The effectiveness of a strategic sourcing program can rise or fall on the quality of the spend analysis. Is your company ready?
In today's economy, spend analysis is gaining respect as a potent weapon in the battle to squeeze new savings out of corporate procurement processes. Currently over 90 percent of the Fortune 100 companies are implementing strategic sourcing programs, and with it they are able to determine precisely what they pay for materials, products and services, when they pay for it, and with whom. Islands of spending data must be extracted and aggregated from multiple enterprise systems in order to generate a single uniform view of enterprise-wide expenditures that can identify cost-cutting opportunities as well as reveal critical differences among suppliers.
Some organizations that have adopted spend management initiatives are reaping big savings. One consumer products company has reported slashing certain bids by as much as 90 percent after consolidating and analyzing over $30 billion worth of purchases from 50 different accounts payable (A/P) systems. A cutting tools manufacturer saved over $1 million on $800 million in "quick hit" negotiations by applying the lessons learned after merging A/P, purchase order (PO) and purchase card (p-card) data. A cabinetry manufacturer lowered the costs of purchased materials with a projected year-over-year savings of 2 to 4 percent by consolidating spend data across five divisions.
In fact, analysts estimate that an effective, ongoing spend analysis program can produce net savings of 7 to 10 percent in the cost of goods sold, with additional savings elsewhere. But most companies fail to realize these savings because they use a short-term SWAT team approach rather than making spend analysis a permanent component of their cost-policing arsenal.
One way to realize the full benefits of spend analysis is by tracking and studying spending patterns on a continuing basis. A commitment to systems that can automate the process of aggregating spend data from all sources, standardizing it according to a granular coding system, and performing multidimensional data analysis to unlock trends perennially obscured by company size and structure, is one method of doing so. The resulting ongoing scrutiny can enable purchasing managers and corporate executives to obtain the actionable data needed to optimize sourcing decisions in the face of changing market demand, corporate requirements and supplier performance.
Once Is Not Enough
In its most common implementation, spend analysis is a one-time project that takes too long, yields incomplete and/or inaccurate results, and cannot be replicated without reinventing the wheel. The culprits: lack of adequate tools and dirty data.
Consultants have to use semi-manual methods to consolidate, clean and classify spend data from across different departments, disparate enterprise systems and multiple corporate locations. Differences in style and terminology must be reconciled (for example, "kilogram" and "kg"), and products must be classified down to very granular levels to permit precise searches on given spending categories ("cap screw" or "laser printer"). The effort can last many months, and the sheer volume of data and limitations of the methodology make it difficult to arrive at a thorough understanding of the complete spend profile.
More significantly, the one-time analysis yields only a one-time benefit. Repeated analysis is often required to identify changes in enterprise spend, by commodity and supplier both, incorporate projected demand as well as historical data into the spending picture, and monitor progressive spend against established contracts to ensure that anticipated value is delivered. How can you make it easier? By implementing automated tools dedicated to such functionality.
Taking the Plunge