Let’s talk about money! The fact that you are reading this article probably means that your organisation is spending a substantial amount of money on goods and services. That spend deserves attention. But how do you start getting to grips with it?
Unless you already have a well-functioning spend management system in place, you’ll need to talk to your finance contact to get your hands on spend data from sources such as:
- the purchasing ledger
- general ledger
- purchase/credit card statements
The spend data should cover a few years so you will be able to spot trends in spend patterns. There are likely to be many thousands of records, so creating pivot tables in Microsoft Excel to view the data will make it a lot easier to analyse. If you haven’t created a pivot table before there are plenty of YouTube clips that will show you how. Once you slice and dice the spend data you will get some important insights straight away, such as:
- Who spends money on what. This is important so you know who to involve in your strategy and implementation work. Any data points showing Cost Centre, Department, Requisitioner or similar will be useful in terms of identifying stakeholders.
- Who your top suppliers are. If supplier names have been used inconsistently, you will need to do some data cleansing. E.g. XYZ Company may have been entered in a variety of ways, such as XYZ Ltd, XYZ Corp, XYZ Limited, etc.
- Which parts of your organisation use your top suppliers and for which goods and services. The total spend with these suppliers may be bigger than you realised. If it’s fragmented, there may be opportunities to consolidate these relationships for better deals and quality.
- How many suppliers you actually have (this may surprise you!). You may find that approx. 20% of the suppliers account for 80% of the spend, but that the “tail” of suppliers is extremely long. The “tail” is the large number of very low spend suppliers.
- Opportunities for consolidation. A large number of suppliers for virtually the same products or services, as well as a long “tail” of suppliers is an indication that spend can be consolidated. This creates larger deals and, therefore, increased negotiation power. It also provides a foundation for developing deeper supplier relationships. Even if consolidating parts of the long tail may not create particularly large deals, it will always reduce the admin costs associated with managing an excessive number of suppliers. Each Purchase Order (PO), each transaction has an “invisible” admin cost attached, which could be as high as £20/PO.
- Opportunities for demand management, i.e. using less of something, rather than changing or renegotiating the deal. You may, for example, observe that travel spend has increased substantially year on year. Implementing and enforcing a policy that limits travel in some way is an example of “demand management”.
- Opportunities to standardise and simplify specifications of what is bought to facilitate further consolidation.
- Obvious risks, e.g. no back-up supplier for critical products/services.
- Level of non-compliant spend. If you already have preferred supplier relationships in place and/or a policy to channel spend to certain suppliers, you will be able to see who has been non-compliant and how much that is costing your organisation.
- Early view of which areas you can target for optimisation and which ones you can’t. Familiarity with your organisation may tell you what spend is “out of bounds”. Perhaps the spend is required for regulatory purposes or it’s too politically sensitive to challenge right now. Once you see what the remaining addressable spend consists of, you may be able to provide a high-level estimate of how much cost could be taken out or how much additional value could be created. The estimate will depend on a number of factors, such as supply market conditions (Monopoly? Perfect competition?), whether the spend has previously been addressed, and how aggressive the organisation wants to be in pursuing cost reductions. It could range anywhere from 5% – 20%.
In addition to these insights, the benefit of doing a spend data analysis is that you will now have something tangible to use in your discussions with other people in your organisation that need to be involved.
An additional method of analysing costs is to look at the total cost associated with performing core activities in your organisation. It is worth visually breaking down the top 5 activities into their individual cost component. This is called a Total Cost of Ownership (TCO) analysis. Looking at cost data in this way will stimulate thinking around how to work differently to reduce total cost, while maintaining or enhancing quality. The following TCO example illustrates the principle.
The ability to analyse spend is fundamental to procurement staff. It is, however, important to remember that there are stories behind the figures, i.e. business reasons (good ones and not-so-good ones) why stakeholders have acted in certain ways. A spend analysis provides a good foundation for having those discussions.
To learn more about strategic supply market analysis, contact our Managing Director, Armand Brevig, today
