Kirk Peterson offers a straightforward explanation of why his company, Owens Corning, sees value in arming its sourcing and procurement executives with spend analysis tools. "The company would much rather have our sourcing people acting on data rather than digging for data," says Peterson, who is e-sourcing project leader with the Toledo, Ohio-based manufacturer of glass and composite materials for the building products and industrial materials markets.
Tools Not Widely Used
Spend analysis tools have been around for several years, riding the wave that brought e-procurement and e-sourcing solutions into the spotlight at the end of the 1990s. But analytical tools still make up only a fraction of what Boston-based technology consultancy AMR Research has estimated to be a $2.0 billion market in 2005 for procurement and sourcing solutions, and benchmarking data suggest that many companies are not employing spend analysis solutions.
Atlanta-based business advisory firm The Hackett Group, for instance, has reported that just 40 percent of world-class companies — those rating in the top 25 percent in terms of efficiency and effectiveness — have the necessary reporting tools in place to enable them to do spend analysis, and only half of those top performers have the ability to view spending data by supplier across the enterprise's total spend. Below the level of these world-class organizations, even fewer "average" companies are using spend analysis: Hackett found that "average" procurement organizations are less than half as likely to be using sophisticated tools for spend analysis as their world-class counterparts.
The primary function of spend analysis tools is to tell a company how, where and on what it is spending its money, and as Kirk Peterson suggests, much of the value of these solutions derives from their ability to automate the collection, cleansing, classification and reporting of spend information. This automation alleviates sourcing and procurement staff of the task of manually assembling the data from various systems across the enterprise, a time-consuming, labor-intensive process that frequently involves bringing in staff from the information technology department to structure and run reports from multiple enterprise systems. Kirk Peterson says, for example, that Owen Corning's adoption, in March 2004, of the Emptoris Spend Analysis Module (itself part of the Emptoris 5 solution) has allowed the manufacturer's sourcing staff to obtain, in minutes, information about the company's $3 billion-plus spend that previously might have taken months to pull together. "With this tool, the information really is at your fingertips," Peterson says, noting that the Emptoris solution is getting data feeds from Owens Corning's SAP enterprise resource planning system, as well as J.D. Edwards and MAPICS systems running in individual business units.
Mittal Steel Eyes Visibility
This ability to pull together data from a variety of systems makes spend analysis solutions particularly useful for companies that have grown through merger and acquisition, bringing numerous back-end systems into a single enterprise. Case in point: Rotterdam, Holland-based Mittal Steel Co. N.V., the largest steelmaker in the world, with revenues of over $22 billion in 2004. Caspar Vrensen, a business analyst with Mittal Steel, explains that his company has grown through a series of acquisitions during the past 25 years, creating a global concern spread across continents, languages, cultures and currencies. Not surprisingly, the company's 36 production units and 10 mine operations in 14 countries use a variety of back-end systems. This created two challenges for Mittal Steel's staff as they worked to analyze the company's substantial global spend: first, collecting data from all of Mittal Steel's geographically dispersed units in a timely manner, and second, comparing data that might come in different units of measure, formats, currencies or nomenclature, depending on the information's country and system of origin. "Bringing it all together took us so much time that in the end we were simply not able to do the analysis," Vrensen says.
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."
Finally, Mitchell believes that enterprises looking to take their spend analysis to the next level should look at applying the analytical tools to understand their total costs, to "get under the hood," as it were, and truly parse the costs in their supply and demand chains. "Spend analysis leads to cost analysis and activity analysis," he says, "and this is where being able to understand the constituent component costs is going to be really important." For example, a sourcing analyst may see that the company has a significant amount of spend in a particular commodity, but what is driving those costs, and to what degree? Is it purchase price, freight costs, inventory? "The more you can start to get that level of visibility, the more you're going to get ahead of the curve," Mitchell concludes.
Sidebar: Best Practices for Spend Analysis
For spend analysis to be effective, companies need to focus on four best practices, says Kevin Potts, director of product marketing with spend management solution provider Emptoris.
* First, the data must be holistic. "You have to make sure that you're looking at all your spend data for this commodity or for this supplier and not just the data from one system," Potts says.
* Second, the data must be accurately mapped against the correct category and vendor. Consider IBM, which sells multiple categories of goods — hardware, software and services, for example. IBM also has multiple subsidiaries, such as Lotus Software. Prior to negotiating with IBM, a company probably should understand all of its spend with IBM, not just how much it spends on hardware or what it spends with Lotus," Potts explains.
* Third, the spend analysis data must be accurate and granular, and the end user — whether it's a chief procurement officer or a commodity manager or an individual buyer — must be able to look at the data in the way that makes sense to them. Again, Potts: "You cannot afford 40 percent or 50 percent of the spend to be classified in the miscellaneous category; that's not really useful to you. And if you are negotiating for an indirect category like office supplies, it might be good enough to know what is your total office supplies spend, because you do not need to know how many pencils you bought. However, in direct materials and MRO categories you need to get a detailed item-level view to know exactly how many of each part you buy."
* Finally, automate as much of the process as possible so that it produces usable information in a timely way, and so that the process can be repeated at regular intervals. "Spend data," Potts notes, "get old as companies buy or sell other companies, launch new products and retire old ones. So being able to refresh your data on a repeated basis and make it viewable quickly is very important."