Setting the right annual strategy for sourcing indirect goods and services for your organization is a critical exercise that shouldn’t be overlooked. Often, corporations face significant challenges when trying to understand the spend and scope within indirect procurement, especially when spend is fragmented across multiple locations, business units and classifications. In order to combat these challenges, full visibility of the managerial process and transparent data is needed.
Collect The Data
First and foremost, to develop a successful indirect category management strategy, gather data. At least a general ledger (GL) level of detail is needed before a proper strategy can be implemented. Be sure you can answer questions, such as, what did you pay, to what suppliers, and in which locations?
Resist the urge to implement a spend cube at this stage; this process is time-intensive, typically taking 9-18 months. Due to the spend cube’s extended timeline, the data often needs to be updated by the time the spend cube is completed. However, by using GL data, the time it takes to complete an analysis can be vastly reduced. A third party, like a GPO such as CoVest, who does this regularly, can perform efficient and thorough spend categorization typically in 2-4 weeks. This expedited speed allows the process to be repeated every 6-12 months, ensuring the strategy continues to be a living document, constantly evolving. Taking this step will help refine categories and identify new opportunities, giving you the three key (however rudimentary) dimensions: business units/locations, suppliers, and categories.
Comprehend The Data
You’ll need to understand your collected data’s sources and limitations. Obvious go-to sources are either internal financial systems or reaching out to suppliers. Include relevant spend forecasts (i.e. capital/re-fit projects) and you will have a good starting point to create your baseline spend.
Now that you have your spend with at least a basic level of categorization, create a strategy and profile for each category or sub-category. Some factors to consider are category spend vs. aggregated spend, saving opportunity and impact, risk, and market dynamics (What market intelligence can you access? Who knows what ‘good’ looks like for this category?) You need to understand the internal and external factors that influence your demand, specifications, and preferences for each category, such as:
- Business needs
- Stakeholder expectations (what change management will be required)
- Market trends
- Best practices
Understanding these factors will help you benchmark your current performance and identify areas where you can reduce costs, increase efficiency, or enhance value.
Wanting to focus on high-impact categories is understandable; however, there are other factors to consider when developing your indirect category management strategy:
- Complexity (including contracting, onboarding, and implementation)
- Number of SKUs
- Percentage of addressable spend (and understanding why spend isn’t addressable)
- Ongoing management required – including auditing pricing compliance processes
- What automation can you put into the process?
This is where a full-service GPO like CoVest can support your corporation efficiently and take the ongoing burden out of category management.
The Kraljic Matrix
One helpful tool to define your strategy is the Kraljic Matrix. You can use this tool to classify each category, supplier, or sub-category, rating each by ‘Impact’ and ‘Complexity’ to the business – either or both are acceptable based on certain circumstances. The matrix will visually show the importance and risk of each product or service. It can also highlight supply chain weaknesses and help to understand how to minimize supply disruption.
The positioning in the quadrant will help set clear goals and objectives for each category, leading you to project ‘type’. Examples include RFP, sourcing engagement (through a third party such as a GPO), direct negotiation with the incumbent(s), and demand management. In some cases, it will be a combination of project types. Utilizing a GPO for categories in the ‘Leverage’ or ‘Non-Critical’ quadrants allows you to focus your resources on ‘Strategic’ and Bottleneck’ categories.
Who’s Executing The Sourcing Strategy?
Deciding whether to centralize or de-centralize the sourcing function is a major decision to make. Are the right people in place to make the best choices in-house? A common challenge affecting indirect procurement strategies is the decision-makers are not experts in the field. They are the ones making significant procurement decisions but lack the experience needed to execute the role effectively.
Outsourcing indirect procurement strategy implementation to a third-party can place these decision-making processes in the hands of industry experts who have the market knowledge, resources, and skillset to make smarter decisions. It is GPOs, like CoVest, who can leverage pricing, use technology to enhance and speed up the process and create efficiencies along the category management process.
It is never too late to review your savings process and the effectiveness of your current Group Purchasing Organization. Savings is an economy of scale in money, time, or essential resources. If you were not privy to the process that attributed to year one savings, which produces the highest level of cost reduction initially, you might be wondering what is the value of this GPO relationship today?
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