Even though there is no inventory, nothing physical to return, and very few recovery opportunities available, even if the supplier fails to perform, you still need to manage your services categories strategically. Why? As per the Hackett Group Spend/Savings Visibility Study (in 2010), 48% of indirect expenditures (composed of T&E, Marketing Spend, Logistics Spend, and Professional Services) are primarily services-related, and an additional 35% (composed of IT/Telecom) are largely-services related.

Furthermore, when you consider that, in some organizations, indirect spend can approach 50% of spend, and that the organization is often left with nothing tangible to show for the spend when all is said and done, strategic category management becomes even more critical on these categories. And extra attention should be focussed on the seven steps that come into play.

Phase 1: Rationalization

When it comes to services, you need to not only analyze your options from multiple perspectives, but consider different strategies. While it is often beneficial to dual-source from a product perspective, to insure continuity of supply, dual-sourcing from a services perspective is often detrimental. For example, hiring two agencies for a marketing campaign is a waste of money, and if, by chance, your cell phone carrier goes out of business, there are at least six more to pick up the business the next day. You will likely need to single source, so you need to do so with care.

Phase 2: Supplier Identification

Not only is it important to open up your search, but it is important to qualify your options more completely. For example, where Marketing is concerned, if the primary need of Marketing is brand building, then the focus should be on agencies with that specific specialty. If the primary need for management consulting is to help the company with international expansion, you need to find a consulting organization with expertise in the target market – and it may not be a Big 5.

Phase 3: Sourcing

Unless you have an in-house expert, you will likely need to call in an expert if you want to get the best deal. Services, and services firms, have their quirks that you will need to understand intimately to get the best deal. For example, in advertising, bundling creative and print is not likely to save you money, as savings in print come from consolidated volumes with a single print house, and volume comes from consolidating orders across campaigns. In Logistics, the best deals are often found on the spot-market, especially if you have a little leeway in delivery schedules. In Telecom, you’ll get a great deal on the most common base package for your mobile devices, but the outliers who go over or who need the high-end packages will be laden with 100% profit margins to help the carrier make back what it gives up on the base. And so on. You need to know the gotchas, and how to avoid them.

Phase 4: Contract Award

The contract is very important, and detailed delivery and performance requirements are a must, otherwise, you’ll have no recourse if the service provider fails to deliver. In agency spend, make sure you have fixed delivery dates, penalties for late delivery, and termination clauses for repeat offences. In print spend, make sure you have contracts that state you don’t pay for their mistakes. In telecom, make sure there are no-pay clauses that state you don’t have to pay after notice of termination is given, even if they forget to deactivate the device/account for 30 days, and that you can apply rebates immediately. In professional services, make sure you have the right to withhold final payment until the final deliverable has been completed and accepted.

Phase 5: Supplier Management

Supplier management needs to be more active than it does in product-based supply chains. In a product based supply chain, once the chain has been worked out, and the first batch of products has been accepted as meeting quality standards, visibility solutions, that inform you of a potential hiccup, can often minimize the need for day-to-day interaction with the supplier until a change is required. No news is often good news. Not so with services. No news is almost always bad news. It typically means things aren’t going to plan and the supplier is trying to avoid telling you. If you aren’t managing the supplier and monitoring the situation, it’s likely that you won’t find out until it’s too late.

Phase 6: Procurement

It’s very important to send a purchase order with a clear statement of work, approved amounts, a payment schedule, and specific instructions (and account codes) for the invoice. It’s critical to capture the correct data for reconciliation, reporting, and evaluation purposes. If you can’t compare approved budget to actuals, you really don’t have a good grip on what your services are costing you.

Phase 9: Recovery Management

If deadlines are not met, overpayments are (accidentally) made, discounts aren’t applied, or other terms and conditions are not met, you will need to recover monies from the supplier. If you have cut a proper contract, appropriately managed the supplier, and procured properly, recovery will be possible (although you may have to threaten / go through with arbitration and/or legal action with suppliers unwilling to cooperate — but be sure you’re ready to sever the relationship before progressing to legal action).

In our first post, we noted that 30% to 40% of negotiated savings never materialize during strategic category sourcing and this is because the “strategic” element is usually forgotten once the sourcing exercise is over. Strategic category sourcing is not enough to realize results, an end-to-end strategic category management lifecycle, which consists of at least nine phases, needs to be followed. In our second post, we defined each of the phases and the key activities in each phase.

In this post, we’re going to present some tips to getting the most out of each phase.

Phase 1: Rationalization

When analyzing a category, be sure to analyze it from multiple perspectives. Look at the products, the (potential) suppliers, the (potential) customers, and the level of spend. As per our last post, when looked at from a product perspective, you might put printers in with computers, but when looked at from a supplier perspective, pairing it with toner in an office suppliers (sub) category can sometimes get you a better deal.

Phase 2: Supplier Identification

Don’t just look at the major competitors to your current suppliers, or at (potential) suppliers who have called you, but open up an RFP to see who might be able to service your needs.

Phase 3: Sourcing

If you’re not sure of the best approach, call in a category expert. As per our last post, the best approach will depend on the category, market conditions, and specific organizational needs and might change from one sourcing event to the next for the category.

Phase 4: Contract Award

Once the negotiations are complete, the next step is to make sure that all of the terms and conditions are defined, not just price and delivery. It’s important to also define return and recovery, (satisfactory) performance metrics, and other factors critical to success.

Phase 5: Supplier Management

Supplier Management is not just an up-front meeting and an annual site-visit, it’s regular communication and joint problem solving. It’s working together to find ways to improve product quality and service delivery. It’s building a strong relationship that will insure quick recovery in the face of a significant supply disruption.

Phase 6: Procurement

Make sure to send a purchase order, issue a goods receipt, and demand an invoice for every shipment and do an-way match. In order to make sure savings are captured, it’s critical to make sure you are not overcharged. Also, track every return and require a credit memo from the supplier on a monthly or quarterly basis.

Phase 7: Inventory and Distribution

Optimize the warehouse layout for inventory management. It should be easy to locate, count, pick, package, and re-ship available inventory as required. Use the services of a 3PL to optimize distribution if that is not your specialty.

Phase 8: Returns Management

Implement a returns management solution to insure returns are appropriately managed.

Phase 9: Recovery Management

Implement a Supply Chain Finance solution that can accurately track returns, refurbished goods, and credit recovery.

And if there is, should there be?

Category Management is an approach to supply management where the range of products and services sourced by the Supply Management organization are broken down into discrete groups of similar or related products and services. The idea is that a systematic, disciplined approach is applied to the category which is treated as a business unit. Strategic Category Management is simply category management in a strategic context.

Category Sourcing is the process of sourcing a category designed to be treated as a business unit. It is generally treated as part of the category management process. Strategic Category Sourcing is category sourcing in a strategic context.

So, technically, there is a difference. But should there be?

Study after study has shown that, on average, 30% to 40% of negotiated savings never materialize. Why? Because most organizations treat category management and category sourcing as one in the same, and simply do the sourcing. In order to realize the full savings potential of category management, you can’t just focus on the sourcing. You also have to focus on the procurement, the logistics, the inventory management, and the accounts payable.

While strategic category sourcing can identify savings potential and value generation above and beyond regular strategic sourcing because similar products / services are often provided by the same suppliers who will offer greater volume discounts and / or who can customize the value added services to maximize profit potential for all parties, the savings are only realized if the sourcing strategy is followed through. For example, let’s say part of the strategy was to insure that stock was ordered just in time, but the warehouse decided to keep the old schedule and always maintain a buffer stock of 45 days when delivery only took 15 days. In this case, the value negotiated wouldn’t be delivered. Or, let’s say the supplier agreed to an additional discount of 10% off of all negotiated prices once 5 Million in orders had been placed (on an expected contract value of 10 Million over 3 years), but never actually deducted the discount on the invoices when the threshold was reached after 18 months. If a close eye wasn’t been kept on the total spend, there’s 500,000 down the drain.

In other words, for strategic category sourcing to deliver value, the strategy has to be followed through over the life-time of the award. Failure to do so will result in lost value. In other words, the category has to be continually monitored as part of a strategic category management effort for the value to be realized. And this means that while there is a difference, treating the processes as separate and just doing one or the other will result in lost value and strategic category sourcing and strategic category management should, for all intents and purposes, be treated as one and the same.