Sourcing Opportunity Assessment: Leverage spend through the identification, development and execution of sourcing strategies

The ability to identify and prioritize sourcing efforts is critical to the success of a supply management organization’s strategic sourcing program. However, because many organizations have multiple transaction systems and lack the tools to track and monitor spend with suppliers, their understanding of what is spent is limited and, in some cases, completely unknown. Moreover, if an organization doesn’t have the resources and time available to effectively research a category, it is difficult to conduct a sourcing opportunity assessment, time to source a category, and how to prioritize sourcing efforts.

Spend analysis

1. Spend analysis is typically one of the first steps in assessing an organization’s category-specific strategic sourcing opportunities. Spend analysis as defined in the ISM Glossary 6th edition is an analysis of the historical spending patterns in an organization, usually by commodity or category. This analysis provides information about the types of items purchased and their cumulative dollar value, which becomes the substance for future strategic and operational purchase planning.

To begin an analysis, however, the assessment team must work with the stakeholders to identify the best approach for collecting the most accurate data. Stakeholders must be interviewed, and sources of data must be identified for full and comprehensive collection. The outcome of successful data collection will lead to a cleansed database of enterprisewide corporate spend data, which can be sorted by category, supplier, division, and geography. Sophisticated, enterprisewide direct and indirect spend databases consist of accounts payables data from all relative sites, ERP/MRP expense data, and fleet and/or procurement card systems data. In some cases, suppliers may be asked to provide spend information to supplement, validate or create the spend database. Additional steps in building a spend database include the following:

• Establish mapping between category codes and category maps.
  • Normalize supplier information.
  • Perform supplier mapping.
  • Refine mapping with financial systems data.
  • Combine spend data into a unified “spend cube” database.
  • Create initial reports — the project team initiates an internal beta test.
  • Create quality assurance initial reports, especially on high-potential categories.
  • Provide feedback on initial reports.
  • Revise spend database based on initial feedback.
  • Modify database based on second feedback.

Once a cleansed database is built, sourcing team members may then begin to create reports, and identify and group spend by the sourcing group, supplier, company site location, and company divisions or agencies. The most common output of spend analysis is frequently called a spend tree. From these reports, a sourcing team may begin to benchmark, assess the opportunity, and truly begin the spend analysis. Typically, spend analysis involves the process of reviewing spend reports, benchmarking, and assessing the category opportunity.

When analyzing spend, review:

• Spend size.
  • Savings percentages from past experiences in related markets.
  • Competitiveness of the supply market as it pertains to the organization (for example, a dominant supplier with patent or unique processes versus numerous capable suppliers).
  • Volume relative to supply market.
  • How recently the category was strategically sourced.
  • Supplier fragmentation.
  • Underlying commodity market conditions. 

Cost/price analysis

• An opportunity assessment should not only analyze spend characteristics, but should also take into consideration the price of the purchased item and key total cost of ownership principles. While price is just the amount paid for something out of pocket, total cost of ownership (TCO) is the total cost incurred through the acquisition, use, support, maintenance, and ultimate disposal of a component or product. TCO includes all costs, direct and indirect, incurred throughout the life cycle of an asset, including price paid, acquisition and procurement, operations and maintenance, and end-of-life management.

Analyzing TCO enables supply management professionals to make better comparisons between suppliers based on hidden costs in addition to first costs; directs us toward potential effective sourcing strategies; assists in negotiating value-added partnership arrangements rather than focusing solely on price reduction (for example, joint process improvements); and also helps us identify and remove non-value-added activities in a product or service’s life cycle. Most importantly, a TCO analysis helps us accurately forecast savings from strategic sourcing.

Although not typically employed during an opportunity assessment, more complex cost analysis through regression analysis may be done for more critical categories. Cost regression analysis (CRA) is a statistical “should price” method to identify savings opportunities in complex categories.

• Key principles of CRA include the following:
  • Detailed analysis of specifications and performances of all variants of the products.
  • Identification of products’ main and measurable cost drivers.
  • Comparison of costs across variants (projects, entities, differences in specifications, and the like)
  • Statistical analysis based on linear regression.
  • Fast regression of variant product prices over their relative performance.
  • Setting a target on the top 20 percent of purchases.
  • Build-up of the target cost and comparison to real costs.
  • Iterative approach to align the linear regression with the true cost drivers.
  • Use of expected target cost to renegotiate with suppliers.

Risk analysis

• The ISM Glossary 6th edition defines risk analysis as the process of identifying elements or factors and their probability of occurrence which could lead to injury, damage, loss or failure. Assessment of risk can be measured both internally (within the organization) or externally (within the marketplace). Understanding the organization’s willingness to change suppliers, implement a new software solution or source internationally will have a direct impact on the accuracy of the opportunity assessment and the resulting sourcing priorities.

Nonetheless, efficiently analyzing risk requires a brief but important exercise. The sourcing team must identify the risk, assess its likelihood of having an impact on the strategic sourcing opportunity, assess its impact on the organization or category if the potential risk were to occur, and develop mitigating actions to avoid the risk. The topic of risk is covered in Task 3-E.

The types of risk facing supply management professionals can be grouped into three categories — item characteristics, market characteristics, and supplier characteristics — as outlined below.

Item characteristics include:

• Availability of supply — Adequate supplier capacity and on-time deliveries are critical to the supply process.
  • Cost — Price increases due to poor planning and forecasting can result in increased prices, which lower profitability.
  • Product application — Initial use of an item in a new product or service application carries greater risk than using the item in an existing product or service.

Market characteristics include:

• Global sourcing — Efforts to reduce costs by using suppliers in low-cost countries results in greater risk due to currency fluctuations, political instability, unreliable infrastructure (for example, power supply and communications), supplier staff turnover, skill and language availability, and increased delivery times.
  • Capacity constraints — Markets where only a few suppliers produce a certain item or provide a given service are negatively impacted if one or more of the suppliers become unable to supply the good or provide the service on a short-term or long-term basis.
  • Number of qualified suppliers — A lower number of qualified suppliers for a good or service presents increased risks due to lack of knowledge of the buying organization’s production processes, testing, service delivery, and involvement with the final product or service. A small number of suppliers could also indicate a monopoly or oligopoly in the supply marketplace.
  • Economic conditions — A slowing economy may result in excess inventory at prices above what buying organizations are willing to pay. A growing economy may result in suppliers’ inability to meet demand for goods and services, particularly if the suppliers’ activity had decreased during a prior slow economy.
  • Price uncertainty — Buying organizations that cannot accurately forecast price changes (increases or decreases) may need to engage in hedging to manage risk.

Supplier characteristics include:

• Capacity constraints — Suppliers may not be able to meet demand for goods and services due to their own internal constraints if buying organizations cannot forecast accurately or if demand for a good or service grows unexpectedly.
  • Inability to reduce cost — Suppliers’ fixed costs may prevent them from reducing costs further. Sustainable price decreases must be accompanied by efficiencies in suppliers’ operations.
  • Incompatible information systems — Difficulties in communicating between the buying organization and supplier due to information systems difficulties may result in the inability to share key information, which impacts the supply chain.
  • Quality problems — Suppliers that cannot consistently meet quality requirements for the goods and services they sell are at risk of losing customers and may find it difficult to attract new customers, which can lead to the supplier discontinuing operations.
  • Unpredictable cycle times — Volatile cycle times create forecasting errors in the supply chain and can result in a buying organization’s underbuying or overbuying products and services.
  • Volume and mix requirement changes — Volume and product or service mix changes place a supplier at risk for not responding to customer requirements, and can increase risk when other characteristics such as capacity constraints, limited production or service flexibility, volatile cycle times, and inaccurate forecasts are present.
  • Inventory management — Suppliers experiencing difficulties in managing raw materials, work in process, finished goods and materials needed to provide service all contribute to supply risk.
  • Financial health — A supplier with poor financial health, such as limited cash flow, may have difficulty paying invoices on a timely basis, which can impact supply and the supplier’s overall operations.
  • Disasters — Acts of nature and other unplanned events can negatively impact a supplier’s ability to provide goods and services.
  • Legal liabilities — Suppliers may be subject to legally enforceable restrictions, such as patent and trademark infringements, which may prevent the sale of their goods and services.
• In the opportunity assessment phase, a sourcing project team must also, when reviewing and discussing spend and prioritizing opportunities, take factors in the market into consideration. Sourcing approaches are typically driven by market dynamics and the organization’s position in that marketplace.

Market analysis

A market analysis addresses the following:

• Market conditions.
  • Supplier dynamics.
  • Evolution of technology.
  • Impact of changing industry dynamics on the marketplace.
  • Buyer’s position in the marketplace.
  • Competitiveness of the market.
  • Threat of new entrants in the market.

After identifying the market dynamics above, Porter’s Five Forces, a model used by Michael Porter (1980) to describe competition, is typically used to document the buying organization’s strength in the marketplace, and is a critical component in determining the appropriate leveraging strategy. The five forces as depicted in Figure 1 are: the extent and intensity of direct competition; the threat of entrants; the threat of substitute products and services; the power of buyers; and the power of suppliers.

Requirements analysis (e.g., standardization, consolidation)

• Finally, once spend, cost, the market and internal/external risk are identified, internal requirements must be reviewed, outlined and perhaps challenged. Conducting a thorough requirements analysis requires the team to understand the dynamics of the organization and of the buying team.

During this process, the sourcing team should carefully review the specifications. If a nonstandard item is being purchased, is there a standard item available that would meet the need without compromising value? In the case of a legal service, is the organization paying for a partner or a lawyer when perhaps a paralegal could complete the required task? Could legal services be consolidated under fewer firms, perhaps gaining leverage or synergy?

The Category Management Process

Categories are “groups of related commodities, products, or services that typically have similar attributes” (ISM Glossary 6th edition). Categories for direct spend might include chemicals, plastics, machined goods, or electronic assemblies. Examples of indirect spend categories include office supplies, legal services, or software. When establishing categories, it is important to identify synergies among the purchases that comprise a category and for the categories not to be too broad or too narrow.³

Note that some organizations use the term commodity management when referring to category management. Depending upon the organization, some categories may be true commodities, such as wheat, coffee, copper, oil, and natural gas. Commodities are raw materials traded on organized exchanges, such as the London Metals Exchange, whose prices are driven by perceptions about supply and demand. However, for many companies, categories will consist of purchased components, finished goods, or services that are not true commodities.

Category management is a data-driven, proactive approach used to develop and implement sourcing and supply management strategies at an aggregate level. The category management process is shown in Figure 2-1.

Figure 2-1: Category Management Process

Establish and Prioritize Categories

Conduct a Spend Analysis

In many organizations, different units at various locations make the same types of purchases from different suppliers, using different contract terms and at different prices. Thus, the first step in category management is to gain visibility in spend across the organization. Spend analysis is defined as the “analysis of the historical spending patterns in an organization, usually by commodity or category” (ISM Glossary 6th edition). A spend analysis analyzes the buying organization’s financial transaction data to determine: what is being purchased within the organization, in what quantities, at what price, from which suppliers, and by whom within the organization.

Most organizations use commercially available software for spend analysis that is either stand alone or part of the buying organization’s ERP system.⁴ Although not ideal, in smaller organizations, Excel spreadsheets can be used to do a spend analysis. The first step in a spend analysis is extracting data from an organization’s various information systems such as e-procurement systems, p-cards, and ERP systems. This can be especially challenging when many different groups within the organization are doing purchasing. The next step is cleansing the data to remove errors and differences. For example, unless cleansed and standardized, in a spend analysis, purchases from “GE” and “General Electric” would be considered as purchases from different suppliers. Then, each purchase is categorized using a standard classification scheme. For example, the category of “facilities” might include all spend related to building maintenance, cleaning services, waste management, and cafeteria services. This can be challenging however as different groups within the organization may use different types of codes for purchases. At this stage, the data may be enriched with other relevant information.

The next step is to identify which categories account for the highest level of spend. A Pareto analysis (also called ABC analysis or 80/20 rule) identifies the highest spend categories, which may be ones that should be closely managed. A Pareto analysis is “the process of determining the small minority of a population that accounts for the majority of a given effect” (ISM Glossary 6th edition). Applied to category management, approximately 20 percent of the categories will account for about 70 percent to 80 percent of the spend. Based on spend, these items are the most important to manage and are classified as “A” categories. Typically, “B” items account for 15 percent to 25 percent of the spend, and most of the categories account for less than 10 percent of spend and are classified as “C” items.

An example of a Pareto analysis for the spend categories identified at State University is shown in Figure 2-2. In this case, printing services and office furniture account for about 70 percent of spend and are considered to be the most important to manage considering spend. This process can also be used to identify which suppliers are accounting for the highest level of spend within a category and which departments are accounting for the highest level of spend within the buying organization.

The results of a Pareto analysis are typically shown graphically in a combo bar chart with percent of annual spend on the left y-axis and percent of cumulative spend for all categories on the right y-axis. Figure 2-3 shows a Pareto chart for the spend categories for State University.

Figure 2-2: Pareto Analysis for Spend Categories for State University

SPEND CATEGORY	AMOUNT ($1000S)	TOTAL SPEND (%)	CUMULATIVE SPEND (%)	CLASSIFICATION
Printing Services	$4,438	36%	36%	A
Office Furniture	$3,922	32%	68%	A
Transportation	$2,229	18%	86%	B
Scientific Equipment	$641	5%	91%	C
Office Supplies	$620	5%	97%	C
Sports Apparel	$425	3%	100%	C

Figure 2-3: Pareto Chart for the Major Spend Categories for State University

It is also important to identify which categories of spend are “addressable,” those where supply management professionals can make changes to sourcing and supply management strategies, and which categories are “nonaddressable,” those where supply management professionals cannot currently influence. For example, in the state of Ohio, the spend for social programs, public safety, and education are outside the control of the state’s supply management professionals and thus are “nonaddressable.”⁵ However, with top management support, policy, and procedural changes, nonaddressable spend can become addressable. The results of a spend analysis may lead an organization’s top management team to support changes to make more spend addressable.

Assess Future Needs

The spend analysis provides a historical view of what spend has been in the organization. Category management is forward looking and strategies may take several years to fully implement. Thus, it is important to know how spend may change in the future by understanding the organization’s strategic directions and objectives. It is important to talk with internal stakeholders to understand how their requirements may change in the next three to five years. For example, are they developing new processes, products, or services that change the importance of categories or require totally new categories?

For example, as shown in Figures 2-1 and 2-2, historically, printing was the highest spend category at State University. However, State University has a strategic goal of being more sustainable and reducing costs for students. It has implemented digital course management software and is providing incentives to faculty and students to use digital documents. With the move to digitization, spend on printing should be dramatically reduced. However, as spend on printing declines, software licensing is likely to become an important spend category.

Analyze Supply Market Fundamentals

In addition to understanding historical spend characteristics and future requirements, supply management professionals must develop a deep understanding of supply market fundamentals and expected changes. This involves gathering and analyzing supply market intelligence. Market intelligence is “the process and result of gathering and analyzing information about the aggregate forces (including economics) at work in trade and commerce in a specific service or commodity” (ISM Glossary 6th edition). Although some organizations gather and analyze market intelligence internally, others d use third-party service providers or subscription services to provide data and analysis. A number of companies offer market intelligence solutions and services combining machine learning, data analytics, and data visualization.

In-depth knowledge of supply markets can be used to prioritize categories and support the development of category strategies. Market intelligence typically includes information about the following:

• Expected changes in supply and demand.
• Supply market structure and intensity of competition.
• Total supply capacity, capacity utilization, and potential expansion or contractions.
• Changes in technology and innovation in the category.
• Laws and regulations affecting the category.

For many purchases, especially those involving raw materials, components with high raw material content, or transportation, the relationship between supply and demand influences price. For example, as supply contracts and demand increase, prices generally increase. Thus, it is important to understand the underlying factors that influence supply and demand and how those may change.

Another important consideration is the supply market structure and intensity of competition in the industry. As suggested by Porter’s Five Forces Model, competition in the market can range from intense to mild.⁶ The degree of competition in the supply market may be full and open, limited, or technical. Full and open competition exists when many suppliers are available. Full and open competition in the supply market typically places the buying organization in a strong position and is often the case for mature products or services. Limited competition exists when few suppliers exist, reducing supply management professionals’ choices in supplier selection and creating less pricing flexibility. New products and services that are early in their life cycles are often less competitive, because fewer suppliers are available.

Technical competition exists when, for a special product, technology, or patent reasons, only one or very few suppliers are available. For example, Samsung and LG are typically the leading suppliers for mobile phone components based on their investment in leading-edge technology. In another example, because of the technical complexity in design and production, for years only two companies worldwide, Boeing and Airbus, produced large commercial airplanes. The China-based COMAC developed and delivered its first mid-sized plane in late 2015, but faces many regulatory and other hurdles before it has customers outside of China.⁷

Mergers, acquisitions, spin-offs, and break-ups also affect the intensity of market competition. Mergers and acquisitions reduce the number of companies in an industry and typically reduce competition. Antitrust concerns over reduced competition and increased prices are reasons the U.S. Justice Department reviews mergers and acquisitions. For example, during the last two decades there has been consolidation in the U.S. airline industry, reducing competition. Conversely, when organizations spin off or break up, the opposite condition occurs; there is more competition within the supply market.

Excess capacity in an industry typically drives prices lower. A product’s or service’s life-cycle stage affects its industry’s capacity utilization. For new products and services, capacity, which is the maximum output or producing ability, can limit supply relative to demand, leading to higher prices. Rapid sales growth typically increases utilization, reducing excess capacity and increasing prices. However, with rapid sales growth, a supplier’s actual costs may even decrease because of increases in productivity caused by the learning curve. The learning curve effect is most common in complex assembly processes such as consumer electronics assembly. Rapid sales growth and high profit margins tend to attract other organizations to enter the market. Over time, as sales begin to slow and decline, capacity utilization, the percent of available capacity that is being used, typically decreases. When capacity utilization decreases, suppliers are often willing to lower prices to gain sales at the expense of their competitors.

The type and rate of technological change is also an important consideration. New technologies and services (for example, digital streaming) make old technologies (such as the DVR) obsolete. During the phase-over period of overlapping product life cycles, these products often compete as substitutable products. In many industries the rate of technological change is accelerating so supply market changes can happen quickly.

Government regulations can affect the market as well. For instance, government subsidies in China, Germany, and the U.S. fueled rapid growth in the solar power industry in the early- to mid-2000s. Supply management professionals need to understand government regulations and changes that are relevant to the products and services being purchased, and the influence that governmental actions may have on the supply market.

In addition to macro-level market intelligence, the analysis should gather information about specific products, services, and suppliers to identify opportunities to increase value for the organization. Information should be gathered about the following:

• Current and potential suppliers, their capabilities, and geographical locations.
• Pricing and cost trends, underlying cost drivers, and should-cost models.
• Supply chain risks and the potential for disruptions.

To be most useful, the analysis of market intelligence needs to go beyond describing what has happened in the past to providing an understanding of what may happen in the future, which is referred to as predictive analytics.⁸ A SWOT analysis is a forward-looking tool used in strategic management to determine the strengths, weaknesses, opportunities, and threats based on internal and supply market data.

Sources of Supply Market Data

Supply market intelligence can be gathered from many different sources. The most frequently used sources of data include information provided by suppliers in response to RFIs.⁹ Other sources of data include company websites, 10-K and annual reports for publicly traded companies, news articles, company press releases, industry studies, and government publications. For example, D&B Hoovers is a source of industry analysis and company profiles.¹⁰ Government agencies and nonprofit organizations are also excellent sources of data. For instance, the U.S. government’s Bureau of Labor Statistics (www.bls.gov) and Energy Information Administration (www.eia.gov) are excellent sources of data. The European Commission’s Eurostat website is a source of data on industry, agriculture, and energy, as well as other economic statistics.¹¹

Market intelligence also can include data gathered through benchmarking which is “a process by which selected practices and results of one organization are compared to those of one or more other organizations to establish targets for improvement” (ISM Glossary 6th edition). Benchmarking data can be gathered by direct interaction with another organization or through data gathered and analyzed by third-party organizations. For example, CAPS Research (www.capsresearch.org) conducts benchmarking studies for several industries and issues

Using Segmentation to Prioritize Categories

The information gathered in the spend analysis, assessment of future needs, and supply market analysis should be integrated and analyzed to identify the categories that offer the greatest opportunity for adding value. Portfolio analysis is commonly used to assign categories to one of four quadrants (routine, leveraged, bottleneck, and strategic) in the Kraljic¹² matrix based on the level of supply risk and value or impact of the category to the buying organization (ISM Glossary 6th edition). The quadrant then defines the category strategies that would be most appropriate. Monczka et al. (2016) suggest the following generic strategies for each quadrant:

• Strategic (high risk/high value): Form strategic partnerships and collaborate with suppliers.
• Leverage (low risk/high value): Consolidate spend with a few suppliers but maintain competition.
• Bottleneck (high risk/low value): Ensure continuity of supply by expanding the number of qualified suppliers.
• Noncritical (low risk/low value): Simplify and automate the sourcing process.

Although traditionally portfolio analysis has focused on avoiding risk in a category management context, it is important to focus on the opportunity for effective category management to increase value for the buying organization. Figure 2-4 illustrates an application of the risk/opportunity and value matrix for a retail bank.

Figure 2-4: Risk and Value for Retail Bank

Source: Adapted from P. Kraljic (1983).

Develop Category Strategies and Action Plans

The objectives and strategies that are developed through category management are implemented in the sourcing and supply management process (ISM Glossary 6th edition). Category managers develop category “playbooks” that articulate the strategies and action plans for each category (ISM Mastery Model^®). The results of spend analysis, future directions, and supply market analysis are summarized visually in the playbooks. Then, specific strategies and action plans for the categories are described. Typically, category plans address supply base optimization for the category, including issues such as the number of suppliers to use, which suppliers are best, locations of suppliers, the types of relationships needed with suppliers, and contract length. However, other factors may also be addressed such as supplier innovation and risk mitigation.

Supply Base Optimization

Supply base optimization involves designing the supply base so that it best meets the buying organization’s needs. When first implementing category management, supply base optimization often begins with supply base rationalization. The ISM Glossary 6th edition defines supply base rationalization as “determining and maintaining the appropriate number of suppliers by item/category depending on the risk and value of the item/category. Initially, rationalization often means reducing the size of the supply base. Longer term, the process focuses more on managing the size of the supply base, particularly as market dynamics change. This method reduces the expenses involved in qualifying and maintaining large supplier bases.” For example, supply chain risk or the need to access innovation may lead the buying organization to increase the size of its supply base. As part of supply base optimization, the category plan typically addresses the issues of single sourcing, dual sourcing, multiple sourcing, or parallel¹³ sourcing.

A sole source situation exists “when only one supplier possesses the ability to fulfill the organization’s needs” (ISM Glossary 6th edition). This may occur because a single supplier has a patent or proprietary technology, economies of scale, or governmental regulations. Because the organization is dependent upon a sole supplier, the organization is exposed to a higher level of risk. These risks include price increases, quality problems, lack of product/service availability if the supplier has capacity constraints or takes on another more profitable customer, and supply disruption due to disaster or supplier financial problems. Organizations may try to move away from sole sourcing by redesigning products to include more suppliers or developing the capabilities of other suppliers to create competition.

Single sourcing exists when a buying organization “deliberately concentrates purchases of a particular item with one supplier in preference over others in a competitive marketplace” (ISM Glossary 6th edition). This practice is sometimes used for strategic supplier relationships, early supplier design involvement (ESDI), and increased reliance on suppliers for innovation. In cases where there are high start-up costs, such as investments in new equipment and tooling, single sourcing can be a cost-effective alternative to using multiple sources. In those countries where supplier diversity initiatives exist, there can be an inherent conflict between a single sourcing strategy and small, diverse, and historically underrepresented supplier program goals. Small, diverse, and historically underrepresented suppliers may not have the capacity to meet all an organization’s purchase requirements.

Single sourcing improves trust, information sharing, and collaboration with the supplier. Benefits from single sourcing are: quality improvements, administrative simplification of working with one supplier, joint schedule planning, less complexity in logistics, early supplier involvement in product or service design, joint costing and pricing benefits from economies of scale, and a greater willingness on the part of the supplier to share innovations. Single sourcing facilitates collaboration, because the supplier will be less concerned that its ideas and innovations will be shared with its competitors. Single sourcing runs counter to the traditional approach of using several suppliers to maintain competition and to hedge the risk of supplier failure.

A heightened awareness of supply chain risks has some organizations looking for ways to retain some of the benefits from — but reduce the drawbacks of — single sourcing. One approach is dual sourcing, which is to award one supplier most of the business and award a second supplier the remainder of the business. After years of single sourcing, Apple has shifted to a dual sourcing strategy for many of its purchases.¹⁴ Another approach is to single source individual components, but to use different suppliers to provide similar, but not identical, items; this is called parallel sourcing.¹⁵ This approach is used in the automotive industry. Companies such as General Motors will single source seats for one model with one supplier and single source with a different supplier for another model. This can reduce the problems of being too dependent on a single supplier. Suppliers will tend to be more innovative and cost and price conscious when other suppliers are competing for an organization’s business.

Multiple sourcing involves “splitting purchases of an item among two or more sources” (ISM Glossary 6th edition). Using multiple sources eliminates the risk of supply disruption because problems with one supplier do not affect the ability of other suppliers to continue making the product or service available to the organization. Multiple sourcing is an appropriate option to ensure the organization does not become overly dependent on a supplier. While multiple sourcing tends to keep the chosen sources competitive, a frequent drawback is a short-term orientation and the absence of a strong, long-term relationship and commitment between the parties. Thus, multiple sourcing is not desirable for high-spend, high-risk purchases in which strategic supplier partnerships are needed. However, multiple sourcing can be a useful approach in other purchase situations, especially those that are high spend but low risk.

Establish Governance

Category management requires resources and changes in sourcing and supply management strategies; thus, top management support is critical. When implementing category management, often an executive-level steering committee is formed. This team provides guidance, resources, and support for category management activities. Because category management affects all purchases across the buying organization and often requires changing suppliers and relationships, internal stakeholders must understand and buy into the change. With top management support and education, internal stakeholders are more likely to support the changes.

When developing category management plans, often the buying organization forms a category team consisting of the category manager, key internal stakeholders, and other supply management professionals. The team’s composition depends upon the complexity of the project. This team is responsible for developing and getting approval for the category plan from the executive steering committee. This team will also update the plan at least once a year, or more frequently if there are changes in spend, the buying organization’s strategy, or the supply market. The category management team leader is typically a supply management professional who facilitates the process. A category team leader must be able to think strategically, communicate effectively with top managers and internal stakeholders, effectively implement change, collaborate with internal and external stakeholders, and build effective relationships.

Implement Action Plans

Once the plan has been developed, depending on the organization, it may be implemented by the category manager or strategic sourcing team. When developing and implementing category plans, good project management practices should be followed. The category manager is the project leader. Project management is the process of coordinating the organization planning, scheduling, controlling, monitoring, and evaluating of activities so that the objectives of a project are met (ISM Glossary 6th edition). These include:

• Defining the project, its rationale, and performance measures to obtain executive support in a project charter. Category management changes sourcing and supply management processes and strategies, so top management support is essential for success.
• Planning the scope of the category strategy, team responsibilities and roles, developing a budget, determining the schedule, and identifying supply risk.
• Communicating the category management project plan and obtaining support from the top management steering committee and internal stakeholders.
• Applying change management practices to standardize the sourcing process and implement other required changes.
• Monitoring progress toward meeting the category management project’s objectives and reporting to top management and other internal stakeholders. If progress is not being made, then the reasons why must be identified and modifications should be made.