... it's only the foundation that you need for great across-the-board cost control.
But let's back up a bit so you know where we're coming from. As we have already discussed, the past couple of years have seen a flurry of M&A activity, with a lot of "best-of-breed" catalog vendors getting scooped up, and one big firm in particular buying two, that's right, two "best-of-breed" catalog vendors (when such firm already had an in-house catalog management solution). This is, of course, a bit whacky because:
- it's not how many external catalogs are built-in out of the box (but how many you need),
- how smart the guided buying is (as most "guided buying" can be accomplished by a few simple rules and it's simply about ensuring the right product is bought), or
- how Web X.0 the UX is (it has to be usable, not confusingly beautiful).
Remember the key points we made in our last post on why you should update that catalog (not that catalog platform, as it might be more than adequate for your organizational needs):
- it captures negotiated savings by making sure negotiated deals are captured for easy requisition by buyers;
- it makes it easy for buyers to see what is contracted, what is preferred, and, most importantly, what is neither;
- it captures more organizational spending and this is why
- it enables more cost control.
Enabling Cost Control
Let's focus on this last point. Enables. Good sourcing and procurement requires good insight into organizational spending. When spend is just put on a P-Card, or even worse, a T&E report, an organization generally doesn't have good insight into precisely what it was for or what other products or services there are that are, or could be, under contract that could have been selected (or why those contracted products and services were not contracted).
Remember, a prime candidate category for sourcing is one that has a great savings potential when current spend is compared to expected spend against market average and depends on two factors: volume and price differential by unit. And if you do not have true insight into category volume or the precise products (and the price differential from current market pricing of preferred products), you will never know what categories with great potential exist that you are missing.
It's not always the 10M+ or 100M+ categories that hide the biggest savings. Chances are you are aggressively sourcing the 100M+ categories every year and the best you can do in any given year when prices are static or rising is 2% with good sourcing optimization and better inventory and cash management. That's maybe 2M in savings. For a 10M category, that is often put through a less rigorous sourcing process, you're still probably coming within 3% to 4% of absolute optimal, let's say 300 K of savings might exist. That's not a lot.
However, it's often the case that there are a handful of 1M to 5M categories being ignored because half of the spend (or more) is unmanaged catalog, P-Card, and, even worse, personal credit card spend (which only appears on T&E reports). Let's say there are five of these categories not under contract which total 10M. Chances are, the average over-spend here is 10% to 30%, depending on the category. Or, on average, 1.5M on categories that could be quickly, and near-optimally, sourced with 3-bids-and-a-buy within 3% of optimal. In other words, the insights a good catalog solution provides through increased spend capture could enable another 1.2M on just a handful of categories.
And this is why catalogs are not the be all and end all. They are the enabler. The true value of a catalog-enabled solution is an end-to-end platform that supports not only strategic sourcing and day-to-day Procurement but tail-spend management around the catalog. This is where the greatest overages, percentage-wise, often are and there is no single strategy for tail-spend management. Some of it has to be spot-buys off a catalog. Some of it has to be 3-bids-and-a-buy quick-hitter single-round RFX. Some of it has to be promoted to strategic categories, existing or new. Some of it has to be auctioned on a regular basis to the lowest bidder. And for some of it, the strategy will change on market events. And if all the platform supports is catalog buys, great opportunities are being missed.
And that's why you need more than just a great, updated, catalog -- you need an integrated end-to-end platform around that updated catalog with good tail spend management to capture the next-level of savings.