To address this challenge, in February of this year Mittal Steel began deploying a spend analysis solution from Verticalnet, dubbed XE Spend Manager, to gain visibility into its direct and indirect materials spend. The solution will pull in information from the various back-end systems at work in the company's different business units, aggregate the data into useable information, and then present that information to sourcing specialists for use in leveraging Mittal Steel's spend on a global basis. The company is rolling out the solution in three phases, beginning with an initial data extract from a subset of the company's business units, the financial validation of the data, a normalization process during which the data will be cleansed and enriched, and a repeat validation by category managers, concluding with training and testing for end users. The second phase will consist of an opportunity analysis during which the sourcing staff will look for areas of potential savings, followed by phase three, in which the solution will be rolled out to additional units across the company.
Vrensen says that Mittal Steel will be looking to the spend analysis tool to drive short-term benefits through improvements in the sourcing and procurement staff's total cost of ownership evaluations, as well as to assist the company in planning long-term procurement strategies for specific commodities. "We want to leverage our buying power…and [the solution] also will help us with our strategic decision-making," he says.
As the Mittal Steel example illustrates, the point of collecting and reporting the spend data is to arm sourcing staff with the information they need to identify, and act upon, opportunities for savings, including by consolidating spend, gaining greater leverage with suppliers, negotiating better contracts, reducing the supply base and, ultimately, better enforcing contracts — completing the strategic sourcing cycle. Spend analysis tools figure in the compliance phase of strategic sourcing by creating a repeatable process that procurement staff can use to evaluate how well the business is doing in terms of actually buying from designated suppliers — after all, the best-negotiated contract in the world will produce little value if no one actually abides by its terms. Owens Corning has sourcing teams refreshing their spend analysis reports every month for specific areas of spend to ensure compliance. "It's an easy tool to use to see if somebody's not using the preferred supplier contract," Peterson says.
Pierre Mitchell, a director covering procurement and supply chain research with Hackett Group, also notes that spend analysis tools can be useful for supplier compliance, that is, ensuring, through price variance analysis, that suppliers are abiding by contract terms and not overcharging one business unit or another across a diverse enterprise. "You could be buying the same thing across multiple business units, even when you have a contract, but for whatever reason it never got implemented properly or the supplier has increased the prices to a couple of the business units," Mitchell says. "Just being able to catch that is a key capability that you want to have from both the regulatory as well as a leakage standpoint."
The "Next Level" of Spend Analysis
Mitchell sees other opportunities for companies to use the analytical solutions to take their spend analysis efforts "to the next level." For example, early discount analysis. "When are you paying your suppliers?" the analyst asks. "If you get a 2 percent discount for paying within 10 days, are you taking those early discounts? Two percent is not chump change if you've got a billion dollars to spend." On the other hand, a company could use its spend analysis tool to determine whether it is paying suppliers too early — in 30 days, say, when the terms and conditions call for 45 days — pointing to a need for improvements in the enterprise's purchase-to-pay processes.
Elsewhere, Mitchell says that he sees few companies using analytical tools on the direct materials side to do the type of long-term strategic planning that Mittal Steel's Vrensen discussed. "Spend analysis for direct materials is like 'future analysis,'" he explains. "How much am I going to spend, do I have contractual positions on these materials, what are they, are they in line with my corporate strategic sourcing objectives, do I actually have long-term contracts, do I have upcoming auto-renewing agreements, and the like. Getting that type of forward-looking spend visibility is not something that a lot of people have paid attention to, although it's becoming more important and strategic to be able to get ahead of the curve versus just looking in the rear view mirror."