Today, Part 2 of the Buying Factors that impact (1) the ease in which a category may be sourced (2) the likelihood of favorable results and (3) the timing and organizational impact from those results. (Part 1 is here).
The Category Sourcing Scorecard that we are developing in this series organizes different sourcing considerations or factors into subsets and provides a framework so those factors may be quantified and compared. The end result is a (virtual) tool or scorecard that calculates a comparable score for each category that can then be used to order or prioritize a sourcing pipeline. The Scorecard includes the five subsets below (click each link to see individual articles):
- Internal or Organizational factors
- Market factors
- Supplier factors
- Buyer factors – (Part 1) & Buyer Factors (Part 2) – Today
- Category factors – Next
Buying Factors
The buying factors in this group focus on the buying process and how the usage of the category impacts both the organization and results. We have placed these factors into this group because how a category is used is not universal across different companies and is often quite dependent on the unique buying company.
Factor 3 – Category Spend Volume
Discussion: “The more money you spend on a category, the more important it is.” That could be true, but not always. Spend volume is important in helping to decide when a category should be sourced; but, if it was as simple as sourcing categories based solely on spend volume, we wouldn’t need a Category Sourcing Scorecard [Sidebar: understanding prior spend volumes is also important during the sourcing process for (a) aggregation purposes – to drive volume discounts – and (b) communication purposes – when expected demand can be communicated confidently to participating suppliers, those bidders can remove some of the uncertainty that exists during the bidding process and present a lower bid, in theory anyway]. Spend volume can be directly linked to savings and often, the number of impacted parties. But, a small spend category with huge savings potential can offer greater opportunity than a large spend category with limited savings opportunity. And, that is why spend volume is A factor, not THE factor.
Scorecard Question: What is the annual spend volume for this category?
Multiple Choice Answers: (A) Low (B) Medium (C) High
More Discussion – Since our readership comes from a wide range of industries, regions, and company sizes, we must present this question in general terms and let each sourcing team define the Low, Medium, and High spend tiers (i.e. Low is less than $X, etc.) One additional consideration is whether the question should ask about annual spend or total contractual spend. I’m looking for feedback on this one, so please send me your thoughts.
Factor 2 – Estimated Savings Potential
Discussion: Yes, some sourcing teams may, at times, use savings opportunity as the only input used in the development of a sourcing pipeline. As Ardent Partners’ research has shown, the pressure to deliver savings is paramount for Chief Procurement Officers and their organizations Fair enough, but those that only look at savings run the risk of marginalizing the value that procurement can deliver on projects where savings is not a primary objective and marginalizing the value that procurement can deliver in general. Savings and its linkage to procurement performance evaluations remains a real challenge for the industry as whole. Rather than crank out a 3,000 word “Sidebar” [Sidebar: I would never write a 3,000 “Sidebar”] on the topic, let’s just leave it as “Savings potential is an important factor, not the only factor.”
Scorecard Question: What is the annual savings potential from sourcing this category?
Multiple Choice Answers: (A) Low (B) Medium (C) High
More Discussion – Similar to the spend volume discussion above, we must present this question in general terms and let each sourcing team define the Low, Medium, and High spend tiers (i.e. Low is less than $X, etc.) One additional consideration is whether the question should ask about annual savings or total contractual savings. Again, I’m looking for feedback on this one, so please send me your thoughts.
Factor 3 – Supplier Switching Costs
Discussion: It is my view that a majority of business professionals, including budget stakeholders and sourcing professionals are risk averse. I also believe that there is a large issue with corporate inertia and an unwillingness to change. These points can combine to heavily favor incumbent suppliers and ultimately stack the deck against a sourcing team that is looking to be more aggressive and start sourcing newer categories. Nonetheless, I have included supplier switching costs as an important consideration, because it has an impact on the total cost of a contractual relationship and is therefore, important. Switching costs are real and sometimes they can be material or significant. I would also remind sourcing teams and stakeholders that same can be said of the opportunity cost or lost value when a category is not sourced – the cost can be material or significant.
Scorecard Question: Please estimate the supplier switching costs relative to the spend and savings potential
Multiple Choice Answers: (A) High (above 5%) (B) Average (2% to 5%) (C) Low (less than 2%)
Additional Discussion: First, the tool would need to include the recommendation that the switching costs and the savings opportunity be evaluated together. With a more refined analysis, a sourcing team could net estimated switching costs against estimated savings (and total spend) to determine the net savings potential for each category and use that value to assign a relative score to each category. While that seems complex in its description, it may be possible to automate that evaluation. Second, we will have to do some additional research to determine the switching cost tiers and their applicability to different categories.
Four segments down, one to go…