Last week, I posted on best practices for category assessment. While that advice should walk you through executing on categories where there are savings opportunities, I think it’s a good idea to take a step back and look at exactly how you should identify those categories. After all, it’s not as though the decision is as simple as sorting a spreadsheet by the “potential savings” column and then working your way down the list from the biggest dollar amount.

So, what are the factors you need to weigh to determine where the opportunities exist and the time frames you should use to prioritize acting on them?

• Business Impact - Clearly identifying the potential repercussions (both positive and negative) to the company in terms of total cost, customer value, product differentiation, safety and regulations is critically important. After all, making a change to your vendors, supply chain or services is a big deal to stakeholders. So you and everyone involved should have done the due diligence to make sure you understand the potential impacts.
• Supply Risk - Every decision has risks associated. But anticipating potential pitfalls for a category helps you know what you might be getting into AND enables you to work on contingency plans. For example, if your category assessment points to an opportunity to source more materials from a low-cost country, but that country is susceptible to earthquakes that have damaged their infrastructure in the past, it is important to understand what that may mean in terms of logistics, inventory and lead times to prevent your business from grinding to a halt.
• Savings Potential - A holistic look at total costs and current market conditions for that category will enable you to get a true look at the monetary value of the opportunity. For example, if labor makes up a significant portion of the category’s cost and there are opportunities to utilize excess labor capacity in an Asian country - perhaps even one your company views as a potential consumer market in the future - it may help make the case for that category, even if it means giving up some ground on raw material costs.
• Ease of Implementation - Underestimate switching costs, technical complexity, scheduling challenges and organizational sensitivity at your own peril. Again this goes back to a holistic view of costs because it’s never as simple as comparing two “prices” an choosing the cheaper one.

Collecting my thoughts on these topics was part of preparation for tomorrow’s webinar on building a sourcing pipeline. So if the topic strikes a chord or brings up questions, I encourage you to attend the webinar (register here), which will dive deeper into the category assessment process and allow for audience questions.

Sundar Kamakshisundaram is the Marketing Manager for Ariba’s Sourcing Solutions. For questions, comments or feedback, Sundar can be reached at sundar[at]ariba.com.