Conducting a sourcing engagement in any category requires a deep consideration of many factors to ensure success. How many suppliers should be invited? What should be included in scope? The challenge is striking a balance of covering all critical aspects of the products or services in question without overwhelming the potential supply base or decision makers with a massively scoped and complex project. In MRO and Packaging categories specifically, this can be a challenge, as the product base is usually high volume and high mix. Items with complicated specifications and supporting documentation can require many resources to digest and review, overwhelming suppliers with the time and headcount required to accurately and strategically price each item.
Applying a market basket methodology reduces the burden on both the supplier and analysts. The term market basket refers to a representative sample of the products or services included in a particular category. A common practice in sourcing categories of this nature is to focus the market basket on the items that take up the top 80% of overall spend over a 12 month period. This removes the low volume items and gives supplies opportunity to focus on the bulk of the spend. While this is a good starting point, there are additional elements that can be incorporated to increase the coverage of quotations without over-extending supplier resources.
The first is to apply product grouping to the entire category spend and utilize that grouping to negotiate discounts on tail spend products. For example, in an industrial supplies and hardware category where 280 items make up the top 80% of spend, and 3500 items account for the remaining 20%, utilizing this methodology will prevent those 3500 items from being completely neglected from pricing negotiations. While only the top 280 items should be priced individually, giving suppliers overall spend figures by category and asking for applicable discounts will further reduce costs outside of the market basket. If a large portion of tail spend falls under fasteners, power tools, and PVF, then suppliers can focus their higher discounts on those categories and future purchases will receive a standard discount.
Another option is to evaluate remaining items as a subsequent round of negotiations. This is especially useful in custom categories such as primary packaging, where leveraging total spend is important but each item requires custom pricing. Utilizing an 80/20 market basket rule runs the risk of a supplier’s capabilities not covering the bottom 20% of items, requiring the use of an additional supplier and making the category more difficult to manage. Once suppliers perform well in the first round of proposals, they are typically more willing to commit additional resources to quoting more items, and the additional leverage will be useful in further reducing overall cost of ownership. Prior to event conclusion and transition, you will have full visibility into the total category cost amongst your select supplier(s).
Overall, best practice in sourcing a complex category with a high product mix is to give suppliers opportunity to be engaged and submit initial pricing before requiring the costing of each and every product. Allowing suppliers to prove themselves as competitive and capable with the top volume market basket reduces the burden on the analyst to have to evaluate thousands of SKUs across each and every invited supplier, and proves to suppliers that they are serious contenders, making them more likely to put their best foot forward.