A guide to indirect spend #1: Office supplies
Scrutinising critical spend categories to ensure your organisation is sourcing at best value from the right suppliers is bread and butter to purchasing teams. But the breadth of spend categories under management in most businesses means those teams have to focus most of their energies on the high value direct commodities critical to business operations, with the danger that savings are left on the table when it comes to negotiating some of the core indirect categories.
There are fundamental questions to be answered to discover how to drive savings. Which categories offer the biggest savings opportunity? What tactics are required to achieve the best outcome? How frequently should sourcing activity be repeated on a category? How much room for bargaining and negotiation does a category hold?
Over the next six weeks, I’ll be providing insights into the six “top trades” every sourcing team must have on their priority list. And we begin this week with the number one, office supplies.
Invariably, one of the biggest indirect spend categories in any business, it is predicted the global market for stationery products will be worth £100 billion by 2015. But despite its position as an established reverse auction favourite, the level of product variation and its ability to be broken down into many elements can still present a minefield of choices that must be navigated carefully.
In engaging with office supplies companies that have faced many e-auctions, I recommend a well-constructed approach based on a high degree of knowledge. With many suppliers also offering a competitive alternative in related areas such as paper and generic print, office supplies sourcing is large in scale and complex. Tactical category expertise is of particular benefit in navigating through all the options and choices.
One well-proven stationery sourcing strategy is to run both forward and reverse e-auctions in parallel to identify and drive best value across a range of core and non-core items. A reverse auction on a well-determined list of core items finds the most competitive suppliers and forward e-auctions can uncover best value on non-core items where suppliers may otherwise seek to recoup margins conceded from the core list.
Splitting the stationery requirement up across contracts with two or three suppliers to achieve best value can also keep the category competitive, but this should be made clear throughout the sourcing process. The additional costs of multiple supplier management must also be factored into the final best value evaluation.
In summary, if you’re seeking to tackle sourcing best value, office supplies has a high degree of potential due to its sheer scale. However, its complexity means that I always handle it with care, keeping a tactical mindset at the fore.
* Temeena Hussain is a sourcing consultant at Wax Digital. Next week: IT consumables
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I am interested to understand how you have addressed internationally?
Form when I worked within a Stationery company, I saw first hand how the sales community sells to customers. Here are just 2 examples for you:
1/ They ask customers to supply a list of their top 20 or so products and then show that customer that they can beat all those prices, even if they make a loss on the. They do this to show that they are cheaper than the competition. However when they win the business, anything bought out side of this top 20 is sold at a higher rate. This is really where they make the money.
2/ If you are offered a massive discount off all products may mean that little is being made on some products, however the majority of products are often non-branded and teh supplier is still making large margins on these products. And often why (like supermarkets do) offer you to switch to the cheaper non-brands knowing they make more money.
In these 2 cases it is often better to tender for all items you require and ask for a cost plus model rather than a discount off
Some interesting insight here. However, for some deeper category information on Office Supplies, such as how to structure the Core List vs. Basket, how to create market-facing Lots, how to source suppliers and so on, please do check out the resources found on the Market Dojo Resources page. Here you will find category templates and guides for many spend categories, with consultancy detail on how to tender them. All for free of course!
Temeena: what’s a forward e-Auction, please?
Thanks for a good blog – the ‘Top Trump’ card is really eye catching.
We find that office supplies delivers good savings for most clients as all organisations need stationery, the market is full of suppliers and is set up to win business by cutting margin.
We find that most businesses turn to it early on when the board demand cost savings. So how come they can keep coming back to it and finding savings? It’s because the initial negotiation / auction (the cost management piece) is just one part of the story.
The challenges:
Purchasing behaviour: The range of products within office supplies and the fact that ordering is often undertaken by staff with limited procurement training means that even if your initial analysis identifies a large proportion of the spend as core, the non-core will quickly grow, dissipating savings.
Supplier side: with such a large range of products it is very easy for the margins which were cut to gain the business to be recovered by price rises and other tactics to recover that margin typically we see this happen within 6 months unless managed.
What should we do?
Purchase management- here are ideas we see working well:
1) communicate the core list to all orderers and explain why it’s important.
2) work out ways to reward those responsible for sticking to core lists. Saving money on indirect spend goes straight to the bottom line without the risks associated with boosting sales – so why not incentives it just like sales?
3) review regularly what’s being bought and what’s needed and then engage with the supplier to adapt the core list to suit.
Supplier Management – the best supplier relationships deliver the best sustained results, so you could:
1) engage regularly with the supplier – review core lists and ask them for ideas to reduce costs – if they want to retain your business, they’ll welcome the opportunity.
2) work with the supplier to identify how they can help you to keep on core – have you set up the ordering system to ensure that non-core items require authorisation? – If you reduce your order / delivery frequency to save them money will they pass this on to you?
The fact that Office Supplies is seen as ‘low hanging fruit’ every time cost savings are needed demonstrates that costs rise quickly when good purchase and supplier management measures are missing.
A great blog for the cost management piece, but don’t forget that it’s just the start of smarter spending for businesses.
Paul Davidson is an associate with Expense Reduction Analysts
Really excellent comments from Simon Deam and spot on.
Temeena: a forward auction is the opposite to a reverse auction, i.e. the bids go up in value, much like eBay for example, yet more professional! Forward auctions are useful to negotiate things like rebates or % discounts or to sell excess assets or stock.
Many thanks for all your responses and questions, it’s great to see some discussion and debate as a result of my first post here on Supply Management!
In answer to Jonathan Self’s question we believe that International events simply offer another dimension and opportunity to the eSourcing event. Whilst there are additional complexities such as different spend habits, core requirements, currency, CSR requirements and T&C’s that differ across regions and countries this in many ways is no different to the range of requirements we may see from a client here in the UK with subsidiary companies, regions etc. In order to consolidate spend a client could consider country clusters but this is again dependent on the spend category, the supply chain and level of supplier competition. We work with clients according to their individual requirements to ensure they achieve the best possible outcome and this can be achieved both locally and internationally.
Looking specifically at the technology that supports the consultancy process Wax Digital’s web3 platform is available in a dozen languages and completely internationalised with all the functionality required to conduct eSourcing projects across the world and from a consultancy point of view we have worked with our clients supporting international purchasing although based here in the UK – we also have partner relationships across the world and can support our client needs regardless of location.
In response to Ian Tait’s question a forward auction is when one seller offers item(s) for bidding and several buyers compete to offer the price the seller will accept. The seller usually has the option to accept any bid or reject all and forward eAuctions are typically used to sell obsolete goods (e.g. scrap metal) or for liquidation purposes. Put more simply, Forward – offer price goes up, Reverse – offer price goes down.
The remaining 5 ‘Top Trades’ will be covered in coming weeks and we look forward to more of your responses. Our full series of 20 ‘Top Trades’ will also be available soon so stay tuned and if you have any further questions or require more details please feel free to get in touch with Wax Digital directly.
Temeena
I have worked in the stationery industry for 18 years and have worked for the largest stationer and for an independent stationer so have an insight how both work.
large organisations think they have to use one of the large stationers to save the most money due to their size and buying power!! this is is not the case, the independants have a distribution network though the main wholesalers (spicers & vow)which hold more stock than the large ones and have no where near the overheads.
when tendering, the independent stationers are never on a level playing field as they publish MRRP where as the large stationers massively inflate the RRP so they offer you core items hugely below cost and make a fortune on your non core spend. I’d recommend making your core list big and using a cost plus price module or by tendering a full 12 month spend and having one large core list meaning every product will be on your contract, please be aware of switching products to items that will never get ordered meaning they can switch these to expensive high margin replacements once the contract is won.
If the large stationers published the MRRP like the independents do then you will see a lot more contracts being awarded to the independents as a lot of the RRP they publish are inflated by over 400% meaning once you get your discount off you still end up paying way more than the MRRP.
They are very clever how they manipulate the system so beware as the savings you might expect to make are not normally achieved.
Interesting post. Reverse auction and forward auction. I learn something new. Thanks for sharing.
It’s cool how you turn the office supplies as topic a interesting one.