vendor module when the vendor has one. And so on.

Not every mega-vendor is out to screw you, but make sure from day one that they’re not and that you are on the same page.

And yes, this is confrontational.  But sometimes you have to stand up for yourself.

Dear Procurement: You Aren’t Nearly As Advanced As You Think You Are

One of the best presentations at Ivalua Now Paris last week (which the doctor summarized in a post over on Spend Matters UK on how the conference was A Huge Success and a Testament to their growth) was Duncan Jones’ presentation on Successful Procurement Transformation that summarized a recent survey on enabling smarter procurement that clearly proved what the doctor and other leading analysts already know: most Procurement organizations believe they are considerably more advanced than they are.

The survey asked Procurement departments to rate themselves as beginner, intermediate, or advanced. The results, which, unfortunately were not unexpected, indicated that:

  • 65% of respondents said they were advanced,
  • 31% said they were intermediate, and
  • 4% said they were beginner

When the reality is that, according to Forrester

  • 16% of respondents are advanced
  • 24% of respondents are intermediate
  • 60% of respondents are beginne

On the Forrester scale which, by the way, is not as arduous as the scale used by the doctor (but we’ll get to that in another post). In other words, four times as many organizations said they were advanced as were actually at that level. So if you think you are advanced, there is at most a 1/4 chance you are advanced and at most a 2/3 chance you are intermediate or better.

This means that you as a Procurement organization need to take a step back, get a third party evaluation, and understand the reality of where you are. It’s totally okay if you’re not as advanced as you think you are because neither are your competitors. And, in fact, if you are willing to get an honest third party assessment and use it as the foundation for improvement, you are way ahead of your competition which still has their heads in the sand like an ostrich. Because, thanks to modern platforms and well understood best practices that can be efficiently experienced by efficient consultants who have been doing it for a decade, you can master intermediate levels of performance quite quickly, and that puts you in the top 40% in a very short time-frame. And it often doesn’t take a lot of improvement to see significant savings, process improvements, or value generation. (With many more tangible improvements to come as you embark on that first 3 to 5 year transformation journey.)

The key to advancement and tremendous success in Procurement is simple:

  • understand where you are
  • accept where you are
  • put a realistic plan in place for mid-term transformation (3-5 years) with well defined milestones along the way
  • commit to change
  • monitor, measure, and stay on track

Now that the best S2P suite providers can roll out enterprise implementations in a quarter, you can enable processes that lead to significant ROI in 6 to 12 months, and take it step wise from there. But it all starts with accepting the reality and committing to change. The system, the process, and your hard work will take care of the rest.

And a big thank you to Duncan to proving the reality!