Procurement organizations focus on optimizing costs. As part of a regular ritual to weed out unnecessary costs, one should first know where the money is being spent. Not all procurement organizations have invested in a comprehensive spend analysis tool, which makes it tough to convincingly single out an underperforming category or categories.
Spend information resides in various databases and spreadsheets, making it difficult to collate them into one coherent form for reporting purposes. However, procurement organizations can reap enormous benefits by bringing in much needed visibility into spend patterns. Let’s take the case of the University of California (UC).
A few years ago, UC set out to achieve an annual savings goal of $200 million by 2017. At the time, UC’s spending processes involved hundreds of thousands of unique suppliers with more than fifteen million lines of transaction data spread across disparate systems. This made it impossible to gauge the context around spending processes, and there was little visibility into spending practices at the departmental or campus level. Through spend analysis, UC was able to streamline classification, normalize data, get a holistic picture of organization-wide spend, and identify opportunities to use existing contracts.
The importance of spend analytics has not gone unnoticed: 38 percent of procurement leaders have rated spend analysis as the most critical area to receive investment over the next 12 months. When carried out effectively, spend analysis can reign in the overuse of maverick buying while enabling procurement teams to employ demand management techniques through real-time tracking of inventory levels. However, procurement teams need to be operationally ready to access the full potential of the process.
Often, spend data is not up-to-date or is highly complex and difficult to analyze. As a result, the true power of data is not exposed. While cleansing and classifying data is important, procurement teams also need to implement data enrichment strategies to gather high quality spend data across the organization.
For the media company, the lack of knowledge of combined unit spend resulted in significant supplier and spend data-related blind spots. For instance, in the paper and telecommunications categories, a single supplier was servicing all four business units under individual pricing agreements. The media company was able to achieve significant savings just by gaining more intelligence of total enterprise spend.
Gathering high quality spend data begins with putting into place systems and processes that ensure the right data is captured from the right sources at the right time. By working with more rudimentary spend analysis methodologies that are time consuming, effort-intensive and prone to errors (such as spreadsheets), procurement organizations often end up with un-actionable results.
Today, there are two key approaches to how procurement teams address spend analysis: database-driven and data-driven. Both these approaches depend upon how an organization chooses to integrate data with the spend analysis software application. Working with the legacy database-driven approach involves mapping data to a predetermined data-field definition. This involves a significant investment of IT personnel time and resources, especially when there are multiple data sources across the organization.
In some cases, procurement organizations may ask their IT teams to develop a home-grown solution by combining the capabilities of a data warehouse solution, a powerful report builder and data visualization solution. In addition to other limitations, these may not have the proper classification and cleansing capabilities required to perform spend analysis.
While procurement organizations recognize the advantages that can be gained from spend analysis, the lack of talent often results in the inability to fully leverage solutions available in the market. There is a growing need for organizations to hire and train procurement analytics teams who can ensure master data consistency and provide a regular flow of spend analytics to category teams.
One of the most important steps in spend analysis is to get down to category level analysis. When a company adopts a category management approach, it becomes relatively simpler to analyze spend data per category. One has to allocate spend into various buckets to enable better interpretation of data. Also, such an approach will also help a procurement organization to drill down each category into various subcategories.
Procurement leaders can enhance their organization’s spend analysis capabilities by focusing on the following three factors: