One of the key differentiators between Strategic Sourcing and Tactical Purchasing is the decision to invest up-front in spend analytics and opportunity profiling. This crucial planning step provides a holistic snapshot of where money was spent and the results associated with that expenditure. Done properly Spend Analysis (SA) focuses the organization and prioritizes scarce resources towards opportunities that best meet the future needs of the business.
While these goals are noble, we find that many companies view and approach spend analytics the wrong way. As a result they end up destroying not creating value.
Over the next weeks, we will be sharing next practices gained from recent Spend Analysis (SA) engagements as well as explore the role of technology and other 3rd party enablers.
Focus on Value Creation vs. Value Destruction
Spend Analysis has greatly evolved over the last decade. One key objective is increased visibility at the supplier, transaction, and commodity level. Improving performance at these control points should be part of any Sourcing organization. However enhanced visibility comes with the burden of responding to those findings. In today’s competitive environment, many Supply Chain and Procurement organizations feel they simply cannot ignore any savings opportunities. These groups pounce on purchase pricing differentials as a rationale to standardize on the lowest price.
I can count on one hand the number of companies that use SA to justify paying suppliers more. As we’ve said before lower prices may be a destructive way to keep score. Value added services, availability of supply, supplier performance under duress, quality, regional strengths, organizational familiarity, risk, health, decreased complexity, etc. usually get thrown under the bus for immediate price gains.
Establish the burning platform
The single most valuable activity in a spend analysis program is often the most neglected. Many spend analysis programs are owned by the Supply Chain group. And thus a crucial opportunity is lost. Spend Analytics need to have visible executive sponsorship.
For a SA program to be transformational it needs to bring in perspectives from those affected by the product or services being evaluated. If we go back to our earlier definition, SA is about understanding the results associated with spending money on goods and services.
C-Levels need to establish burning platforms that signal the necessity of the program, that every rock and stone will be looked at, and that participation is mandatory. It needs to outline long-term company goals and address tough change management issues. This communication should be customized to employees, investors, suppliers and customers. It should especially encourage and reward opportunities that come from outside the Sourcing organization.
Forget about the data
Almost every SA process/project begins with the first step of data extraction. This is costly. Here are some tough facts:
- Data is a perishable commodity.
- If you extract it you have to clean it.
- There is never enough data.
- You will not use most of the data that is available.
We begin every engagement by asking the philosophical question “what if we didn’t have any data” to ourselves and our clients. What information would we gather? How would we convince the organization to share knowledge? How long would the process take? How do would we validate the opportunity? Answering these questions get stakeholders involved and excited.
This week we talked about some of the shortcomings of traditional spend analysis. Next week we’ll discuss the tools and resources that companies can use to enhance their analytic capability.