What are the options for sourcing categories with high degree of product variety?
Today’s post is a favorite of the SafeSourcing Archive.
There are thousands of categories that businesses purchase every year that are “complicated” to say the least. Categories like office supplies, for instance, involve thousands of individual items that a company must purchase in order to do business, but that can be very difficult to source in a manner that provides the best benefit to the company.
Let’s take a look at the process of sourcing these types of categories from one extreme of the complexity spectrum to the other with a couple of options that meet towards the middle.
Sourcing the market basket – The first end of the spectrum is to take the entire collection of all items in the category and source them as one large market basket that will be represented by a discount off of the vendor’s list pricing. One obvious pro of this approach is that it is easier to collect and manage an overall discount from a supplier than anything else and is one reason why procurement departments sometimes take this approach. On the downside this approach does not allow you to focus on items that have higher spends and because each vendor will have different beginning list prices, an overall discount can sometimes be misleading when comparing vendors side by side.
Sourcing every item – At the other end of the spectrum is the approach of gathering pricing and proposals on every item in the category. The advantages to this approach is that it allows you to show where your purchases are heavier for the vendors and it gives you absolute pricing and comparison of the group across all proposals from the vendor community. The trouble with this approach is that when you are looking at 4,000 items this can be a time-consuming task for the vendors to complete and for your team to evaluate at the end, and in some cases vendors do not have the capability to provide unique price sheet pricing on a customer by customer basis.
Group Discount Sourcing – In the group discount approach you collect discount pricing off of list on a product group by product group basis which allows you to split your spend into smaller areas for the vendors to focus on providing more competitive quotes in the areas you need them most. Also, many vendors support this approach in their internal systems much easier. The downside in this approach is like the first approach where the list prices of the vendors can vary a great deal making a straight discount to discount comparison more difficult to evaluate.
Hybrid Sourcing – The final approach is one that takes the positive elements of all three and blends them together. This approach leverages the individual focus pricing on items making up the majority of your spend. From there, the majority of what is left is split into product groups market baskets, with a final market basket of products gathering a discount off of list representing no more than 10% of the spend. The advantage for your company is that you have the focus in all the areas you need and discounts on areas that aren’t as large. The downside is that many vendors are not generally equipped to handle this approach on an account by account basis so it may require more effort on their part in order to support you and the hybrid pricing model.
Regardless of how you choose to source these types of categories there is a model that fits for you and your business. For assistance in sourcing these categories for your business, please contact a SafeSourcing Customer Service Representative.
We look forward to your comments.