The document discusses sourcing complex categories using market informed sourcing. It provides examples of sourcing flexible films and personal hygiene products for large companies. Traditional category management limits options by defining requirements upfront, whereas market informed sourcing allows suppliers to propose flexible options and alternatives. This unlocks greater value and savings of 15-45% compared to 5% expected from traditional negotiations. The approach collects a large number of proposals from suppliers on inputs, processes, and costs to identify optimal sourcing solutions.

2. Sourcing a Complex Category
Peter Hodgkinson | BravoSolution
Welcome

3. 3
Peter Hodgkinson
• 11 Years Supply Chain and
Procurement experience
• Proven ability to define and deliver
savings and efficiency programmes
for clients
• MCIPS qualified and MBA, Strategy
and Procurement Management, led
by Professor Andrew Cox at
Birmingham University Business
School
• Proven ability to implement solutions
which evolve with clients
requirements

4. 4
Sourcing a Complex Category
What, Why, How, When & Who?
Peter Smith | Spend Matters UK & Europe

5. 5
About Peter Smith
• Managing Editor of Spend Matters
UK/Europe
• Procurement Director for Dun &
Bradstreet Europe, the Department
of Social Security, and the NatWest
Group.
• Fellow and 2003 President of CIPS
• MA in Mathematics from
Cambridge University
• Co-authored book, “Buying
Professional Services”, published
in June 2010.

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1. Introduction
2. Traditional Procurement and Category Management
3. Sourcing a Complex Category with Market Informed
Sourcing?
4. How does it work – and why is it valuable?
The Sourcing Revolution

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A requisition comes into the procurement department
OR
The factory requires something, usually specified by the line
manager or engineering, design, R & D...
In both cases, procurement is told – with some precision in
most cases – what it should go out and source / buy from the
market
Traditional Procurement

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• Procurement (maybe with stakeholders) defines a set of categories,
sub-categories
• Takes a pro-active approach to determining the best way of
purchasing each category
• Procurement analyses the market, relates that to the internal
requirement
• Procurement approaches the market – or a few suppliers – with a
well-defined requirement in terms of quantity, specification, etc.
Category Management

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Strengths:
• Proactive
• Links business needs to market and suppliers
• Considers aggregation and leverage
• Well-structured and repeatable process
BUT...
• It assumes that the buyer understands how to frame the
requirement better than the market
Category Management

10. • You are buying fresh tomatoes for Milano Foods, who
use them in a number of finished consumer products,
made in a number of European factories
• Production is all year round, but varies month by month
in terms of quantity
• What are the variables you might wish to consider in your
specification and in suppliers’ responses?
Exercise

11. • Volume needed
• Number and location of production sites
• Usage quantities / schedules
• Number of suppliers (is dis-aggregation allowed?)
• Shelf life
• Delivery dates / times – inc. collection options
• Quality – specification and substitution variables
• Price – basic, volume related, delivery size etc.
• Conditional price factors (“if / or”)
Buying tomatoes - What are the variables?

12. • The complexity of the requirement is evident!
• That means we tend to drive towards a standard solution that the
suppliers can make offers against
• That enables us to handle the multiple variables and make
rational assessment of the alternatives
Buying tomatoes - What are the variables?

13. • If we allowed suppliers to suggest alternatives, we simply couldn’t
cope with the complexity in terms of the responses from multiple
suppliers
• We would not be able to analyse the sheer amount of data, and the
options it would contain
• So we apply Category Management – we second guess the market
through research and strategising
• We then decide in advance how many suppliers we want, delivery
quantities, timings, the quality levels, specifications, max / min
volumes and other parameters
Why do we use Category Management?

14. • But this is not the best way of doing things!
• It restricts suppliers’ flexibility to offer alternatives – part-offers,
alternative specifications, time constraints – which might provide
value
• But we limit this because doing so is just the only way we can run
manageable and fair sourcing exercises
• BUT... There is now an alternative, which is generating savings of
20%+ even for firms who have done CatMan well for years!
Why do we use Category Management?

15. • I can supply 100 tonnes of tomatoes each month between March
and October but only to your two factories in Spain and France, at an
“A” quality level.
• I am happy to supply a minimum of three months (consecutively ) but
I will not contract for just one or two months.
• I can deliver and here are my rates depending on delivery size to
each factory – on top of my ex-farm price. OR you can organise
shipment if you prefer.
• If you contract for the whole 1600 tonnes I will offer an additional 2%
discount. If you buy 500 tonnes of peppers as well, there is an
additional 1% on the table.
What is Market Informed Sourcing?

16. • We close options down not because it is the best way of managing
the sourcing problem
• We do it because otherwise we just don’t know how to cope with the
complexity of the alternative
What is Market Informed Sourcing?

17. Exercise

18. Answers

19. Defining complexity
• The size and nature of the supply market - a greater number of suppliers, or a
wider geographic spread, will potentially increase the complexity of the process.
• The number of ‘lines’ or items that need to be purchased; so a finished product
with many individual components, or a transport contract with many ‘lanes’, has
intrinsic complexity.
• The scope or spread of the requirement in terms of the purchasing organization; so
if we need the item delivered to 45 different company offices or factories situated in
47 various countries from Australia to Peru, then the activity is intrinsically more
complex than a single delivery point.
• The number of users or stakeholders internally; as their numbers increase, so too
will the likely complexity or breadth of the requirement, and the need to align a wide
group of people with the process and the outcome of the procurement.

20. • The potential for dis-aggregation of the requirement i.e. whether suppliers can offer
some of the entire requirement rather than the totality; if there are multiple items, is
it feasible for suppliers to offer a subset of the total package?
• The timescale over which the purchase is to be made. So a single one-off
purchase is easier to source than an item or service that will be delivered in lots or
continuously over an extended time period.
• The potential for substitution; can suppliers offer alternatives to the goods or
services specified by the buying organisation?
• Supply chain dependencies or critical paths; if items A and B are needed in order to
produce item C, then I may have to consider that critical path . There may also be
the option to consider disaggregating that supply chain rather than going for an
integrated single supplier approach.
• Supplier-created dependencies; situations in which a supplier can make conditional
offers; for instance, ‘I can only offer you this price on item A if you also buy item C
from me’.
Defining complexity (continued)

21. A major food company runs an annual European logistics tender.
The basic parameters are:
• 1,000 Routes
• 90,000 Movements
• 200 Hauliers
• 60 Factories
(Other criteria – quality, green issues, speed of response – also take
into account)
Defining complexity (continued)

22. Another Example
A firm requires a complex printed product; a catalogue, brochure or
similar perhaps. Assume the quantities are such that one or more major
printing suppliers will be required. The product is required in large
quantities across 30 countries; it then needs to be delivered in batches to
over 100 locations in those countries.
So, while the product itself is relatively easy to specify, the supply chain
has a number of different elements, principally:
• The base paper required for the product
• The printing process – ‘ink onto paper’
• Assembly and binding of the product
• Intermediate storage and stock-holding
• Delivery to the final customer locations
How would you approach the market?

23. Another Example
• So what is the best way of structuring the supply chain?
• How aggregated or dis-aggregated should it be?
• What is the right number of suppliers?
• How about location of suppliers?
A perfect problem for an optimisation / market-informed sourcing
approach
Allow the market to suggest the “best” way of doing this

24. How does it work?
A request is presented to the market, with as many options and variables
as required.
That might include supply to different factories by month / quantity /
specification; or quotes for different routes (lanes) and load sizes / types
in a logistics situation.
Suppliers respond (electronically) and the platform then runs the
optimisation calculation using complex mathematical algorithms.
The optimal solution is calculated, which can then be further interrogated.

25. After the initial optimisation analysis, the user can then look at different
scenarios. For instance:
•Reduce the number of suppliers
•Spread the geographic risk e.g. Country of origin
•Spread the supplier risk – maximum share of volume
•Maximum suppliers per country / site
•Preferential treatment for incumbents
•Preference for SMEs, minority owned businesses
In each case, the system can assess the premium that would be paid
against the initial optimal solution
How does it work?

26. • Leading adopters have seen average 15-20% saving even where
category management has previously been well implemented
• Understanding of supply chain and opportunity to widen the supply
base e.g. SME participation
• Supplier perceptions improved – they feel they are being given the
chance to express different options and contribute their ideas
• So although it has some of the ‘toughness’ of auctions (and can
even be combined with elements of auctioning), it supports good
collaborative relationships and supplier innovation
• Transparency is also very strong
The Results

27. • Some users are going beyond “just” sourcing and using the
technology for wider issues
• That can include production planning, manufacturing optimisation,
supply chain and related issues
• For example, internal production capabilities can be built into the
calculations along with external providers so make / buy decisions
can be included in the analysis
The Results

28. • Very simple contract requirements or categories may not justify the time or
effort needed to run a MIS process.
• If the requirement is very clear and there is no possible benefit in opening
options up to the market, then clearly MIS is not justified.
• MIS may not be suitable if there may be reasons above and beyond the
normal commercial objectives that mean, for instance, an organisation
wishes to develop a partnering relationship with a particular supplier.
• Even where MIS is worth using, judgement still needs to be applied in terms
of how many options are considered. So you wouldn’t look to dis-aggregate
your FM requirement to the level where you asked for pricing per floor of
every building for the cleaning element of the contract.
• There will need to be careful thought around how MIS can be used in the
public sector, but we see no intrinsic reasons why that is not possible; for
instance, within a Competitive Dialogue process.
The Results

29. • Skills needed by the procurement executive change
• Less focus on market analysis and structuring a very definite tender
• Identification of the key variables and understanding of the market in
order to know how to frame the enquiry and the alternative criteria
for responses is key
• Understanding of the “what if” questions post event and the ability to
look at options creatively whilst meeting business goals
The Role of Procurement

30. In Summary
• Market Informed Sourcing does not replace Category Management,
but it changes the fundamental nature of the CatMan / strategic
sourcing process and requires a different process to be adopted by
buyers
• MIS allows the procuring organisation to open up options to the
market, instead of narrowing down which is the core of traditional
CatMan. That enables the market to reflect back true economic
factors in a manner that can benefit the buyer.
• Market-Informed Sourcing is the most significant development in
core procurement practice since Category Management

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Sourcing Complex Categories
Case Studies
Jeff Ryan | BravoSolution

32. • Thought leader for advanced
sourcing techniques for over 15
years
• Broad supply chain expertise across
a range of industries and categories
• Proven ability to apply complex
problem solving skills to specific
customer challenges
• Thought leader and developer of
applied optimization techniques to
strategic sourcing and many other
supply chain solutions
• Proven ability to design and
implement customized category
management programs
Jeff Ryan

33. Client
Project
Company
Background
One of the largest meat processors in the
world with a network of 51 distribution
centers reaching supermarkets, retail and
wholesale markets, food service and other
institutional clients in more than 110
countries
Over 100 year old, American retailer,
representing largest supermarket chain
in the US; employs 343,000 associates
with sales close to $100 billion
Project HQ  San Paulo, Brazil  Cincinnati, Ohio
Scope
 $R 254 million ($150 million)
 2,124 items
 $93 million annually
 158 SKUs
Flexible Films Personal Hygiene
The Role of Procurement

34. Flexible Films Personal Hygiene
 Requested pricing on existing
structures
 Structures were historically
custom-engineered by supplier to
reduce competition
 Avoided being in the market due
to regular resin increases
 Expectation: 7% to 8% price
INCREASE
 Merchandizing mentality /
Fragmented spend
 Many costs buried for
convenience (e.g. artwork, plates,
promotional expectation, transportation)
 Onerous terms (e.g. two year fixed price,
finished good inventory demands)
 Recent direct negotiations
yielded 0%
 Savings Prayer: Flat  Savings Hope: 5%
The Role of Procurement

35. Enabler – Sourcing Optimization
Optimization
Engine
Complete proposal complexity
 Includes all expressive offers (disparate bundles,
discounts, alternates, etc.)
 Multiple levels of conditional pricing
Optimal
Award
Allocation
Real-world business rules
 Team models buyer’s constraints
and hypotheses
 Scenarios submitted through web
interface
 Ensures feasibility of solution
Scenario Analytics
 Scenario Comparisons
 Solution Summaries
 Solution Details
 Operational Impacts
 Negotiation Preparation
 Implementation Support
Optimization technology embedded into a versatile scenario generation tool to
removes historical limitations on analysis
Supplier
Proposals
Buyer’s
Demand
Profiles

36.  Don’t tell the supply base the answer; tell them the needs
 Develop deeper understanding of supplier economics
 Focus on supplier capabilities and interests
 Lean on suppliers for creativity and innovation
 Let proposal collection be expressive
 RFPs are simply a study of the marketplace; decide later which
solutions make the most sense
Collaborative Principles

37. Expressive Features
Suppliers are given the capability to demonstrate more efficient approaches and
put their best foot forward
Flexible Films Personal Hygiene
 Design alternate structures
 Substitute supplier preferred
components (resins/films)
 Propose various process capabilities
(printing, extrusion, lamination)
 Generate more efficient run economics
(setup cost in many cases effectively reduced to zero)
 Provide additional incentives (Bundle
discounts, volume discounts, payment terms)
 Un-bury hidden costs (artwork, plates, displays,
freight)
 Focus on commercial approach
- Share risk on volatile cost components
(price Indexing)
- Offer conditional strategic expansion
(proposed facilities, proposed equipment)
- Propose more meaningful contract duration
(3, 4, 5 years)
 Consider full lifecycle and TCO
- Order frequency/size
- Distribution route (regional DC, local DC)
- Freight cost alternatives (LTL, TL, IM)
- Inbound terms (Delivered, Collect)

38. More proposals…less supplier effort; e.g.. from Flexible Films
Suppliers enter economic drivers; BCS creates
the proposals
2,124 Items
123 Functional
Spec Items
Supplier input
Collected at most
appropriate level:
• 40 material
components
• 8 conversion facilities
• 20 machine level
pricing
• 32 freight costs
-----------------------
100 inputs
~25
Structures
per supplier
For each structure (eg.)
• 2 material set choices
• 3 conversion facilities /
processes
• Shipping cost to 4 end locations
2 x 3 x 4 = 24 proposals
Each structure could satisfy eight (8)
functional spec items
8 X 24 = 192 proposals
Each function spec item maps to 20
items
20 x 192 = 3,840 proposals
Times 25 proposed structures
25 x 3840 = 96,000 proposals
World of Opportunity: 96,000 proposals x 47 suppliers = 4.5 million proposals

39. Proposal collection is the single biggest differentiator in advance sourcing;
better solutions from better proposals
Materials Process Packaging Final CostTransportation
692 305 573 Result: >2.5M
proposals
92
# of options provided across supply base
The Role of Procurement

40. Results
Project
Flexible Films Personal Hygiene
Expected Savings 0% 5%
Savings
Unconstrained 45% 20%
Short-term
Implementable
25%
$37.5 million
15%
$14 million
Looking Forward
 Selected items with greatest
savings and least change for
immediate implementation
 Chose to work on harder
implementations after PMI
activities slowed
 Stuck with status quo in a few
valuable area to reduce
implementation challenges
 Professing to work on artwork and
plate handling, brokerage,
distribution options, and inbound
freight terms conversion

41. Q&A