PurchTips - Edition # 113
Office Supplies Sourcing Secrets
By Charles Dominick, SPSM, SPSM2, SPSM3
What Are The Challenges of Office Supplies Sourcing?
In this edition of PurchTips, we'll be exploring best practices in sourcing something that just about every organization purchases and some organizations spend millions of dollars on office supplies! I recently had the opportunity to discuss some of the hidden challenges and secrets to success of office supplies sourcing with David Clevenger, the Vice President of Corporate United, a GPO that sources office supplies for its Fortune 1000 clients.
One of the fundamental characteristics of office supplies contracts are the separation of "core items" from "non-core items." Core items are usually sold at very, very aggressive prices and non-core items are closer to list price.
The best practice of determining your core items is "to sort your usage by extended dollars spent and identify the highest usage, highest dollar items," explains Clevenger. "A rule of thumb is that your core list should account for at least 60% of the office supply spend."
In developing the core list, a sourcing professional may be tempted to introduce standardization principles. However, Clevenger cautions against doing that when creating your first core list, saying it is more important to "identify what is it that your people are buying? What are the preferred items? What are the preferred brands?" By selecting the items that are already popular with your users, change management becomes less difficult and better compliance actually can help save more than a standardization program that is rife with lots of maverick buying.
That's not to say that a sourcing department should always buy whatever end users prefer regardless of business considerations, but instead perhaps taking a two-step approach that increases the probability of short-term savings. "If your people are buying 3M pads, over time you can make an effort to switch them to a private label or a less expensive version," Clevenger suggests. "But in the near term, you're probably well-suited to negotiate aggressively an agreement on the 3M product in order to ensure that your organization is getting compliance and savings."
Some organizations take a more forceful approach to achieving compliance with mandates to purchase only core items or standardized items. Some even require their office supply vendors to automatically substitute a standardized item for a similar non-core item when an end user attempts to purchase that non-core item. Clevenger sees danger in that approach called "cus cat-ing" - and cautions that sourcing professionals must ensure "that substitute is of the same or better quality. One of the things that can really damage your efforts is if the replacement doesn't work. Then, you've really lost credibility with your audience" and compliance is "almost impossible at that point."
But poor compliance is only one reason office supply contracts fail to deliver the predicted savings. Another is that core items become discontinued and are often replaced with higher cost items. Clevenger recommends evaluating the core list on at least an annual basis to identify changes in the availability of core items as well as changes in your buying patterns because of a certain "game" that office supplies vendors play with sourcing departments.
This "game" allows suppliers to make a seemingly aggressively priced contract very profitable for themselves. "It's very easy in an office supplies sourcing effort to show a very low price on a core list or a subset of what you buy to secure the business," Clevenger shares. But in the second and third years of a contract, the supplier changes items in and out of the core list. In fact, 40% of your original core items could be discontinued in a year.
"Organizations that source the contract (and) put it in a drawer for three years don't see that those items are changing and (the original core items) are being replaced with items that the supplier has a higher margin on or that the supplier simply can charge more for," Clevenger says. "Most buyers are not tracking to that level of detail. The suppliers are extremely adept at switching (items) in and out." And because of even less transparency with non-core items, the risk of price creep is even more significant.
Clevenger recommends close collaboration with suppliers to ensure that one-sided core list adjustments are avoided. Sometimes, you can get a lower cost on a replacement item and the supplier can get a higher margin as well. Working together towards this type of win-win scenario is an effective way of achieving all of the savings that a sourcing team predicted.
Aside from challenges with managing core items, the agreed upon price structure of non-core items also often results in higher than expected expenditures on office supplies. Clevenger has some tips for managing the pricing of non-core items for maximum savings: "It's important to know how the non-core pricing is structured with the supplier. We utilize a discount from manufacturer list price, but we have that separated out in over 90 categories. We audit that on a quarterly basis for accuracy. By separating into categories, it enables us to manage it on a much clearer basis." Each sub-category paper, toner, pens, etc. has different market characteristics, so a one-discount-percentage-fits-all number may not be prudent. A 10% discount on one sub-category may be great, but a 10% discount on another may be less than you deserve because of your volume. To truly maximize your savings on office supplies, a sourcing professional needs to be sure that an appropriate discount percentage is negotiated for all subcategories in which there is significant spend.
Finally, a good metric to watch over the life of the contract is the percentage of office supply spend comprised by the core list. If the sourcing organization finds that its percentage decreases from quarter-to-quarter or year-to-year over the life of the contract, that is an indication that the contract is not being managed well.
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Want to learn more about today's topic? Then listen to my podcast interview with David Clevenger! Podcasts are digital audio files that you can listen to on your PC, download to your iPod/MP3 player, or burn to CD. Our Purchasing & Supply Management Podcast Series® is a new way for us to help you succeed!
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