Sourcing opportunity analysis – how can you save money?

The opportunity analysis is one of the fundamental tools in strategic sourcing. The objectives of opportunity analysis the analysis are to:

  1. Identify cost saving opportunities
  2. Create an action plan to implement the savings.

By following a six step process you will have a structured way of assessing and implementing measurable savings.

The opportunity analysis is performed in six different steps:

  1. Perform a spend analysis – categorize your expenditure by supplier and category
  2. Identify the price and source flexibility of the products you are buying – for each category you decide the price/source flexibility rating: Low, Medium, High
  3. Identify what effort and skills that are required to realise the savings within each category: Low, Medium, High
  4. Identify potential cost reduction for the category
  5. Define an prioritized action plan for the savings opportunities
  6. Measure and follow up

After step 1 you have performed a spend analysis and categorized it. The next step is to categorize the price and source flexibility for each category. This is done by evaluating each category by asking yourselves different questions, e.g:

  • Level of added value from the supplier in the category
  • Number of competitors in the category
  • Regulatory constrains for the category
  • Price model used in the category
  • Type of specification
  • Internal constrains
  • Capacity situation on the market

By assessing below you decide a rating for the category: Low, Medium or High “price and source flexibility”.

In step 3 you assess the efforts and skills that have previously been applied in the sourcing work for each category:

  • Number of hours needed to perform a tender in the category
  • Degree of technical understanding when sourcing the category
  • Market knowledge in the category – who are the different suppliers, key trends etc
  • What kind of purchasing methods has previously been applied?
  • How well are the purchasing contracts implemented and used?

For each category you assess according to above and rate the category in Low, Medium and High “effort and skill evaluation”.

Step number 4 is to identify a cost reduction potential for each category. In this assessment the following matrix can be used, the actual numbers are of course different from company to company:

 

Effort and skills applied 

 

Price and source flexibility

HIGH

MEDIUM

LOW

HIGH

5%

10%

>15%

MEDIUM

3%

5%

10%

LOW

1%

3%

5%

 

List your different categories, your existing spend, your “price and source flexibility” and “effort and skills applied” ratings and use above matrix to find out potential savings factor.

Prioritize the categories and cost reduction opportunities and define the action plan that is needed to realise the identified saving opportunities.

The last step is a common pit fall why some companies fail in strategic sourcing activities: measure, follow up and adapt when necessary.