SupplyExcellence is happy to welcome guest blogger Michael Lamoureux (aka “the doctor”), editor of the Sourcing Innovation blog,

In these tight economic times, two thoughts are are at the forefront of every buyer’s mind: Cost Reduction and Supply Assurance. Considering that the very foundations of SupplyExcellence are Cost Avoidance and Uninterrupted Supply, this is a good thing.

In an effort to help you with your cost reduction initiatives, over the last few months, SupplyExcellence has brought you a number of valuable posts on how to lower the cost of supply in numerous categories, including Legal Services and Hardware, IT Services, and Plastics and Rubber. In addition, in an effort to help you with your supply assurance, SupplyExcellence has brought you some great posts on Supply Risk, Procurement KPIs, and Services Procurement to help you get the most from your category acquisition efforts.

But for every category covered by an Ariba SupplyWatch effort, there are two more waiting in the wings that might represent a considerable savings opportunity for your organization. In addition to category-specific advice for the most attractive categories in this time of economic turmoil, you also need generic advice that you can apply to the slightly less attractive categories that, when taken together, likely represent a significant savings opportunity that should not be overlooked. Thus, in this post, I will outline some initial techniques that work on any category.

1. Do a Real Spend Analysis: A number of posts here on SupplyExcellence and on Sourcing Innovation have dealt with this topic, and done so for a good reason. You can’t save big if you don’t know where your biggest savings opportunities are. The first step of any cost-reduction is to have an in-depth spend analysis done by experts who dive into your data using leading spend analysis tools and look at not only where you spend the most, but, based upon your transaction data and their current market knowledge, identify where your biggest savings opportunities are. For example, just because you’re spending 500,000,000 on corn doesn’t mean that you can take 10% off and save 50,000,000. Maybe you’re already getting the best market price from a long-time supplier. It could be the 100,000,000 temporary labor services category that you might be tempted to overlook is the biggest savings opportunity of all with 40,000,000 to be saved if you re-allocate your services contracts among multiple providers with excess contractors on the bench in different cities who can, locally, give you the best rates.
2. Build a Should-Cost Model: If you don’t know how much you should be spending, how can you possibly know how much you should be saving? For each product, with the help of a category expert, break it down into raw material components and overhead costs (labor, energy, environmental disposal, etc.) and use current market indexes to cost what a unit of the product or service should approximately cost, using competitive banding and price-prediction over the previous and coming quarter if your tool supports it. If you’re average cost is below this range, there’s no cost savings opportunity. If it’s in the range, there is the potential for some cost savings, and if it is way above, that’s your gold mine opportunity.
3. Use e-Sourcing: Not only will an e-Sourcing tool allow you to compare costs and and benefits in an apples-to-apples manner, but, done right, it will introduce transparency and structure into the process while ensuring both sides maintain high ethical standards. Plus, it will increase your efficiency and reduce your cycle times, allowing you to tackle more cost-reduction and supply assurance projects on a quarterly basis.

Regardless of the category being sourced, spend analysis, should-cost modeling, and e-Sourcing will always save you time and money. If they’re not already, these three techniques should be part of every sourceror’s utility belt. They work.

Michael Lamoureux, aka “the doctor”, is the editor of the Sourcing Innovation blog.