Some procurement professionals fail to understand the benefits that come from "standardization" of the products and services they are responsible for acquiring. They often don't challenge their internal customers to simplify and streamline the selection of products they require. And thus, procurement may source/bid a spend category...but not materially improve category performance.
This article will describe the procurement benefits of standardization, and several methods a procurement group can facilitate this for their organizations...
A great example of standardization is one US domestic airline which has often outperformed its rivals. Amongst other competitive practices, Southwest Airlines has realized significant benefits from "standardizing" its aircraft fleet. They primarily operate just one type of aircraft (Boeing 737 aircraft.). What has standardizing done for their supply chain performance...?
First, standardization simplified training requirements for pilots, crew, and technical/mechanical personnel;
Second, standardizing allowed the reduction of spare parts and maintenance equipment at maintenance hubs and airport locations;
Third, it enabled the airline to buy larger quantities of select parts and materials, due to commonality of use among entire fleet;
Fourth, standardizing allowed redundant supplies of maintenance parts to be available at majority of serviced airport locations, making resolution of emergency repairs (including "AOG" - Aircraft on the Ground) more timely; and
Fifth, the carrier's inventory investment expense is drastically lower than if the airline operated multiple models from numerous manufacturers....each requiring a unique set of spare parts, diagnostic materials, schematic diagrams, ground handling equipment, etc.
The procurement team at Southwest has benefitted from the initial standardization of aircraft by their senior management. But some procurement teams are not always so fortunate...
I spoke with a Chief Procurement Officer the other day, whose technology firm produces complex engineered equipment for their customers. One of their most expensive (multi-million dollar) products has many configuration options offered by the sales organization to customers, resulting in over 4,000 permutations! This variability in final product has created a very difficult procurement challenge for this firm's supply chain team...something they plan to simplify through standardization in the future.
Standardization can benefit service organizations too, as procurement seeks to simplify and leverage the products and services those organizations buy. Years ago, I directed strategic sourcing operations for one of the five-largest global bank holding companies. Our sourcing team found that the company was buying 330 different types of envelopes used in business mailings. Rather than just performing a competitive bid for all of these envelopes; our cross-functional sourcing team spent two months working with the company groups which utilized these various envelope types to standardizing and simplifying their requirements.
The team was successful in "standardizing" down to just 30 total envelopes. This obviously required the redesign of many of the mailing inserts which were sent out in these envelopes. When we then competed a five year requirement for these envelopes, we ended up reducing total costs by 26%!
Three tips for standardizing:
One. To the greatest extent possible, utilize standard marketplace standards. The more you vary from industry standards, the higher will be the cost;
Two. Look at related downstream costs. For example, typical ERP application software often costs 100% to 150% of its license cost to install and configure, and another 18% - 22% per year to maintain (over five years, that's another 100% of the license fee). That means that it costs as much to operate equipment or software over five years as it did to originally purchase or license it. Failure to address all TCO elements (such as cost of maintenance, energy requirements, etc) at the beginning of a selection will result in inability to control those costs later on.
Three. Standardize descriptions. Especially if you have internal inventory listings or utilize supplier catalog details in your eProcurement tool, inconsistent naming conventions will complicate procurement activities. Years ago, a major cruise ship company had separate inventory warehouses which supported different ships in their fleet. Each inventory had been built by separate teams of personnel, and thus identical items in six separate warehouses might have six variant descriptions and part number (for example, "Large White T-Shirt with Blue Company Logo", "White T-Shirt, Large, Blue Logo", etc). The firm utilized one of today's catalog cleansing technology tools to revise ALL of their part descriptions. These tools utilize Boolian search engine technologies (similar to what Yahoo or Google might do) to rewrite every product description in their inventory listing at all locations. Standardization of the description allowed the procurement team to better-source and manage a much-less complex listing of product items.
Strategic Procurement Solutions trains procurement groups around the world on the benefits of standardization in our Strategic Procurement Management Training™ (3 day) onsite workshop. For more information about our Online Supply Management Skills Testing or Onsite Training Workshops, please email us at Info@StrategicProcurementSolutions.com
About the Author - Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 27 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors...culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, of Bank of America (then, the USA's third most-profitable company). During his last two years with Bank of America, Mark's areas of responsiblities delivered a Quarter Billion Dollars in cost reductions. During the last dozen years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, Asia, and Malaysia. He is a frequent author on supply management topcs, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal.