Does today’s rise in category complexity increase the delays, complications, and headaches in your procurement operations? Complexity has become a significant concern in the world of procurement. Yet instead of eroding profits and monopolizing your time, complexity in the categories can be addressed effectively when you have the right strategies in place.
Successful companies make this look easy. Recently, Rob Anthony, SVP Global Supply Chain and UK Country Manager at Kongsberg, and Virginia Gonzalez, Head of Procurement at Boston Beer Company, sat down in an exclusive session with JAGGAER to share their insights and methods on streamlining category complexity. Five real-life lessons emerged that can transform your approach to complexity and help you gain the upper hand.
Lesson 1: Understand Your Level of Control
Category complexity is the combination of components, ingredients, technology requirements, services, suppliers, and transport efforts involved in obtaining goods belonging to a single category of products, such as soap, paper plates, or canned tuna in a convenience store. Complexity increases with the number of requirements and how difficult it is to meet them.
For instance, Virginia Gonzalez noted that research and development (R&D) teams sometimes call for unusual ingredients that are very challenging to source. Another example is the complexity that emerges when manufacturing requires a rare metal—something Rob Anthony has experienced in the past. What if that’s not the only issue? Complexities multiply if the number of suppliers who offer the goods you need is extremely small, when a unique skillset is required for assembly, and if shipping is delayed due to congestion at the ports.
The best way to begin is by evaluating the nature of your challenge. Complexity can be eliminated, minimized, simplified, or just accepted and managed, depending on the category and situation. Recognizing your level of control can help you avoid wasted energy and focus your efforts with precision.
For indirect procurement, external factors such as geopolitical risk, regulations, local requirements, and industry-specific considerations affect category complexity but come with the territory. Since they’re out of your control, it’s best to accept them as such. Additionally, many factors within your organization are also outside of your control, including structural issues, stakeholders, and your business location. The goal is to accept these factors as a constant and manage the complexities well, assisted by the right technology.
Direct procurement can be extremely complex and often unpredictable. Rapidly shifting customer and consumer expectations, sourcing issues that delay production, and extreme weather changes are just a few factors that intensify direct procurement complexity. Often it’s necessary to simply manage them, because they too are outside your control. However, you can frequently empower yourself and your team to eliminate, minimize, or simplify factors like these, particularly if you’ve mastered the remaining lessons.
Lesson 2: Build Strong Partner Relationships
Consciously developing solid, positive relationships with your internal stakeholders and collaborating with your suppliers positions you to address complexity proactively. You’ll be alert to issues ahead of time. In many cases, you can influence decision-making before final choices are made to avoid further complicating your categories. In fact, Gonzalez finds it critical to understand the goals and objectives of internal stakeholders and connect with suppliers, staying one step ahead of complexity whenever possible.
Relationship-building often involves regular meetings. Here are some proven methods to help you get started:
- In addition to effective supplier management, evaluate and get to know your suppliers through onsite visits or even by attending quality business reviews with suppliers and your quality team.
- Keep a pulse on the R&D team’s agenda so you can have a voice in decisions involving components or ingredients that are difficult or costly to source.
- Attend leadership team meetings to review weekly operations issues and respond proactively when you’re aware of potential concerns.
- Give your category sourcing leads and other critical talent the training and onsite supplier experiences they need to support your efforts and handle complexity more effectively.
- After processing questions or objections, have internal stakeholders sign off on the launch of a new strategy or process to gain a mandate to advance without roadblocks.
- Connect with your legal team during supplier contract design to create contracts that protect your organization.
Anthony highly recommends receiving stakeholder signoff on your initiatives. The official support of key stakeholders opens the door for you to execute on your strategy and truly make an impact without encumbrances.
Lesson 3: Complete Your Strategic Planning
Continuous challenges—including operational problems, risk, delays in finalizing deliverables, and concerns about business growth—can prevent you from carving out time to strategize. Yet strategic work is critical for dealing with risk and addressing the complexities that drain your time and energy the most. According to Anthony, it’s essential to make strategic work a priority. And Gonzalez won’t execute a contract without a category strategy that has been shared with stakeholders.
Start with category management. Choose suppliers that meet your criteria, understand any technology requirements by consulting with engineers, add flexibility, and include the global options you need. For indirect procurement, instead of trying to address everything immediately, choose one complexity to work through first.
To avoid letting manual processes and firefighting keep you stuck, Anthony recommends including advanced planning in your strategy. Digitalization, automation, and transformation form the foundation for agility and resilience in the long term. Consider an automated system to efficiently create, revise, and track your category management strategies.
Lesson 4: Tailor Supplier Contracts to Your Advantage
Use contract design to protect your interests. With business dynamics and markets changing so rapidly, what was once a strategic long-term contract can become a burden long before the term is up. For instance, if projected growth never occurs, quantities could be too low while contracted volume commitments remain high.
Existing contracts with unfavorable terms can be addressed through collaboration if the supplier is willing. When your organization has cultivated and established good working partner relationships that include collaborating with trusted suppliers, such negotiations may go very smoothly.
For new contracts, you can protect your organization’s interests and minimize or eliminate potential complexities by applying key strategies from both Gonzalez and Anthony:
- Stakeholder approval for RFPs: Receiving feedback from internal stakeholders on category strategies can reveal important information about suppliers that helps you avoid making poor decisions. You can also use stakeholder input to fine-tune a strategy.
- Contract length: In rapidly changing industries and certain categories—such as perishables in the food and beverage industry or trendy fashions in the apparel industry—long-term contracts can keep you in a headlock, while shorter-term contracts provide much-needed flexibility. If a contract begins to lose its advantages but ends sooner than later, you can quickly replace it with a new contract containing terms that better reflect recent changes in market conditions or your organization’s needs. If a supplier pushes for a longer term, one year might suffice for both parties. For anything longer, preserve your organization’s profitability by including clauses that guard against diminished savings and adverse market conditions.
- Savings scrutiny: A long-term contract can yield significant savings. However, based on Gonzalez’s experience, categories or subcategories might contain numerous items, and some of them could bring you no savings at all. For instance, out of all the materials in a subcategory, a contract with a five-year term might save you money on only half of the line items for the life of the contract. Evaluating your long-term contract savings can help you better determine the contract’s value when compared to a shorter-term contract.
- Cost versus value: Adopt a mindset of contract decision-making based on value rather than just cost. At the same time, foster competition among suppliers so they’ll offer you their best pricing.
- KPIs: To help preserve any savings and motivate suppliers, you can add key performance indicators (KPIs) to longer-term contracts. For instance, you could build in a percentage of annual savings the supplier must commit to, locking in that advantage for your company. KPIs could also involve innovation and other indicators.
- Indices: Today’s volatile economic conditions make indices necessary in certain categories. For instance, the cost of a raw material Kongsberg procured went up 400% in a single day when Ukraine was invaded. Indices in Kongsberg’s supplier contract enabled the company to pay on the index, then scale back when prices started returning to normal. Combining fixed pricing and indices as appropriate can help you create a balance in your contracts and keep the supplier relationship healthy.
Lesson 5: Use Sales Skills to Eliminate or Minimize Complexity
Address complexity proactively by becoming a convincing salesperson internally and in your supplier collaboration strategy. If you can effectively “sell” a new course of action to stakeholders and suppliers, they might be persuaded to modify concepts and plans that are leading you into procurement complexities. If you’re really strategic, this can eliminate complexity completely.
For example, at one point a Boston Beer packaging supplier relocated its manufacturing process about 2,000 miles away to change the composition of a coating used for the company’s aluminum cans. To accommodate this, Boston Beer had to pay for the storage of additional on-hand inventory. Moreover, the company would have paid more than $2 million for freight transportation if procurement leader Gonzalez had not taken action by stepping into the role of salesperson.
Gonzalez brought together key stakeholders—including both companies’ CEOs—and presented a persuasive argument that emphasized the long-term business relationship the firm wanted to have with the supplier. After a lengthy discussion, the supplier made a new decision that returned the manufacturing process to the region.
By strategizing effectively, assembling the right stakeholders, and selling the supplier on a different idea, Gonzalez saved the company $2 million—plus excess inventory storage fees. Sidestepping a complexity by convincing the supplier to make a change eliminated a costly problem. It also resulted in a promotion for Gonzalez.
Anthony, too, is no stranger to the salesperson role. His firm-but-fair approach to establishing and enforcing the appropriate use of contract indices in times of economic stress is just one example.
Rising to the Top
Handling increasing complexity is a journey. Along the way, you can perfect your skills as you learn from seasoned procurement leaders like Kronsberg’s Rob Anthony and Virginia Gonzalez of Boston Beer Company.
Remember to evaluate the level of control you have over a specific category complexity so it doesn’t overwhelm you. Some complexity you can eliminate, some you can minimize or simplify, and some you must simply manage. When you’re backed by strong collaborative relationships with suppliers and internal stakeholders, you’ll have greater insight into what’s coming and can mitigate complexity by influencing your partners.
Don’t forget the critical importance of strategic planning—even if you have to block off chunks of time to complete it. Always use caution with supplier contracts, taking steps to protect your organization’s interests and avoid potential complexities when it comes to contract length and other terms. Finally, brush up on your sales skills, since persuading and convincing suppliers and stakeholders can make the difference between a minor adjustment and a painful, ongoing complexity.
Category complexity will always be with us. Your competitors deal with many of the same issues you face, so the better you are at handling complexity, the more likely your organization will rise to the top.
