- Combine spend data that may be stored in multiple databases. These data often exist as individual transactions in ERP systems, e-procurement applications such as Ariba, or American Express travel and expense reports.
- Map each product to popular standards-based classification taxonomies using the Universal Standard Products and Services Classification (UNSPSC) and eCl@ss. Mapping allows users to aggregate spend information by commodity type — such as five of the same motors coming from two different suppliers — despite the fact that these motors are labeled with different item codes in the ERP system. Classification data can be added to the item data within an MDM hub so the information is accessible for current and future initiatives that require this information.
- Gather all useful information about a company's suppliers, including parent company name, revenues, credit rating, standard industry code and diversity status and incorporate it into the system. These data give buyers the weapons they need to negotiate better deals across their subsidiaries. All the updates are applied to the data within the MDM hub.
Phase II — Analyze spending and identify potential savings
- Use automated spend analysis charts — either custom-developed or from a business intelligence application — to pinpoint the areas of greatest potential cost savings and estimate the cultural changes required to achieve targeted results.
- Use analysis techniques to determine savings potential, the amount of disruption expected and how receptive the organization will be to the change. So-called "quick wins," changes that will prove easiest, most beneficial or quickest to make, can be prioritized and implemented.
- If spend analysis shows that one department pays significantly more for a motor than another, for example, the company can move to consolidate motor purchases. Also consider implementing the processes needed to ensure all departments comply with new contract rules regarding purchasing the less expensive motor. This elimination of duplicate, equivalent or similar items allows companies to achieve significant cost savings.
Phase III — Expand into supplier rationalization and other spend optimization initiatives
- Once a common data framework is in place, companies can use the data gathered during the analysis phase to refine their sourcing strategies. Key performance indicators can also be established and used as a way to analyze suppliers.
- Data also can be used to identify issues that cause costs or the amount of time it takes to complete a transaction to spike when working with suppliers during the design, manufacturing and procurement process.
Since the updated master data are managed within an MDM framework, this can ensure that any changes to a specific master data can be propagated to other occurrences of that data. As a result, Phase I does not have to be repeated whenever spend analysis is initiated again, which for most organizations is once a quarter or even once every six months.
Through adopting the three phases of spend analysis, a large manufacturing company we worked with recently was able to reduce its overall purchasing spend by about 5 percent. Throughout the process, the company analyzed procurement rules within 16 systems, including SAP. The company extracted and consolidated a total of 22 million records and standardized more than three million item/service records. It also created a five-level classification scheme for items and services. After finishing the spend analysis initiative, the company was able to reduce its rate of purchase of similar commodities from multiple suppliers at varying contractual prices. The CPO also eliminated maverick buying. After clearing up price variance issues — a prevalent problem throughout the company — the organization reported significant savings, for example a $42,000 annual savings on the purchase of just one item.
Moreover, the value of spend analysis goes far beyond a one-off project. A long-term program will help a company continue its success by preventing maverick buying, encouraging contract compliance and reducing the practice of buying from multiple suppliers at different prices. This kind of a project — with clear and achievable goals, one business champion, data contained within a single business function — can then be used to present a solid use-case for how MDM can deliver tangible business value in other areas of the enterprise. Instead of evangelizing an MDM vision, an evolutionary approach such as this can put IT in the position of prioritizing which line-of-business executive's project could be next in line for success.
About the Author: Jessie Chimni is vice president of North America services for Bristlecone Inc., a provider of supply chain services and solutions. More information at www.bcone.com.