More often than not your purchases are categorised as Class A, B or C depending on the purchase volume. The ABC analysis method – derived from the Pareto principle*, can be used to organise a company’s purchases in to hierarchical order. The situation is reversed however, when these purchases are classified according to the administrative costs they incur for the business.
The three procurement categories are as follows:
- Category A – strategic purchases, represents 70% of the purchase volume.
- Category B – covers all recurring indirect purchases (travel, IT hardware, etc.) and accounts for 25% of the total volume.
- Category C – encompasses all spot, ad hoc, non-recurring and rogue purchases. Accounts for just 5% of the total purchase volume… negligible then, or is it?
Class C purchases account for 5% of the total purchase volume, however represent 75% of the number of suppliers, orders and invoices. They are usually non-strategic items and often overlooked. By better managing these purchases, huge savings can be achieved for the business.
Pierre-Olivier Brial Manutan’s Deputy General Manager discussed this issue with a customer in charge of an industrial company generating revenue of €500 million and operating at three sites in France. The customer seemed sceptical, so Pierre invited him to extract a list of all the suppliers with an order value less than €200. The result was a list with 1,000 suppliers!
Three golden rules for improving your Class C purchases
Many companies are still reluctant to tackle the problem, since they are worried about embarking on a complicated project where the challenges are often relatively unknown. For nearly 10 years, Manutan has been providing hundreds of customers with support and guidance, and we know that companies can streamline their Class C purchases as long as they follow three key principles:
- Work with a supplier that is capable of offering an extensive product range (addressing the “long tail”), providing logistical services to all the company’s sites and issuing highly detailed reports. Data is the keyword in this area.
- Implement an e-procurement solution. Programs are currently available to suit all types of company and budget. Examples include Punch-Out, hosted catalogues and other solutions for companies without an e‑procurement system.
- Ensure that the supplier knows how to work with the procurement department in order to sign a blanket agreement and also communicate with users to promote the agreement, such as through on-the-ground visits.
The money that can be saved runs into the hundreds of thousands, so it would be a shame to miss out. Believe in Pierres’ experience: Class C purchases deserve an… A!
*The Pareto principle is named after Vilfredo Pareto, a late 19th century Italian economist and sociologist according to whom 20% of the number of units represents 80% of the global value of all units.