Tailor catalogs to capture savings
By Randy Watson, Suman Sarkar -- Purchasing, 12/13/2007 7:00:00 AM
Most companies put enormous effort into clinching the sourcing deal with a supplier, but less effort into teaching employees outside the procurement organization how to buy under the new contract terms. Online catalogs can solve the problem.
Catalogs allow employees to requisition products and services under terms from the master contract. These catalogs can be reinforced with spend-analytic tools that monitor and quickly address rogue spending.
Most companies today put their online catalogs on the corporate intranet or a secure external website. The catalogs offer a finite number of items per category (to reduce complexity); each item requires in-place supplier agreements and continual updating as contract terms evolve. Catalogs accelerate the product identification and selection time, the approval and payment process cycle time, and reduce the pricing errors as price checks against the pre-negotiated contracts are already reflected in the catalog.
In addition, some companies create sales catalogs that link with buy-side catalogs, thus making it simpler for their own customers to place orders. In such a system, once a sales order is placed, a supplier order is triggered automatically if the items are not already in stock.
The other side of compliance is to ensure that suppliers are adhering to the contracts. Spend-analytic tools confirm that suppliers are in compliance with agreed-to terms and specifications, and they help identify rogue spending. Of course, not all spend can flow through a catalog, so companies must continue to confirm they are receiving the maximum value from suppliers on items that are not included in the catalog.
Making the best use of catalogs begins with answering the following questions:
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Which items should be cataloged? Items and services that are standardized and have agreed-upon prices are ideal for catalogs. Non-standard items that are either custom made or made-to-order do not belong in catalogs and instead should be handled through an exception process, as should items or services for which there are no negotiated pricing mechanisms. These exception buys will involve manual processing and a lengthier ordering process, so they should be used selectively.
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Should the company or its suppliers host the catalogs? Internally hosted catalogs provide better data control, but they also add cost and effort. Conversely, relying on a supplier-maintained site reduces costs and effort, but also limits control over the data. The answer lies somewhere in the middle. For example, companies that perform trade-off analyses often find that controlling the data is critical when they want to standardize items and minimize confusion. In our view, a company should host the catalog for all direct and high-spend categories to obtain maximum benefits from compliance.
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Who should manage the catalogs? Populating a catalog is a major undertaking, and keeping it updated requires dedicated resources. It typically makes sense for a company to own the review process (determining prices and items) and to outsource the process of data population and maintenance. This decision depends largely on the company's ability to get suppliers to comply with its catalog requirements. If suppliers are willing to support catalog requirements, then the outsourcing requirements will be minimal. Overall, the cost of managing catalogs is negligible compared to the benefits they bring; management costs often represent less than 2% of the total savings resulting from improved compliance.
Catalogs require substantial up front work, in gathering and cleansing supplier data, validating prices, and synchronizing supplier ordering systems with the company's procurement system. Additionally, ongoing maintenance is needed to ensure that the data remains current. Catalogs give procurement an opportunity to leverage the corporate contracts that it so painstakingly negotiated. Given the money lost to noncompliance, the return on investment from cataloging is well worth the effort.
| Author Information |
 Randy Watson is a vice president with A.T. Kearney and can be reached at randy.watson@atkearney.com.  Suman Sarkar is a manager with A.T. Kearney and can be reached at suman.sarkar@atkearney.com |
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