What should our category savings be?

January 4th, 2012

I still have companies ask me daily what are some examples of category savings we might expect when running e-procurement events.

The answer is that it depends on the industry, company or vertical within an industry as well as who you are asking and what you will actually be measuring. There are dozens of procurement focused websites that speak to or quote category savings.

The reason the answer depends on who you ask is that to begin with every company defines their categories differently. Yes there is similarity across industries in areas like fleet maintenance or currier services. However when we look at the retail landscape and an example like bottled water, thinks get a little murky. Is bottled water really a category or is it a sub category of beverages which is a sub category of grocery. If it is a true category, your buyer or category manager should be able to provide you with pricing, margin and any related cost that shrinks the later.  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 products savings are good, but don’t get the product to your shelf.  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 event? 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 bucket referred to 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.

All of the above assumes that your buyers know where to find additional suppliers in order to make the event competitive in the first place. Should they go to other wholesalers, manufacturers, distributors, other vertical suppliers that don’t traditionally supply your vertical?

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? Were distribution charges and other uplifted costs removed or bid on separately?  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?

In order to actually answer the questioned posed in this post, the real answer is that I need to ask you some questions and depending on your answers I can give you a range of savings based on the size of your total spend and dependant on other market influences such as fuel costs and other related commodity costs.

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

We look forward to your comments.

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