Category Archives: Category Management

Exact Purchasing Requires Category Intelligence

Now, if you’ve been listening to the thought leaders, like The Mpower Group, you’d know that good sourcing requires category management because one size does not fit all from a sourcing perspective, and, even if you didn’t know why, you’ve seen it during the auction craze (which seems to resurface every decade or so) where you auction everything you can that hasn’t been sourced before and get good savings, try it on categories sourced every 3 years, get none, and then try again on the first set of categories in 3 years, and see prices rise (because you can only take supplier margin out once, and then you have inflation), during a marketplace craze (where you just order from distributors who suddenly can’t supply when their primary suppliers or supply lines go down), and during overly drawn out strategic sourcing events (where, by the time you’re done, scarce supply has been locked up).

However, category management alone is not enough. Up until 2020, it was since global trade flowed freely, inflation was low, disruptive events were typically limited to natural disasters, logistics slowdowns (due to strikes that shut down ports) could be predicted by anyone following the contract expiry dates and current negotiation states, and black swans were rarely seen. In this environment, you simply needed to devise a good category strategy for sourcing, procurement, and supplier management and all was well (and ended well).

The time of smooth sailing in global supply chains is long gone! You now need multiple sourcing, procurement, and supplier management strategies for overall supply assurance that take into account the various risks, disruptions, and shortages you could face on a semi-regular basis. And you need to identify which of these strategies you need to employ on every regularly scheduled event (sourcing exercise, PO/reorder point, logistics (re)contract, and supplier review/development meeting) and unexpected real world event that could/will impact your supply chain to some degree (from delay to complete closure). This requires category intelligence, sometimes near real-time.

Category intelligence is the one thing pretty much every Source-to-Pay/Source-to-Settle (S2P/S2S) is missing. A few support elementary category management, but even that doesn’t go beyond product groupings and default sourcing workflows and RFX templates, contracts, and re-order schedules. There are a number of best-of-breed risk monitoring applications, but at most they are tied to the supplier and you have little to no idea of the potential impact since most applications only tie suppliers to currently supplied products, and you don’t fully understand what bill of materials (BoMs) they appear in, product lines they impact, customers who rely on them (and whom you are contractually obligated to serve), overall revenue stream, and profit margins. In other words, you get supplier insight, but not category intelligence. And category intelligence is what you need to make all of your Procurement decisions on.

This is the beauty of Busch-Lamoureux Exact Purchasing. When you separate out the three critical factors of complexity, risk, and impact, you understand not only that each of the eight category types needs to be managed differently (since complexity limits supply base, risk limits supply assurance, and impact determines criticality of ensuring supply and maintaining a sufficiently large and risk mitigating supply base), but that each category type requires differing intelligence to properly manage, that the intelligence required across the categories differs in types and depth, and that some of the intelligence has to be near real-time (with updates/alerts required hourly). The days of the annual spend analysis exercise to (re)classify categories and sequence sourcing and supplier development events are long gone. If a mine collapses, a fire destroys a production plant, a port shuts down, or a carrier goes out of business, you need to know that day and start executing mitigation plans on those complex and high-impact categories immediately, because by the time the (advance) shipment (notice) doesn’t arrive, it’s too late.

Myth-busting 2025 2015 Procurement Predictions and Trends! Part 10

Introduction

In our first instalment, we noted that the ambitious started pumping out 2025 prediction and trend articles in late November / early December, wanting to be ahead of the pack, even though there is rarely much value in these articles. First of all, and we say this with 25 years of experience in this space, the more they proclaim things will change … Secondly, the predictions all revolve around the same topics we’ve been talking about for almost two decades. In fact, if you dug up a Procurement predictions article for 2015, there’s a good chance 9 of the top 10 topic areas would be the same. (And see the links in our first article for two “future” series with about 3 dozen trends that are more or less as relevant now as they were then.)

In our last instalment, we continued our review of the 10 core predictions (and variants) that came out of our initial review of 71 “predictions” and “trends” across the first eight articles we found, in an effort to demonstrate that most of these aren’t ground-shattering, new, or, if they actually are, not going to happen because the more they proclaim things will change …

In this instalment, we’re again continuing to work our way up the list from the bottom to the top and continuing with “Category Management”.

Category Management

There were 2 predictions across the eight articles which basically revolved around a shift from generic sourcing to “category management”. As with almost every “prediction” and “trend” in this series, this is yet another prediction that makes headlines every year, no more important this year than the last, and still as unlikely to actually happen because, despite all the lip service around the value achievable from a category focus, at the end of the day, unless the C-Suite is convinced it will save more money (since it’s only savings they are ultimately concerned about), it doesn’t happen. Before we discuss further, here were the two predictions:

  • Category Management Takes Center Stage
  • We’ll See More Emphasis on Category Management Innovation

Category Management is yet another topic that a small contingent of thought leaders, Gurus, and consultants bring up year after year. And it’s yet another topic that never really sees the light of day. Especially when you consider that, at any given time, less than (half-a) dozen vendors take a category-centric approach to sourcing, and only a handful of consultancies push the approach.

We wholeheartedly agree that category centric Procurement is the key to value creation in certain enterprises where some categories are more strategic than others, have unique characteristics that can be exploited at the category level, and where experts can identify unique avenues of pursuit that will allow for strategic differentiation that can allow the company to charge more for the finished products, thus creating the value management that the experts say Procurement should be focussed on. However, as this is a value-centric activity that is, initially, far removed from the cost-cutting focus that CFOs and CEOs ultimately hand down to the head of Procurement, it will continue to live on the periphery of Procurement and only come into play in select organizations for select strategic categories.

What Should Happen? (But Won’t!)

What should happen is stupid simple. Analyze all the categories you buy and determine which categories, if any, should be sourced and procured using a category-centric approach. Then, category strategies and processes should be implemented for those categories and the remaining products and services should be sourced as they typically are. That’s it.

Nine down. Just one (big one) to go!

Update that Catalog! It’s Still the Best Cost Control Tool You Have.

Originally posted on the Synertrade blog in June, 2018.

Those of you that know me, and my constant pursuit to get your organization to implement modern analytics and optimization-backed sourcing platforms, probably either have a look of confusion on your face thinking you read the title wrong or a look of dumbfounded shock on your face right now thinking the doctor has finally gone cuckoo from talking to deaf ears.

So I’ll pause for a bit while you re-read those words just so you can be sure you read them right.

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Now that you’ve satisfied yourself that you’ve read the words right, I’m going to say it again. Update that Catalog! It’s still the best cost control tool you have.

There’s Cost Savings, Cost Avoidance, and Cost Control. Catalogs do squat for cost savings and have minimal impact on cost avoidance, and, moreover, only achieve cost avoidance if there are proper approval mechanisms in place (to insure only valid purchases are made) and deterrents to avoiding the catalogs (to prevent maverick spend). But when it comes to cost control, catalogs can do wonders.

Why? First of all, a catalog is often the best tool for ensuring that negotiated savings get captured. It’s a well known statistic that, in an average Procurement organization, 30 cents to 40 cents of negotiated savings never materialize. There are a slew of reasons for this, including intentional maverick spend, but common reasons include lack of knowledge of what products and services are covered by a contract and lack of ease in identifying the right product or service.

A good organizational catalog, which captures all contracted (and preferred) products and services both makes it easy for an organizational buyer to identify both what is on the contract and to buy it. A user can do a simple search and the smart catalog brings the user right to the product and allows the user to requisition it with a single click if approval is required and buy it with that single click if they have purchase authority.

Secondly, a catalog is one of the best tools that an organization has in their arsenal to ensure that there is a central portal to capture all organizational spending, even if there isn’t a contracted product or solution in place that meets the user’s needs. A modern catalog allows a buyer to not only buy on-contract products and services, but punch-out to third party sites for other products and services using a mechanism and standard that allows the spend to be captured and, if necessary, pushed through an approval process (which will allow the invoice to be automatically matched and paid). And we mean products and services. A great catalog comes with e-Forms that allow standard services to be requested with minimal specifications (hours/days or fixed tasks, locations, etc.) and, if necessary, be put to quick bid.

But it doesn’t stop there. A great catalog also includes the ability to do simple RFXs for custom product or services not in the catalog. A user simply enters the specs, pushes it to suppliers in the system, gets bids back, selects one, and makes an award, which is automatic if they have the budget and approval authority or routed to the right approver if they do not.

Thirdly, if the user needs something that they really should get help with, they can immediately put in a request for help to a senior buyer with all of the information they have. The senior buyer can then guide the more junior user to a proper catalog product or service if it exists, create a proper RFX/Auction if a proper product or service does not exist and the event value is small, or the senior buyer can take over the process if the event value is large or the buy should be part of a managed category.

Great catalogs capture spend throughout the organization, and that’s the real key to cost control. Knowing how much you spend, on what, with whom, and what percentage is captured by preferred and on-contract suppliers is fundamental to managing cost and defining category strategies. That’s why all true spend analysis projects start by collecting spend from disparate systems and trying to normalize it to a schema that allows it to be analyzed on an apples-to-apples basis across categories and suppliers. But, as we all know, this is typically a monumental undertaking and by the time the data is collected, cleansed, enriched, mapped, and analyzed, which often takes anywhere from 6 weeks to 6 months, the spend is stale. But if all spend goes through a catalog, the centralization, categorization, and cleansed data is already there, and spend can be analyzed in real-time. Changes in the cost profile can be identified quickly and addressed just as quickly.

And that’s why catalogs are still the best cost control tool that you have. What else can you roll out to (tens of) thousands of users across the organization?