Most procurement departments have a good understanding of the most critical categories of goods and services that their organizations buy. These are the direct materials, subcontracted services, and other things that are close to the core of what the organization is in business to do. This understanding of these categories means that these procurement departments know what they buy, how much they buy, who they buy from, and what fair market pricing is. This understanding enables these procurement departments to manage these critical categories well, achieving respectable cost savings and getting good supplier performance.
But these critical categories only represent a small portion of the organization's overall spend. They only represent a fraction of the line items purchased in a given year. And they only represent a minor percentage of the cost savings opportunities that the organization has the potential to achieve. The majority of the cost savings opportunities are hidden in the rest of the categories of goods and services that the organization buys. Because these categories have less visibility within the organization, they have been historically undermanaged, characterized by the use of too many suppliers and are bought at higher than benchmark prices. Because of this lack of visibility, procurement departments
can find it challenging to figure out a way to address the opportunities. And it's not uncommon to see them perceive this challenge as so insurmountable that they end up ignoring those categories that are so ripe for cost savings.
Identifying these hidden opportunities does not have to be so difficult. We shall look at a 5 step process that helps organizations identify as well act upon the opportunities in these categories.