This is the third in a multiple part series on Spend Analytics.
Two weeks ago we talked about some of the techniques that can help launch a successful Spend Analysis (SA) project. This week we’ll focus on answering some of the tougher questions we get asked.
Do I just focus on Spend Analysis?
No. Spend Analysis should be rolled out as part of a larger “visibility” program that combines spend analysis, performance (SLA) monitoring, risk management, quality management, and savings tracking. Aggregating and linking these information silos provides additional visibility into how money was spent and the results associated with that expenditure. Investment should be spread equally and should focus on both process and systems.
When Is My Organization Ready For Spend Analysis?
Organizations typically respond to shocks, complexity, and competitive challenges. Here are some events that might drive a SA initiative:
Shocks: Changes in major cost areas (commodity cost increases, volatility, spiraling usage, etc.)
Complexity: Changes in growth (acquisitions, restructuring, territory expansion, etc.) and/or in scope (new locations, business units, product lines, channels, etc.)
Competitive Challenges: Changes in the competitive landscape that force new focus on cost containment and exemplary service.
As companies mature they hit inflection points where the organization needs to adopt new tools, structures, and techniques to transition into the next phase. Spend Analysis initiatives should be matched to support that continuum. Some early maturity points can be approximated via annual revenue
- <$50 Million: Organizational focus is usually on growing the business and survival. The company is likely aware of major spend categories and likely has a small procurement group situated at a single location. At this early revenue stage companies need to adopt Strategic Sourcing processes in lieu of tactical purchasing behaviors.
- $50-100 Million: Multiple sites and BU’s begin to introduce more complexity. It is becoming difficult to assemble a single version of the truth. To remedy this problem “System” investments begin to occur. This is an excellent time to invest in processes and systems to integrate reporting of spend, performance (SLA) monitoring, and savings tracking.
- >$100 Million: International and cross border issues add more complexity. Earlier “System” decisions and manual methods begin to show their age. Company now has the scale to specialize in procurement and sourcing specialization and may hire staff to support the procurement function. Companies should view spend analysis, quality systems, risk, performance (SLA) monitoring, and savings tracking as necessary investments.
How often should I plan to update the spend?
The quick answer: Before you are going to actually use that information to make decisions. But it’s a little more complicated than that.
- How stable is your business? How often do prices update? How often does usage fluctuate?
- How many transactions occur annually? Who has the ability to buy this good/service?
- How many suppliers do you deal with? How many are under contract?
- Do I have the ability and resources to spot or avert trends?
If your answers to the above show more stable and predictable patterns with few “owners” then you may be able to perform semi-annual or even annual refreshes of data. Likewise if you’re don’t have a process in place to act on any actionable information found in the spend cube then the question is kind of moot.
Does Spend Analysis encourage Transactional Purchasing Habits or Strategic Sourcing?
Strategic Sourcing by its very definition adopts a planned approach to tackling a category. Following that logic, Strategic Sourcing agreements also tend to be longer term in nature. Many companies evaluate categories quarterly and enter into multi-year supply agreements.
Transactional purchasing tends to be more opportunistic. In a perfect world, purchasing buys off of contracts established by Sourcing group. In reality many buyers feel rewarded when they can identify and take advantage of “spot” opportunities in the market. Done enough times this erodes the volume promised to the contracted supplier and deleverages the organization.
For more sophisticated companies, we would encourage advanced “data mining” to aggregate information from several databases (Quality, Supplier Performance, Internal costs etc.) and spend categories (e.g. commodity, transportation, tax, customs, etc.) to build a holistic model that optimize these challenges.
________________
Check back soon for our next update.