We’re using the ocean waves and surfing images during the creation of our virtual Category Sourcing Scorecard because the purpose of this tool is to help sourcing teams vet and prioritize the categories that will comprise their sourcing pipelines. Since sourcing projects should not be run in a fully linear order (i.e. kick-off one project only after the last has been completed) it is customary to think about sourcing projects in groups or waves. [Reason two: sometimes I miss my days living in Hermosa Beach].
Once you have identified numerous potential categories to source, the team must work to prioritize them into some type of order or what is often called developing or bundling categories into sourcing waves. This is done by looking at various aspects or factors related to the category. These are the factors we’ll address in this series:
- Internal or Organizational factors
- Market factors
- Supplier factors – Today!
- Buying factors
- Category factors
Similar to many of the factors discussed in the Non-price attributes series, these factors describe the capabilities and attributes of the suppliers of a specific category. That a category has any of these factors is not a bad thing, but, these factors tend to add a layer of complexity to the overall bid evaluation. Complexity is also not a bad thing; but, complexity can make the decision-making process more difficult or involved and push out the timing of any potential savings.
Factor 1 - Highly-Specialized or Unique Capability
Discussion: Are there certain aspects around the supplier’s production or delivery of this category that are, as the actor’s name suggests, highly-specialized or unique? For example, does the production process require some very unique machining that can only be done under very specific conditions? Does the creation of the product take an extended amount of time or is it something that can only be performed by someone or some team with a very specific set of skills and experience?
Scorecard Question: Does this category require the supplier to have specialized or unique capabilities?
Multiple Choice Answers: (A) High specialization (B) Average specialization (C) Low specialization
Factor 2 - Supplier Profit Margins
Discussion: How profitable are the suppliers in this industry? Are they working on razor-thin margins or is there a decent cushion for the average supplier? This is not to suggest that industries with low or compressed profit margins don’t offer sourcing savings opportunities – they can and often do. Those industries can also be highly competitive. But, as we try to prioritize categories, we’re looking at the relative savings opportunities across a number of categories. As such, it is generally easier to drive sourcing savings when the suppliers are starting from a healthy financial position.
Scorecard Question: Describe the supplier profit margins in this sector.
Multiple Choice Answers: (A) Low (less than 5%) (B) Average (between 5% and 10%) (C) High (greater than 10%)
Factor 3 - Value-Added Service component
Discussion: Are you simply looking at a machine part that is a component to a larger assembly or are you looking at a piece of machinery or a machine that will be in use for years and comes with a 15-year service contract? The addition of value-added services to a sourcing project can increase the complexity of the RFP and the complexity of supplier evaluations. Sourcing teams should not shy away from the sourcing of complex items and services, these are projects that absolutely should be tackled – just not all of them in the first wave.
Scorecard Question: Are value-added services part of the bid?
Multiple Choice Answers: (A) Yes – significant (B) Somewhat (C) Little-to-none
Factor 4 - Level of Technical Excellence
Discussion: The level of technical excellence required in the installation and on-going maintenance of the primary elevators in the corporate headquarters is vastly different than the repaving and painting of the corporate parking lot. When a high level of technical excellence is required as part of the bid, someone on the sourcing team or, just as often, a stakeholder or team of stakeholders must be able to evaluate the technical craft. This can result in longer and more complex evaluations by the team. As such, when and how you start the project should be balanced against other, faster, simpler projects.
Scorecard Question: What is the level of supplier technical excellence required in this bid?
Multiple Choice Answers: (A) High (B) Some/Average (C) Low/None
Factor 5 - Financial Stability
Discussion: Somewhat similar to the profit margin factor, with this factor, we are trying to assess the overall financial stability of the suppliers in this space. For example, are we bidding out our audit services among the well-heeled Big 4 Audit forms or are we dealing with 7 or 8 regional players who lack the size and scale to support a national or global bid. Are many of the suppliers in this sector publicly-traded with AA or AA credit ratings or are we looking at a supply base where one-third have recently filed chapter 11?
Scorecard Question: Describe the level of financial stability in this supply base.
Multiple Choice Answers: (A) Poor (B) Average (C) Strong
And there you have it – Supplier Factors.
Postscript: In the final Scorecard, we will need to provide some guidance and context to the answers to the above questions. Additionally, we will need to include a discussion to ensure that some categories with the complexity identified by the factors above are layered into the sourcing pipeline; particularly as the sourcing team gains traction and/or matures in what it can manage.