A Spend Analysis Carol

Dickens classic tale has particular relevance for the supply management world at this time of year

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Chicago — December 20, 2010 — We're probably all familiar with the classic Dickens tale "A Christmas Carol." This time of year, with the constant reruns, our personal holiday shopping decisions and corporate parties, it's particularly in our minds.

Like many classic tales with lessons, this familiar fable has relevance in our supply chain world. While the obvious message in this tale is not to be stingy with your spend, I like to think there is a more important tip that we can apply to our business practices. That's the importance that high definition visibility plays in analyzing your past, present and hypothetical future collaborations with suppliers — and the importance of that understanding in making future business decisions.

For those of you a bit hazy on the tale, Ebenezer Scrooge, a rich miser, is visited by several ghosts who encourage him to change his anti-social ways. The first of the spirits, the Ghost of Christmas Past, takes Scrooge to the scenes of his boyhood and youth. The second spirit, the Ghost of Christmas Present, takes Scrooge to several present day scenes, showing him events that are happening that he wasn't aware of. The third spirit, the Ghost of Christmas Future, shows Scrooge the tribulations that await him in the future should he not change.

When Scrooge was visited by the three ghosts, he gained insight into his mistakes and found awareness for how to make things right. So what does this have to do with the supply chain?

With today's complex issues, including volatile costs, supplier collapse, fluctuating inventory and regional supply disruptions, it's easy for purchasing executives to have poor vision into their supply chain.

Spend analysis plays the role of the ghosts, allowing purchasing executives to examine and scrutinize their supplier's and their own performance, contracts, commitments and risks in diverse tenses. Much like with Scrooge, what these ghosts reveal may be distressing. But this in-depth knowledge is the tool that allows actions to be taken to better conduct your business going forward.

You and the Ghost of Spend Past

Spend and supplier analytics are powerful lenses with which to look back on purchasing performance. When these tools are properly used, purchasing executives gain awareness into what they've done — good and bad. The combination of two lenses (supplier and spend analytics) provides a three-dimensional, lifelike view to look back over the horrors and successes of past. Did an entire supply chain — not just a single supplier — go out of business with 30 days notice? What were the results? Were you diverse enough to cover the disruption? Or say, a strategic supplier stepped up at a critical time and flexed capacity to address an unexpected and sustained spike in demand.

With external data that can be analyzed, purchasing executives can have visibility into each supplier's status, their spend, in how many divisions and across how many product lines they were accessed, allowing a fair opportunity to evaluate exposure and make appropriate plans to address the risk. What's needed is accurate, up-to-date information to support this type of advanced analysis.

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You and the Ghost of Spend Present

This aspect lets purchasing executives see the reality of today's transactions and commitments through numbers. This can be an inflection point whether to continue to put out fires and stay the current course, or whether to accept the tough lessons and do something (that is, improve for betterment's sake). These are tough decisions to make, but if you have the facts and analysis, you can feel more comfortable in the decision that you make.

Aberdeen Group, in its report "Transforming Data into Value" (September 2009), highlighted an organization that used spend analysis to rationalize payment terms. During this process, the $3 billion manufacturer discovered a set of strategic vendors whose financial risk profile suggested they would struggle with the manufacturer's new extended payment terms.

With insights gleaned through technology from my company, BravoSolution, this manufacturer worked with these smaller vendors to secure third-party financing that would support a viable working capital model for both parties. Finding ways to support these types of win-win scenarios helps to ensure that your vendors are healthy and stable.

You and the Ghost of Spend Future

Spend analysis and sourcing provide a new "what-if" course of purchasing — the choice presented is whether to stay the current course, possibly repeating your mistakes (that is, the supply chain collapses again) or to choose a new course, having learned from your mistakes made visible by spend and supplier (awareness and consistent analysis of past) and improved your decision processes, allowing you to repeat successes (for example, that strategic supplier steps up) with spend analysis and sourcing.

During the supplier-selection process, innovative companies look beyond a vendor's current capabilities, thinking about future capabilities and the cost to bring that capacity online. Using advanced optimization techniques, buying teams can quickly analyze the costs and benefits of making such an investment in a key supplier.

In planning for the future, procurement teams need visibility and easy access to data to help in their decision-making processes. This is particularly relevant in category baseline development. Industry surveys reveal that sourcing-specific reports and spend visibility can improve savings forecast accuracy by as much as 40 percent and reduce sourcing cycle times by half!

With dozens of sourcing-specific reports and visibility options, spend analysis provides the power to monitor purchasing activity to ensure buyer compliance, vendor purchase price adherence to contract terms, new categories of spending, diversity spending and savings against targets over time. The goal is to have better access to more information.

This timely analogy illustrates how high definition spend analysis allows companies to explore their past, present and future supplier dealings — so they can right their ship much as Ebenezer Scrooge did. By making a strong commitment to developing lasting collaborative relationships with your most strategic vendors, organizations can create the visibility and control necessary to be certain the necessary steps have been taken to reduce the risk.

God bless us, everyone!

About the Author: Paul Martyn is the vice president of global marketing at BravoSolution, which supports procurement professionals with tools and services to identify sourcing opportunities, prioritize initiatives, execute projects with tailored solutions, and realize the benefits of their initiatives. BravoSolution generates value by supporting clients in the improvement of sourcing processes to drive their companies' strategic objectives. More information on BravoSolution at www.bravosolution.com.