Procurement buyers face mounting pressure to add more business value, with the majority stating cost reduction as a focus area in the coming year. Around 78 percent of procurement executives said that cost reduction is still their top priority for 2018, according to Deloitte’s 2018 Global Chief Procurement Officer Survey.
Supply chain and logistics managers pursuing lean operations generally prefer to eliminate excess inventory. However, sales and marketing initiatives often lead companies to increase the volume of products they keep in stock. Moreover, ‘specifications’ (or ‘specs’) have become a critical factor. Big brands with different amounts of specs are attaining better evaluation and cost savings through the ‘specification rationalization’ exercise. Thus, the specification rationalization/ harmonization process has become a distinct trend across Procurement Organizations of all sizes.
In any supplier negotiation, it is critical to evaluate a particular supplier’s spend, and this is no different for packaging suppliers. In this article, we look at the spend for various packaging products, such as corrugates, films and labels, which have thousands of specifications, by suppliers and locations across the world. Sourcing managers are required to manage the spend and achieve cost savings for a particular category.
One way of explaining specification harmonization is that it is the prevention or elimination of differences in the specifications having the same scope.
In the conventional business sense, it is always preferable to have many specs for packaging products to provide customers with customization as per their requirements. However, having too many specifications can result in a complex business process. This is because too many specs may require many suppliers, too many data points to collect and analyze, too many machines to make products and too much storage space.
A critical starting point is understanding what type of information and data sets will be most valuable in the ‘contract tendering/supplier negotiation’ process in today’s world of increasing complexities. Examples of such complexities include increasing number of suppliers, changing geographical landscape of the packaging industry and increasing ability to aggregate spends on the global/regional/local level. In fact, after procurement managers exhaust traditional savings approaches, viz., rate negotiations, volume consolidation and even low cost country sourcing, specification harmonization becomes one of most important tools to drive cost savings.
In the past few years, through interaction with procurement professionals, we observed that that the desired savings are not being captured despite spend consolidation for a particular category. The reason may be that category teams are missing huge opportunities by considering specs by suppliers for tendering only based on their contribution to the spend. Is this because there is so much diversity in specifications that category teams do not have space for consolidation, or is the reason something else?
Currently, procurement teams have started to conduct exercises regarding standardization of specifications. Is this something that category/sourcing managers should consider?
One classic way to start a specification harmonization exercise is to conduct an ABC/Pareto analysis. This method is generally used for managing inventory but can also be used here.
The Pareto principle is also known as the 80/20 rule. In the ABC/Pareto analysis, managers identify the top three to five specifications across suppliers in a particular country by production site that contribute the most to product spend (A-ranked products). Many specs that do not contribute much or contribute to the tail spend are also identified.
Let us have look at a case study/industry example.
|Total Product Volume - 20.57 Million Units||Spec 1||Spec 2||Spec 3||Spec 4||Spec 5||Spec 6||Spec 7|
|% of Total Product Volume - Gent (Total Volume - 20.44 M)~ 99.35%||49.0%||3.2%||15.3%||29.0%||3.4%||0.1%||NA|
|% of Total Product Volume - Chaudfontaine (Total Volume - 0.13 M)~ 0.65%||NA||NA||NA||NA||NA||NA||100%|
|% of Total Product Volume - Belgium (Total Volume - 20.57 M Units)||48.5%||3.2%||15.2%||28.8%||3.4%||0.1%||0.6%|
|ID Length (mm)||316||316||316||394||322||317||352|
|ID Width (mm)||213||213||213||263||226||217||265|
|ID Height (mm)||45||45||45||38||108||45||47|
|Outer liner Grade||White Testliner||Speedlite||White Testliner||White Testliner||Speedlite||White Testliner||TWTC2|
|Outer liner grammage/m2||135||175||135||135||175||135||125|
|Flute 1 Grade||Fluting||Fluting||Fluting||Fluting||Fluting||Fluting||RF1|
|Flute 1 grammage/m2||100||100||100||100||100||100||100|
|Inner liner Grade||Testliner||Testliner||Testliner||Testliner||Testliner||Testliner||T3|
|Inner liner grammage/m2||135||135||120||120||135||120||120|
|Printing process: flexo postprint, offset, flexo preprint||FLEXO||FLEXO||FLEXO||FLEXO||FLEXO||FLEXO||FLEXO|
|Pallet type||Heavy pallet 1000x1200||Heavy pallet 1000x1200||Heavy pallet 1000x1200||Heavy pallet 1000x1200||Heavy pallet 1000x1200||Heavy pallet 1000x1200||chep|
|Product quantity per pallet||4400||4400||4400||3300||3300||4400||3600|
|Maximum pallet height||2000||2000||2000||2000||2000||2000||1800|
In the above table, we have considered various specifications for packaging products for fast-moving consumer goods’ brand owners in Belgium at two production plants. We also considered their spend contributions.
|Level of Standardization||Specifications||Vol. Coverage-(% of Total Product Vol. for Belgium)||No. of Specs (after spec. standardization)||% of Spec. Consolidation|
|1st||1 & 3||63.70%||6||14%|
|2nd||1,3 & 6||63.80%||5||29%|
|3rd||2 & 5||6.60%||4||43%|
Please note that before implementing the above step, category managers need to look at the variations for different sets of specs at each level of standardization.
The following list provides things to ‘keep in mind’ when planning for specs. Harmonization/Standardization
Specification Harmonization - Part of the Lifecycle Mgmt. Process
Packaging buyers should implement specification harmonization only as an element of the overall packaging product lifecycle management to efficiently reduce procurement costs to the company.
Forecast Switching and Cannibalization
Brand owners should analyze and predict both the specification consolidation within a single supplier and revenue cannibalization (that occurs during consolidation among two suppliers), as it would help them thoroughly understand the financial impact of
specification harmonization/rationalization/ standardization.
Tailoring Decisions at a Meaningful Level
One should identify and analyze the need to perform specification harmonization for which the packaging sub-category is at the country/supplier or production plant level. One should also analyze the performance difference between the existing variants and the newly replaced standardized variant. Harmonization avoids the one-size-fits-all approach.
Changing the Strategy Rather than Making a One-Time Adjustment
Procurement Organizations should approach spec harmonization as a gradual change in their tactic vs. a one-time adjustment in their procurement plan. With this approach, organizations become more likely to avoid specs that are redundant or a reduction in specs (significant percentage of contribution - total spend volume of the product), which could impact supplier negotiation.
Test-Run before implementation
This exercise can impact (positively or negatively) the buyers’ procurement spend and its relation with suppliers based on the accuracy of planning and execution. Thus, rather than ‘rolling-out’ these decisions across all specs of a particular product for all countries simultaneously, SHs should look to implement planned decisions for a small batch to measure the actual impact and validate/analyze the estimated impact.
The strategic ‘specification standardization/consolidation’ step of specification harmonization is becoming more important than ever. Thus, it is imperative that these key strategic decisions synchronize seamlessly with purchasing as well as other aspects of the supply chain and procurement.
Companies that look forward to adopting ‘specification harmonization/ rationalization’ as part of their supplier negotiation or procurement operation stand to gain the most and achieve the ‘cost savings’ they have forecasted/planned.
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