Alleviate Spend Management Pain: Cut Costs and Increase Visibility
Spend analytics is fast becoming a crucial component of spend management, because it can alleviate so many procurement challenges when implemented. Those challenges -- or pain points -- include high costs, lack of visibility, data silos and out-of-date information. To many supply management professionals, these can be roadblocks to success, but they don’t have to be.
In this first of three articles on the topic, we’ll look at how high costs and lack of visibility into supplier information hamper procurement efforts, and we’ll demonstrate how to overcome those challenges by implementing spend analysis. Our second article will focus on the need to master your data for a comprehensive overview of your suppliers, and the final piece will address “the need for speed.”.
Cost reduction initiatives top the list of priorities for most chief procurement officers (CPOs), but many companies continue to miss significant savings opportunities by not leveraging spend analysis as part of their procurement strategy.
One of the major challenges that prevents organizations from achieving savings objectives is their limited visibility into detailed spend information. Spend data is often not available or up-to-date, is incomplete, or -- in some cases -- may be presented only at a high-level rather than granular (e.g. invoiced line items or parts). Additionally, the lack of appropriate resources and support can limit organizations’ ability to identify and eliminate unnecessary costs and optimize spend across the enterprise.
Spend analysis can help companies quickly increase their bottom line and effectively streamline spend management processes, aggregate information and consolidate spend across the entire organization.
Spend analysis drives savings opportunities
Spend analysis is the first step and a key component in every spend management process. It provides the information organizations need to perform an assessment of savings opportunities. That assessment gives companies visibility into who they are buying from, and what and how much they are buying. It can include evaluating contracts for savings opportunities; pinpointing the optimal number of vendors for a specific commodity; and determining whether the organization is buying at the best price. Procurement organizations can then identify savings opportunities and implement spend governance with that holistic view.
Indirect and tail spend for cost reduction
The analysis of indirect spending (i.e., purchases of all things required for a business to operate) and “tail spending” (i.e., Suppliers or spend categories that add up to 20% of total spend) is another area of focus for organizations that want to capitalize on savings opportunities. Industry average savings for indirect spend categories can range from 7% (general supplies & services) to 14% (IT hardware & services), according to Denali Consulting. Duplicate suppliers can also have an impact to Total Cost of Ownership (TCO), with costs ranging between $700 and $1,400 to onboard and maintain a supplier relationship. By mapping leakages to indirect categories of spend, organizations can quickly identify and measure the impact to TCO and re-evaluate strategies from a pricing or payment terms perspective. The process is typically achieved through data normalization, categorization and aggregation processes that allow procurement professionals to “slice and dice” spend information and increase their visibility into categories of spend matched to suppliers’ information. This enables them to expand the analysis into major areas of category management, to drive spend consolidation and cost savings at the enterprise level.
Advanced spend analytics can also assist in the analysis of tail-related spend through capabilities that use all available information captured in invoices, coupled with dynamic user feedback, that incorporates high levels of precision, accuracy and granularity for rationalization and categorization purposes. This functionality enables organizations to streamline, consolidate and monitor low-value areas of spending – in most cases ranging between $2,500 and $100,000 – and provides visibility into ad-hoc spend transactions, such as purchases made on low-volume items off contract, rush orders or special projects. Transactions can also be traced to identify where in the organizations orders are taking place, so that requirements and internal policies can be tweaked if necessary. These instances can lead to savings of between 5% and 15%, a significant amount in large spending organizations.
Tracking price compliance to identify savings
Another area of concern for procurement organizations arises when pricing discounts may not be properly applied or spend management processes in place may not enable specific functions. These might include monitoring price compliance on an ongoing basis, tracking spend items to contract specifications, or analyzing recurring purchases where items may be too small to track individually. Spend analysis and customized reporting capabilities would assist these organizations in scanning areas of non-compliance to identify differences between contracted savings estimated at sourcing implementation stage and what actual savings occurred during the contract lifecycle. Through highly flexible configuration functionality that allows users to adjust rules and parameters, spend analysis can provide detailed invoiced and transactional data to compare negotiated price to price paid to accurately quantify any realized savings. This information can then be leveraged to re-negotiate better discounted terms and achieve cost reduction based on suppliers’ performance or non- compliance. Without these details, an organization has no way of knowing whether the supplier met its contract obligations.
Achieving working capital targets
Working capital is an important measure of a company’s liquidity and a crucial source of funding for a company’s operating and financing needs. The procurement function can have a significant impact on how an organization achieves its working capital targets by implementing spend management systems and processes that give them increased visibility across all areas of spend. These processes enable procurement teams to eliminate duplicate suppliers, consolidate and optimize spend, monitor non-compliance, and lower any “expense creep.” Implementing intelligent decision-making spend analysis will help forward-looking companies capitalize on savings opportunities.
Rather than function as a cost center with limited visibility into its supplier universe, procurement can instead become a strategic business partner through the implementation of spend analysis.
Reduce your costs and increase working capital with D&B Spend Intelligence.