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Spend Management – Step One To Increase Savings! [A White Paper]

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Focus on sourcing typically yields significant profits: a rupee in increased sales is ten paisa in profit while a rupee saved in costs is a rupee increase in profit.

Prologue

Spend analysis is one of the most significant steps considered to develop and achieve an overall strategic procurement tactic for an organization. When this strategy is applied perfectly, it allows the organization to recognize opportunities leveraging buying power, reduce costs, and augment operational performance, offering excellent management and oversight of vendors, while maintaining a healthy relationship with internal and external stakeholders.

Spend analysis begins with identifying various sources to amass all spend related data of an organization. Sources include procurement, financial, or logistics systems and procurement card. Once the data is amassed, it ought to be cleansed, grouped, classified and analyzed.

Besides, this analysis forms a solid foundation for sourcing programs. It helps comprehending organization’s spend structure and facilitates in deciphering suitable actions to be taken based on facts rather than intuition. On the other hand, spend analysis does not create a ROI itself: it just gives necessary insight to focus on procurement projects, which appears to promise the highest ROI.

While most of the organizations often consider spend analytics solutions to reduce spend, they immediately realize that the success of spend analytics initiatives eventually rely upon the underlying consistency and quality of vendor and item data. A study conducted by the Hackett Group entitled “Key Issues Study for Procurement” emphasizes the significance and interrelationship of Analytics and Master Data Management (MDM), being the duo emerging as the two most significant priorities of the current procurement era.

Spend Analytics: Why Now?                                                               

In the current scenario, asset prices are fluctuating rapidly and volatility is “new normal”.  Implications of these forces into the present scenario of procurement are vital, profound and far reaching.

Spend Analytics

Extreme price fluctuation and volatility enforces a need for a sophisticated approach to empower the service delivery. Nevertheless, experienced procurement executives, aware of the current trend, face two critical issues;

  • Strengthening their procurement’s forecasting, analytical and modeling capabilities in response to the complex and volatile business environment.
  • To maintain and achieve a competitive cost structure parallel to the hyper-competitive business environment to maintain their business and to give an edge to their competitors.

Procurement has to be recognized as a bottom line driven activity that contributes via diminution of end product costs and find vendors with new innovation.

How Organizations Manage Spend?

Spend analysis

It is a bitter truth that most of the organization fails to have an end-to-end view on their spending. According to a study conducted by AMR Research, amongst 70 supply chain management executives, 55% never bother to check spend analytics and fails to save 10% to 15% in total cost due to their negligence. The same study also reveals that spend management varies considerably between different organizations.

If the organization’s system fails to provide timely and accurate spend data, it may directly impact on sourcing decision. Added to this, many companies do fail in comprehending the cost saving potential as they fail to realize the significance of linking the spend analytics data to their strategic sourcing decisions.However, if the company comprehend the importance of spend analytics, purchasing can be simple and cost-effective

Methodical analysis of spend data acts as the foundation of an efficient procurement system. It helps organization unleashing the potential of sourcing development activities. However, these activities may vary from one organization to another in terms of renegotiating the existing contracts to strategizing better payment terms and to get insights on spending patterns, supplier performance and commitments and internal compliance of contracts.

The Need To Analyze Spend Structure

Spend Analytics 1

Spend analysis acts as a critical determinant of procurement’s success within an organization. It is an undeniable fact that achieving a top class performance totally demands controlling and leveraging an organization’s spend. Nevertheless, top class performance can only be expected if spend management performance is analyzed frequently in the context of continuous improvement.

It is a high time to analyze;

  • The measureable goals for procurement to get most value from external spending
  • Compute both spend and spending conduct
  • Analyze the spend to find opportunities to spend more efficiently
  • Empower strategic sourcing and P2P channels

As spend behavior keep on changing frequently, thy organization need to understand its behavior and act upon this change efficiently.

“What gets measured gets managed.” -Peter Drucker

Importance Of Spend Management

According to the Hackett Group’s, “KEY ISSUES STUDY FOR PROCUREMENT” establishing data governance process is a key aspect of undertaking Master Data Management (MDM) initiatives. An extremely relevant study also suggests that “fixing” errors and embracing supplier master data to empower enterprise spend visibility and analytics is the second highest priority of the current procurement industry.

After the survey, Hackett group concludes that most of the organizations do have problem in convincing management to invest in amending master data, which is directly connected with the spend analytic problems. Although it is a complex work to build flawless master data, World Class Organization suggest solving strategic sourcing problems, which is nothing but providing transparent spend visibility data to justify funding of master data investments.

Enterprise MDM Strategy

According to the Hackett’s observation implementing enterprise MDM strategy by centralizing spend management master data, (a collection of item and supplier data) generates superior spend management analytics.

The key findings of the survey include;

  • 89% of the World Class Organizations maintain single enterprise-wide supplier master
  • 75% of the World Class Organizations maintain single enterprise-wide item master
  • 86% of the World Class Organizations maintain a formal approval process for data creation and changes

Hackett Group Survey also describes that maintaining evenness of supplier and item cataloging information across the enterprise is entwined with the World Class Performance. Those organizations leveraging an Enterprise MDM Strategy tend to be closer to the World Class Performance than its peers not having that strategy. Besides, among the world class organizations implementing a company-wide commodity coding scheme doesn’t matter as long as the scheme applied uniformly across the enterprise thus providing a satisfactory classification mechanism essential for efficient spend analytics.

Survey

                                        World Class Companies implementing Enterprise-Wide Data Standardization

It is said that the world class organizations implementing standard MDM strategy have a better global view of spend data when compared to its peers due to the extensive availability of category and vendor specific data accessible for analysis.

Implementing MDM strategy in thy organization

So, how to implement MDM strategy in thy organization and reap its benefits? Below points, as recommended by the Hackett Group in its paper, act as practical guidelines;

  • A standard naming structure and commodity-coding scheme has to be applied frequently throughout the organization and proliferate it down to the vendor and commodity master files
  • Amalgamate various systems holding inconsistent vendor and item information into a centralized MDM system that contains of unique, accurate and complete set of information essential to mend out effective spend management analytics
  • Administrate the new set of master data resulting in unique, accurate and complete set of information required to generate effective spend management analytics
  • Distribute the consolidated source to all operational and analytical applications across the enterprise

Data sets that are not integrated at the enterprise level increase manual adjustment, which results in poor decision down the lane. This can be avoided in all aspects when the MDM strategy is implemented. Besides, as spend analytics start taking its shape, it is essential to have flexible data nomenclature and standards.

Benefits Of MDM In Terms Of Spend Analytics

Now, as we come this long, let us see how MDM is beneficial for an organization? Hackett Group strategized an approach to evaluate the cost saving, which can be achieved through defining and integrating MDM as a part of an application. This can be achieved by analyzing the gap performance between the competitors sharing similar applications. Based on this analysis, a layout is set to implement data standards that can be established later on.

Survey 1

As represented above, the data definitions of top-notch application environment diminishes the low value finance costs by 1.64% to 1.13%, which directly represents the cost savings of approximately $5.1 million per billion of revenue. Besides, the group has also summarized that top performing companies leveraging MDM strategy & spend analytics reduced their purchasing costs by 10% to 15%

Master Data Management: A Key Enabler of Success

Many organizations have this question “What are the key enablers to leverage vendor and commodity data?” Hackett Group Research presents four key aspects that answers aforesaid question;

Work Culture: Hackett group identifies that implementing global data stewardship program helps identifying master data owners, promote consistent master data across all processes, businesses and systems and determining its impact on business thereby eliminating irrelevant touch points within the organized business processes.

Data Governance: Efficient data governance eliminates the redundant process to the maximum extent thereby developing common data characterization, establishing steady & dependable dimensional structures across all the systems and processes thereby strategizing business rules and validating MDM process.

Technology: It integrates an application that facilitates MDM process to analyze the future of workflow progression, administrates data centrally and automates the vendor data and commodity data into every system.

Maintain Data Quality: Defines and empowers data standards worldwide by cleansing the existing consolidated data collected across various verticals. Helps developing master data quality governance and integrate the concept of MDM into the system.

Adherence to the aforesaid guidelines will insure that thy Master Data Management initiative offers high probability of success that meet organization goals and have complete control over spends.

Final Words

Most of the companies often rely on spend analytics to reduce its purchasing spend, but they quickly realize that spend analytics mainly depend upon the evenness, stability and the quality of accrued suppliers and product data across all systems within the organization. This whitepaper concludes that the successful spend analytics ought to be grounded on facts and clear master data management foundation. To make the point clear, this paper rely on the survey and points presented by the Hackett Group, “World Class companies leveraging MDM best practices as part of their spend analytics initiatives have reduced their purchasing costs by 7 to 15 percent”.

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