©ALL RIGHTS RESERVED - Confidential Searching for Clues - Making Spend Analysis Work Guy Allen Wednesday April 3 rd 2013 Spend Matters Real World Sourcing
Oct 19, 2014
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Searching for Clues - Making Spend Analysis Work
Guy Allen Wednesday April 3rd 2013
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Agenda
1. Sources of Spend Data
2. Turning Data Into Information
3. Identifying Opportunities and Prioritisation
4. Spend Analysis and Managing Categories
5. Identifying Actions
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Part 1 – Introduction
The Real World Sourcing Series is a series of sessions covering hot topics for procurement professionals.
The Real World Sourcing Series is promoted and supported by Tejari and CIPS MENA, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Ltd.)
Guy Allen started his procurement career with Ford Motor Company, moving through IBM, SmithKline Beecham and GSK before becoming CPO for Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a Managing Partner. Guy has since left 4C and started his own consultancy, Real World Sourcing Limited.
Spend Matters Real World Sourcing
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Making Spend Analysis Work
A Core Requirement for all Procurement Professionals:
Know Your Numbers!
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Sources of Data
• Make the most of what is available
• If you can’t get data, nor can anyone else
• Lack of data cannot be an excuse for inaction
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Sources of Data
• AP File – downloaded into Excel
• AP Audits
• Budgets (past and present)
• P Card
• 3rd party website
• Suppliers
Whatever the source, the most effective Spend Information comes from a dedicated Spend Database System, refreshed regularly
Making Spend Analysis Work
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Data A collection of text and numbers
Information Coded data, with relevant reporting
Action Decisions based on the information
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Making Spend Analysis Work
Data into Information
• Coding – Must code the supplier at least, ideally the transaction
• Parent Child relationships – who owns who?
• Assumptions
• Build using the information into your ways of working
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Dat
a A
vaila
bili
ty
High
Low
Invoice Descriptions
Invoice Line
Descriptions
PO Descriptions
PO Line
Descriptions
Suppliers General Ledger Codes Commodity
Codes
High Low
Making Spend Analysis Work
Even with a Spend Database System, the usefulness of the information will depend on quality of the data going in. GIGO (Garbage In, Garbage Out)
Categorization Data Quality
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Making Spend Analysis Work
Do all that and you will end up with something like this
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Task 1
Work on your tables, and list what uses you might make of well coded
spend information
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Making Spend Analysis Work
Tail Leverage
Category Planning
Compliance Tracking
Pricing Variance
Opportunity Analysis
Fraud Detection
Selecting priorities for the Procurement Function
Measuring actual prices to budget , contract or previous year’s prices
Measuring conformance to preferred suppliers or processes
Preparing the strategy for your category
Managing a supplier reduction programme
Monitoring Key Supply Base information, ie Diversity
Identifying possible fraudulent (or inaccurate) activity
Supplier Base Management
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Making Spend Analysis Work
A Typical Category Management process
Develop, implement and embed category management
Understand internal
requirements &
stakeholders
Stage 1
Define scope and category
structure
Stage 2
Understand market and
suppliers
Stage 3
Develop category
strategy and plan
Stage 4
Select supplier(s)
Stage 5
Implement contracts
Stage 6
Contract and supplier
management
Stage 7
Iterative process
Tail Leverage
Category Planning
Compliance Tracking
Pricing Variance Opportunity
Analysis
Fraud Detection
Supplier Base Management
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Low High
High
Magnitude of spend
Sup
ply
ris
k
Critical Strategic
Acquisition Leverage
Collaboration - close supplier management:
• detailed contract • collaborate • market awareness
Drive for value:
• market pricing • aggressive approach • use leverage
Minimum attention:
• price formula • call-off contract • look to rationalise
Ensure availability:
• long-term contract • price indexes • contingency planning
Making Spend Analysis Work
Opportunity Analysis
Kraljic Matrix (adapted)
Setting Your Functional Priorities
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Spend By Supplier / Division Opportunity
Analysis
Spend Matters Real World Sourcing
Making Spend Analysis Work
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Home Care Personal Care
Food Medical Products
Marketing
Lab Equipment
Lab Supplies
Review the common categories across the company’s divisions
Opportunity Analysis
Making Spend Analysis Work
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Making Spend Analysis Work
• Are we paying what we should be paying?
• Are there different prices for different suppliers for the same product?
• Are there different prices from the SAME supplier for different locations?
• How does the price compare to PPV (Purchasing Price Variance)? In other words are we beating budget prices?
• How has pricing changed since last year?
Pricing Variance
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Making Spend Analysis Work
Pricing Variance
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Pricing Variance
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Making Spend Analysis Work
• How much leakage is there from the preferred supplier?
• Are some divisions more compliant than others?
• Why is this the case?
• Are there areas of spend that are not being well covered?
Compliance Tracking
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Making Spend Analysis Work Compliance
Tracking
Spend Matters Real World Sourcing
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Contract Spend By Supplier Making Spend Analysis Work Compliance
Tracking
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Making Spend Analysis Work
• Preparing complete spend profile of category
• Analysing which divisions use which suppliers
• Prepare Category Strategy
• Developing your negotiation strategy, including eAuction if appropriate
Category Planning
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Making Spend Analysis Work
• How long is it?
• Are there opportunities to consolidate by category?
• Can you introduce a supplier reduction programme?
• Do you have appropriate controls to ensure the tail isn't growing?
Tail Leverage
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Volume Consolidation Summary Making Spend Analysis Work
Tail Leverage
Spend Matters Real World Sourcing
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Making Spend Analysis Work
• Analyse the profile of orders and invoices
– Are there multiple orders just below approval limits?
– What proportion of orders are after the event?
– Are there duplicate invoices?
• Monitor significant changes in order and payment profiles
• Understand the reasons for the differences
Fraud Detection
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Fraud Detection
Spend Matters Real World Sourcing
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Making Spend Analysis Work
Task 2 - Searching for Clues
In your workbook there are 4 graphs. Have a look at them and discuss with the
people next to you what actions they might lead you to take.
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Example 1 Spend by Supplier and Organisation
(Colours represent the different business units)
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Example 2
Spend Matters Real World Sourcing
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Example 3
Spend Matters Real World Sourcing
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Example 4
[Annoymised Business Units]
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Making Spend Analysis Work
Some Final Thoughts
• Just providing the system isn't enough
• Build usage of your spend system into your reviews
• Expect to see regular analysis of compliance, price variance etc
• Provide simple dashboards to your internal customers
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Graphs are great
PowerPoint is convincing
Spend Matters Real World Sourcing
Action is real
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Real World Sourcing Scholarship
• 10,000AED towards any procurement based training
• Go to StrategicSourcing.ae with the URL you will receive tomorrow by email
• Complete the quiz programme
• Answer as many questions right as possible
• The winner will be announced at the end of the series!
Assessing the Procurement Function
Spend Matters Real World Sourcing
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THANK YOU!
Please feel free to contact me on
Spend Matters Real World Sourcing