3 Steps for Cutting Costs in Business – Step 3: Catalogue and Category Management
10 Sep. 2012 General
This article is the last in the series of our endeavor to decode the cost mystery. After Value Analysis and eSourcing our final pit stop before crossing the victory line is Catalogue and Category management. Cost saving using this method would be mostly intangible in nature. However, you’d slowly realize the operational efficiency figures climbing up and you will have plenty of ‘resource time’ to utilize it in the best possible way.
So, where do you start? Well, with about 70-80% of the purchased items, the C-class category becomes a soft target for category management. There are two ways of identifying the categories for this stage:
Volume Based: Identify the C-class items as a category for cost reduction and assign ‘X’ percentage as the target saving. Segregate the C-class items in 3 buckets (say i, ii and iii) in the order of criticality of application. A general estimate would suggest that the items falling in bucket iii, would be repetitive in nature, with high frequency of purchase in small quantum. You would rather order them on ‘As-Needed’ basis vis-à-vis bulk purchase.
Value Based: Identify items that are small in value (say less than 5% of the total annual spend). Define the criticality of these items as defined above in i, ii and iii buckets.
If I were to draw a general cost breakup structure of any item used in the organization, it would comprise of the following elements:
- Item/ Service cost
- Administration cost (to procure, invoice, follow-up, check and replace items)
- Warehouse/ Workstation cost
- Maintenance cost
A quick calculation of the cost breakup structure would indicate that the Administration cost for items in bucket iii vis-à-vis that for bucket i and (sometimes ii) would be more or less same. Yet the actual benefit to the purchasing organization would be minimal. So, what do we do to reduce these ‘administration’ cost.
The answer is simple, ‘Outsource!’ Ohhh… that hurts! Ain’t it? “We don’t outsource, when we have abundant resources, do we?” But, therein rests your answer. Your abundant resources should certainly be used for more productive work, probably increasing production levels or working on Value added supplies with the vendors and surely not increase your ‘Administration cost’ element of iii-class items.
But, still, if it hurts, let’s call it ‘Category Rationalization System’ (CRS). Sounds ‘corporate’ isn’t it? CRS would allow you to shed off the administration, operation and repair elements associated with the iii-class items to third party vendors. Following are the main advantages of this model:
- The target for cost reduction vis-à-vis market dynamics can be passed on to the service provider and they in turn would own the responsibility to negotiate with the supplier(s).
- Reduction in supplier pool, hence rationalization of administration and supplier ecosystem cost.
- Linking of cost reduction and rejection (and other operational ratios) with service provider payment ensures accountability on the part of service provider.
- Liberating your core resource pool from tedious supplier negotiation, discussion, O2P and P2P cycles ensures they can focus on core competencies of purchases like part development, vendor management and Strategic Sourcing.
There are two models along which you may perform the engagement:
Full CRS: The identified category, its operations and responsibility are owned by the third party service provider. The engagement model and services are fixed for monthly operation.
Spill-Over CRS: In some cases, the volumes of C-class items are fluctuating in nature. In such cases, the engagement with service provider can be arranged to share certain specific category load with the service provider for defined period.
So, here concludes our series of 3 ways (Value Analysis, eSourcing and Category Rationalization) for Annual Cost Reduction in procurement organizations. Measuring the effectiveness of these 3 methods is as important as their implementation. A very important and overriding factor for cost reduction which is mostly overlooked at, is ‘Latent Knowledge’ in the process. Documentation or arresting the ‘Purchasing intelligence’ can go a long way in saving crucial time and process parameters for progressive organizations.
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