Get caught up with the Cost Reduction Series:

- Part I: Where Do I Begin?
- Part II: Data, Data, Data
- Part III: Dealing with Decentralized Data Sets
- Part IV: Cleansing Spend Data

Now that you have your initial classification under wraps, let’s start rank­ing categories for further analysis.

Here’s how:

Run a pivot table that shows spend by category, then sort the data by spend. You can now see which categories contain the highest spend and therefore have the greatest impact on the organization. Now add the supplier column to the pivot table. You can now see how many suppliers make up each category of spend.

When ranking categories, you are essentially determining the order in which you plan to drill down further into the data. Factors to consider when developing your ranking include how much spend is in a category, how many suppliers are in a category, which categories have not been sourced recently, and which categories can be sourced most quickly (and with the least resis­tance). Understanding your company culture is important for properly manag­ing this step. For example, depending on the industry you serve, the category of marketing will probably be very high up your list in terms of spend and supplier utilized. However, many marketing departments maintain tight control over their supplier selection and are typically very reluctant to work with people outside the marketing department on supplier selection or supplier negotia­tions. If you are unfamiliar with strategic sourcing, or you get the impression that there is high resistance from marketing, you may not want to identify this area as a starting point. Instead, focus on areas of the company that are more open to change or are less politically sensitive.

This is not to say that marketing spend should not be examined. The pur­pose of a strategic sourcing initiative is to reduce costs and hopefully create significant savings opportunities in the area of marketing. However, building sponsorship and buy-in to the process is critical, and sometimes the best way to do that is by showing some positive results from a strategic sourcing engage­ment. Starting with a department that is reluctant to engage will not help you build that business case.

Now that you have ranked the categories, it is time to subcategorize the information into projects. During this stage you are identifying what you con­sider to be distinct strategic sourcing initiatives, each with its own project plan, timeline, and sourcing strategy. In doing this, you are developing a preliminary sourcing strategy based on leverage points—grouping the spend in a way that provides the best opportunity for a supplier to reduce price, improve service levels, or provide additional incentives.

Our Spend Analysis series is coming to a close. In the final installment, we'll discuss how to get a better understanding of your supplier mix. 
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