What is the first step for profiling a commodity

A commodity strategy is the purchasing plan for a specific product or service (commodities) that facilitates the management of the supplier base, avoids and/or proactively solves potential problems, and is the basis of future Postal Service business practices surrounding a purchase of the commodity involved. The competitive market demands that the purchase/SCM team develop focused concepts and methods and apply them to purchasing behavior. A commodity strategy is based on the CSSP that ensures the use of systematic processes for developing strategies to achieve SCM goals that fully support objectives. Strategies, as their name implies, should be strategic and focus on standardization and innovation, not just on technical and tactical support. Strategies are developed by establishing goals and specific baselines that are generated by a thorough understanding of the external supplier environment and the internal client reality. Every year, strategies are reviewed in face-to-face meetings with the purchase/SCM team and the VP, SM. The most crucial factors and points of reference for all category strategy planning are:

Early, detailed, cross-functional strategic planning is an essential component in meeting supply chain goals. Obtaining cross-functional involvement ensures a more holistic view of the purchase process and enables SM to better meet its goals and its clients’ goals. Collaboration among the CMCs as an overall strategy requires:

Each CMC team is required to develop and maintain a written commodity strategy (including input from applicable clients) for each major spend category for which the team is responsible. The CMC team has a composition similar to that of a purchase/SCM team and comprises buyers, market analysts, price analysts, and item managers with expertise and experience specific to each commodity. The CMC team applies SCM business practices to both strategic sourcing and individual purchases and examines demand trends, the marketplace, and the supplier community to determine how to achieve best value for the clients and which practices will be of the greatest significance.

The strategies developed by the CMC team will focus on planned objectives, as well as the tactics and resources necessary to achieve client satisfaction and business success in the supply category in the coming year. It is especially important that the CMC team, when developing commodity strategies, identify the technological nature of the commodity (if any) and what technology is needed to support the purchase throughout the life cycle. Goals are translated into specifics and sequentially broken down according to:

A commodity strategy is developed by evaluating, considering, and leveraging data about the following:

The first step of strategic sourcing is identifying your business’s sourcing category or commodity. The best way to do this is with a spend analysis. By collecting the necessary data, sorting through it, analyzing it, and validating it, your procurement team will have

a better understanding of the particular sourcing category for your business, as well as the commodities within it. They will, therefore, be more equipped to make informed sourcing decisions for the betterment of your company.

Analyze the Following Key Areas:

As the first step of the strategic sourcing process, as outlined by AT Kearney, this step is a planning phase. So, it is important to gather as much information as possible. You will need to research and gather data on the following key areas in your company:

• The product categories you business uses
• Your spending patterns by department or user
• Your business’s historical spend and volume
• Your spend by supplier
• Your business send categorized by product and sub-product
• The processes and departments involved in your supply chain
• Your product or service demand forecast
• Your competitors
• Your customer base (including who they are and where they are located).

An effective way to gather this information is through a spend analysis.

What is a Spend Analysis?

Spend analysis is the practice of analyzing procurement spend data to improve supplier relationships, reduce costs, or increase efficiency. Spend data refers to the costs your business incurred for goods and services that have been acquired from external suppliers. It is important to remember that the terms ‘spend analytics’ and ‘spend analysis,’ while often used interchangeably, mean different things. You use the spend analytics to gain the necessary data needed to conduct a spend analysis. Simply put, spend analytics gives you the data you need, and spend analysis determines what you do with that data.

Ask Yourself the Following Important Questions

With a spend analysis, you need to ask the right questions in order to attain the most valuable information. You need to pull together your purchase history data and look at all angles of your business expenditure.  Ask yourself the following questions which can help you review past performances and assess potential future performance and trends:

• What is my business buying?
• How much are we paying?
• How much have we bought? (Quantity).
• Who are our suppliers?
• Who is buying from us? (Our customers).
• What were the terms of the purchase?
• What is the frequency of our purchases?
• When did we make the purchase?
• Has what was promised been delivered?
• Where were the items delivered (geographical location)?
• Where does the data stand in comparison to previous years?

Using Spend Analysis Software to Make the Process More Efficient

Using specialized software, you can simplify your spend analysis process. Digitizing this process can also be very beneficial for the accuracy and efficiency of your supply chain management and procurement processes as a whole. There are a few software solutions that focus solely on spend analysis, but it is recommended to invest in a more well-rounded solution such as procurement software. Procurement software can help take your entire procurement and sourcing process to the next level, rather than just focusing on one aspect.  

This type of software can either be bought from a specialized software vendor or created specifically for the needs of your business. There are three types main types of procurement software:

1. In-house solutions can be layered on top of an existing Business Intelligence (BI) solution or be used as a standalone application. Any maintenance or upgrades will depend on your company's IT resources.  
2. Licensed Software solutions are sold as commodities, with a single-use license that only allows installation on a specific number of machines. Larger updates might require the purchase of a new license, depending on the license agreement. Generally, licenses are sold as lump-sum purchases.
4. Software as a Service (SaaS) is a subscription-based option that is more flexible than in-house or licensed software solutions. Providers usually host software at a separate location, allowing for central management. Updating the software is typically covered in a subscription agreement.

Tradogram brings you the best features of all the above solutions in one simple package. You can establish full spend visibility with budget and project cost tracking tools, identify new ways to save with custom spend reports and analytics, and a lot more. Our software offers solutions for Purchase to Pay, Strategic Sourcing, Supplier Management, Contract Management, Spend Analysis, and Order Management. Plus, it has various integration options so you can use our software in conjunction with some of today's biggest ERP, accounting, and SSO platforms. Contact us today to find out more.

Subscribe to have new content delivered directly to your inbox.

Purchased material and services can be 60-80% of a business cost. Understanding, managing and having a clear strategy for your purchased base is critical to optimizing performance and profit of your company. Here are some basic questions to ask yourself:

1.     Does your company maintain a list of every direct and indirect supplier with annual spend and commodity code?

2.     Does your company know which suppliers are strategic, niche, leverageable or commodity suppliers?

3.     Does your company know all of the other potential suppliers globally available that can provide your required goods and services?

4.     Does your company have a multi-year commodity strategy for your supply base?  

If the answer is No to any of these there are excellent Sourcing tools and processes to gain control and create a strategy for your purchased supply base. 

The first step is to perform a Purchase Base Analysis to understand what functions are buying from whom in the total business. This is done by gathering all of your accounts payable data showing all suppliers you pay money to. Then categorize each supplier with a commodity code and the function of the business that uses the supplier. Then pareto your Purchase base by commodity, by suppliers and by function to be able to see your highest to lowest spend commodities and suppliers for the different functions within the business.   This simple process allows you to be able to see how many suppliers and how much spend you have in all of the various direct and indirect business costs. 

The Purchase Base Analysis will allow the Procurement Team to work with the business functional leaders to see which suppliers they are spending the most money with to support them. Together they can evaluate and discuss supplier performance. They can agree on how the current suppliers support current and long term needs of the business. Also, they can agree on opportunities to optimize the supply base and costs.

The next step is to create the supplier Portfolio Analysis. This is done by placing each supplier into their four block category.

The Market Difficulty can be based on outside factors of limited or single suppliers in the marketplace or from inside factors such as unique design or specifications. Each category has a different strategies to approach the suppliers. 

Some examples: 

Strategic – Should you develop other suppliers to move this supplier to leverage to allow greater competition and deflation? Should you enter into a long term contract that guarantees performance and price?

Niche – What assurances do you have to gain proprietary information required to maintain this supply if the supplier goes out of business?

Commodity – Do you want to buy, stock and transact these low cost items or should you work on setting up vendor managed inventory?

Leverage – Do you have a plan for competing these items every 1 to 3 years to maximize deflation?

Once every supplier is categorized a strategy can be developed to optimize cost, hedge major raw commodities, reduce supplier caused business risk, determine short term vs long term contracts and increase business performance based on the Commodity Strategy for your supply base.

Maintaining a Purchase Base Analysis, a Portfolio Analysis and Commodity Strategy will ensure an optimized, value added supply base that is aligned with current and long term business plans.

written by - Peter Jerin, MBA

About the author: Peter has a BS in Industrial Engineering and MBA. A graduate of General Electric’s Manufacturing Management Program, he has over 36 years of Manufacturing Operations, Procurement and executive leadership experience of high performance teams across nine different businesses in over 25 countries while living in three continents. He is Lean trained by Shingijutsu in Japan and Six Sigma certified. Please feel free to contact him for advice to achieve business excellence.