Category Savings. What’s the question?

June 9th, 2008

I have had many retailers ask me the question

I have had many retailers ask me the question, what are some examples of category savings we might expect when running e-procurement events? The answer is that it depends on who you are asking and what you actually are measuring. There are probably at least a dozen websites that speak to category savings. Each discusses different numbers. The reason the answer depends on who you ask is that to begin with every company defines categories differently. An example might be bottled water. Is bottled water really a category or is it a sub category of beverages which is a sub category of grocery. So, the first question that needs to be answered is…are you looking for true category savings or are you looking for specific product savings The next question one might ask is, are you asking for actual realized savings or are you asking for savings that are hi-lited at the end of an e-procurement even?. If you are asking for true realized savings, there are a multitude issues that need to be discussed. If the successful supplier is your incumbent, then the savings may actually be closer to those viewed during the e-procurement event; however, reality indicates that a large number of incumbents do not end up as the low quote. If the supplier is not the incumbent, there are actually quite a few elements that result in true savings that have to be considered. By in large, they can be included in a category called switching costs. To begin with the supplier that you may have just awarded business to may not be an authorized vendor in your data base. As such, the IT department and or the finance department are needed to add them to your database. A new contract may also be required with a company that you have not done business with before. This requires the involvement of your legal department and may, in fact, add delays to the process that require you to order additional product from your existing supplier at potentially higher prices than awarded during the e-procurement event. If products are being delivered to a distribution center, slotting requirements are needed and pick lists require updating in order for the product to be available when ordered by individual store locations.

Now, let’s go back to the actual e-procurement event for a minute. At the end of the e-procurement event when business was awarded were the savings the same as displayed during the event? Did the e-procurement event just provide you with high level savings made up of all low quotes; or, if business was awarded to multiple suppliers ,were savings calculated in that manner? Were funds, if included in the winning bid, included in the savings and treated the same way that your company treats them from an accounting perspective? Are pre-event historical savings a result of how companies awarded business; or are you being quoted a historical average of all low quotes run through a system even though business was not actually awarded that way and savings may not have been realized?

So, what can you expect for category savings in an e-procurement event? The answer is it depends.

I look forward to your comments.

Ron

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