Secrets to Office Supply Sourcing
By Charles Dominick, SPSM
Many hidden challenges, secrets, and strategies surround office-supply sourcing, according to David Clevenger, Vice President of Corporate United, a GPO (Group Purchasing Organization) that sources office supplies for its Fortune 1000 clients.
For instance, a fundamental characteristic of office-supply contracts involves the separation of “core items” from “non-core items.” Core items are usually sold at very aggressive prices, while non-core items are closer to list price.
The best practice of determining your agency’s core items is “to sort your usage by extended dollars spent and identify the highest usage, highest dollar items,” Clevenger explains. “A rule of thumb is that your core list should account for at least 60 percent of the office supply spend.”
In developing core lists, a sourcing professional may be tempted to introduce standardization principles. However, Clevenger cautions against this procedure when creating your first core list. Instead, he advises that the following questions be addressed: “Identify what is it that your people are buying? What are the preferred items? What are the preferred brands?”
By selecting items that are already popular with your users, change management becomes less challenging, and better compliance can help save more than a standardization program that is rife with maverick buying.
Suggested procedures do not imply that a sourcing department should always buy whatever end users prefer, regardless of business considerations. Instead, a two-step approach may increase 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 the 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.” He adds that compliance is “almost impossible at that point.”
However, poor compliance is only one reason office-supply contracts fail to deliver predicted savings. Another reason is that core items become discontinued and are often replaced with higher cost items. Clevenger recommends evaluating the core list, at least on an annual basis, to identify changes in the availability of core items as well as changes in your buying patterns. Goals are to prevent a certain “game” that office- supply 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 notes. He cautions that in the second and third years of a contract, the supplier may change items in and out of the core list. In fact, 40 percent of a buyer’s 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 adds. “Most buyers are not tracking to that level of detail. The suppliers are extremely adept at switching [items] in and out.” Because of even less transparency with non-core items, the risk of price creep is significant.
Clevenger recommends close collaboration with suppliers to ensure that one-sided core list adjustments are avoided. Sometimes, a buyer can receive a lower cost on a replacement item, and the supplier can obtain a higher margin as well. Working together towards this type of win-win scenario is an effective way of achieving the total savings that a sourcing team predicted.
Aside from challenges with managing core items, the agreed-upon price structure of non-core items often results in higher-than-expected expenditures on office supplies. To achieve maximum savings, Clevenger offers tips for managing the pricing of non-core items: “It’s important to know how the non-core pricing is structured with the supplier. We [use] 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.”
Clevenger adds that each sub-category–such as paper, toner, or pens–has different market characteristics. Thus, a one-discount-percentage-fits-all number may not be prudent. A 10 percent discount on one sub-category may be substantial, but a 10 percent discount on another item may be less than the purchaser deserves, because of the agency’s high volume.
To maximize savings on office supplies, a sourcing professional needs to be sure that an appropriate discount percentage is negotiated for all sub-categories in which there is significant spend.
Finally, a good metric to monitor 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.
About the Author
Charles Dominick, SPSM (Senior Professional in Supply Management), is President of Next Level Purchasing, Inc., based in the suburbs of Pittsburgh, PA. Through online purchasing classes that he has developed, Dominick has trained purchasing professionals from multi-billion-dollar organizations throughout North America, South America, the Caribbean, Europe, Asia, Africa, and Australia/Oceania.
Dominick has also taught eBusiness and purchasing classes for Penn State University and the University of Pittsburgh. Prior to founding Next Level Purchasing in 2000, Dominick acquired nearly a decade of results-producing experience in purchasing at the Kurt J. Lesker Company, US Airways, and the University of Pittsburgh.