Four Tips on Spend Analysis for Small Companies
Purchasing pros at big companies share what they've learned from years of analyzing spending and using the data to pursue strategic sourcing activities that benefit the bottom line.
By Susan Avery -- Purchasing, 4/9/2009
Armed with powerful software tools, purchasing operations at big companies have been gathering data on spending, analyzing it and using the information to identify strategic sourcing opportunities, consolidate the supply base, reduce costs and bring other benefits to their organizations for years now.
What's more, buyers at big companies are using their "wins" to help expand their influence within the organization, taking on responsibility for new areas of spending like legal services.
But what can mid-size companies (those with less than $1 billion in sales) with fewer resources do? Well, actually, plenty. Purchasing asked spend-management experts—Ken Hartman, manager of indirect and global sourcing technology for Boston Scientific in Natick, Mass. and Steve Hughes, director of supply chain management at Vertis Communications in Baltimore, Md.—what advice they would give colleagues at smaller companies. Their advice centered around four major points.
1. Start by identifying the short- and long-term objectives of spend analysis tools and prioritizing those objectives to focus on highest return benefit.
"You are not going to be able to do everything in one day," says Hartman. "So you want to focus on the things that have the biggest impact to the business." He gives consolidating the supplier master file as one example of a short-term objective. A long-term objective is implementing a process that stratifies suppliers.
2. Make sure customers of the data are signed up and on board with using the results of the analysis.
"You don't want to go through the expense and effort of implementing the spend analysis system if you don't have buy-in of the groups that are going to see the data that they are willing to take action on it," says Hartman.
3. Focus on producing a few key metrics across all spend categories. Build and refine those metrics for the categories with the greatest impact to the business. Examples: Spend under management or number of suppliers, simple to generate, yet powerful, metrics.
4. Trust the data. During implementation, do a deep dive into a category purchasing already manages and knows well. This helps to calibrate spend analysis tools and ensure processes and data are accurate. Now, purchasing has confidence to approach new spend areas.
"Buyers at mid-size companies ask if spend analysis is important for them or whether they can just pick a couple of categories and run some reverse auctions ad hoc," says Kirit Pandit, author of Spend Analysis: The Window into Strategic Sourcing and vice president of content strategy and spend-analysis solutions at Emptoris, a spend analysis tools and services provider in Burlington, Mass.
"They want to know how much more incremental savings they will see if they implement spend analysis. My answer to them is that if they don't they could be missing out on quite a lot."
In his conversations with buyers at mid-size companies, Pandit says they tell him that they've been asked by management to reduce costs and don't really know where to begin. They don't have visibility into spending and don't know how to put it (the data) all together. "This is common," he says.
The discussion flows into what it takes to get there, he says, and sometimes companies have to create a central department gain control of the spend.
Once they've embarked on the journey to spend analysis they will see the possibilities. Initially, buyers at mid-size companies will realize cost savings of 10% to 15%. These savings can be gained by consolidating spending with fewer suppliers. Companies also will be able to reduce maverick buying. Then, Pandit says, they can start thinking about such activities as supplier relationship management and contract management, as additional opportunities to reduce costs.
Boston Scientific started using spend analytics within purchasing four years ago. The company's first step was to code its spend categories for the database by using a proprietary taxonomy for direct materials and the United Nations Standard Products and Services Classification (UNSPSC) code for indirect materials and services. Now, purchasing is using the data to identify opportunities for strategic sourcing in new areas of spending. Boston Scientific works with Emptoris.
"We were able to use the data to show senior management of functions within Boston Scientific that we weren't supporting that were significant opportunities for savings," says Hartman. "Going to senior management armed with this data makes the compelling case for change that much easier."
At Vertis, Hughes has compiled and categorized all of the company's data on its indirect spend for the past four years. It works with spend analysis provider Ketera.
"I feel more confident today about the decisions we are making and the direction we are taking," he says. "Looking at history can be very useful in helping to understand what's happening in the present. The data continues to get richer."
Hughes now is involved in pulling together this data with that of the supply operation at American Color Graphics, a company acquired by Vertis in 2008.
The basics
While sourcing operations at mid-size companies may not have all the resources of their colleagues at bigger companies, they do recognize the importance of knowing what they are spending and with whom.
In fact, new research by Purchasing for software company Ariba finds that spend analysis is at the top of the to-do list for sourcing operations at mid-size companies.
Forty-four percent of the more than 500 mid-size companies polled for the research say their companies will be investing in spend analysis activities in 2009. Just supplier performance management, at 49%, received more mentions.
The research finds buyers at mid-size companies face many of the same challenges as their colleagues at big companies. Asked about the economy, 31% say they see recovery coming later this year; 41% say it will occur within the first six months of 2010.
In this economic climate, the majority (65%) says management is looking to purchasing to lead cost reduction efforts. And that is the number-one reason purchasing operations undertake spend analysis activities: Cost savings. Another, buyers say, is to consolidate the supplier base.
At big companies typically, purchasing uses the information generated by spend analysis activities to determine which categories to source strategically. When Hughes joined Vertis three years ago he says he "needed to know the biggest categories that were consuming the majority of our indirect spend dollars and to develop a game plan that would allow us to systematically tackle each one of these projects from highest to lowest impact over time."
What Hughes and other buyers find is that their companies often have seven or eight (or more) different sources of data. Sources include ERP (enterprise resource planning), purchasing card, travel card and other financial systems.
"Acquiring data from various sources, rationalizing the data, synthesizing it and getting it to a level of quality that a spend analysis software provider can use is the biggest challenge," says Hartman at Boston Scientific.
When selecting a software provider, he suggests choosing a supplier with a similar philosophy, pointing out that there are companies that offer a soup-to-nuts approach and those that simply provide the tools so buyers can do the analysis themselves.
Purchasing operations generally use proprietary coding systems to classify direct materials and the UNSPSC code or another standard industry classification code for indirect materials.
When Hughes arrived at Vertis, the company was using Standard Industry Classification codes, which can be helpful to identify suppliers by product line. He made a switch to the UNSPSC code, which provides more detail on products provided by suppliers. "That was critical for us to get a better understanding of how we were spending our money," he says.
When all is said and done, purchasing organizations should have visibility into about 85% of their companies' spending. But spend analysis is never really complete, says Hughes. "The best thing we have going for us now is a more robust database of spend history and we can start to identify trends across the years."
In fact, spend analysis enables companies to look at spending from either a finance or sourcing taxonomy that becomes a Rosetta Stone for speaking the same language says Hartman of Boston Scientific, referring to miscommunications that can occur between the two groups. "Spend analysis helps to build understanding that strengthens the relationship between purchasing and finance," he says.
Pandit agrees that now the two can speak the same language. "Data becomes a source of truth," he says.
By Susan Avery -- Purchasing, 4/9/2009
Armed with powerful software tools, purchasing operations at big companies have been gathering data on spending, analyzing it and using the information to identify strategic sourcing opportunities, consolidate the supply base, reduce costs and bring other benefits to their organizations for years now.
What's more, buyers at big companies are using their "wins" to help expand their influence within the organization, taking on responsibility for new areas of spending like legal services.
But what can mid-size companies (those with less than $1 billion in sales) with fewer resources do? Well, actually, plenty. Purchasing asked spend-management experts—Ken Hartman, manager of indirect and global sourcing technology for Boston Scientific in Natick, Mass. and Steve Hughes, director of supply chain management at Vertis Communications in Baltimore, Md.—what advice they would give colleagues at smaller companies. Their advice centered around four major points.
1. Start by identifying the short- and long-term objectives of spend analysis tools and prioritizing those objectives to focus on highest return benefit.
"You are not going to be able to do everything in one day," says Hartman. "So you want to focus on the things that have the biggest impact to the business." He gives consolidating the supplier master file as one example of a short-term objective. A long-term objective is implementing a process that stratifies suppliers.
2. Make sure customers of the data are signed up and on board with using the results of the analysis.
"You don't want to go through the expense and effort of implementing the spend analysis system if you don't have buy-in of the groups that are going to see the data that they are willing to take action on it," says Hartman.
3. Focus on producing a few key metrics across all spend categories. Build and refine those metrics for the categories with the greatest impact to the business. Examples: Spend under management or number of suppliers, simple to generate, yet powerful, metrics.
4. Trust the data. During implementation, do a deep dive into a category purchasing already manages and knows well. This helps to calibrate spend analysis tools and ensure processes and data are accurate. Now, purchasing has confidence to approach new spend areas.
"Buyers at mid-size companies ask if spend analysis is important for them or whether they can just pick a couple of categories and run some reverse auctions ad hoc," says Kirit Pandit, author of Spend Analysis: The Window into Strategic Sourcing and vice president of content strategy and spend-analysis solutions at Emptoris, a spend analysis tools and services provider in Burlington, Mass.
"They want to know how much more incremental savings they will see if they implement spend analysis. My answer to them is that if they don't they could be missing out on quite a lot."
In his conversations with buyers at mid-size companies, Pandit says they tell him that they've been asked by management to reduce costs and don't really know where to begin. They don't have visibility into spending and don't know how to put it (the data) all together. "This is common," he says.
The discussion flows into what it takes to get there, he says, and sometimes companies have to create a central department gain control of the spend.
Once they've embarked on the journey to spend analysis they will see the possibilities. Initially, buyers at mid-size companies will realize cost savings of 10% to 15%. These savings can be gained by consolidating spending with fewer suppliers. Companies also will be able to reduce maverick buying. Then, Pandit says, they can start thinking about such activities as supplier relationship management and contract management, as additional opportunities to reduce costs.
Boston Scientific started using spend analytics within purchasing four years ago. The company's first step was to code its spend categories for the database by using a proprietary taxonomy for direct materials and the United Nations Standard Products and Services Classification (UNSPSC) code for indirect materials and services. Now, purchasing is using the data to identify opportunities for strategic sourcing in new areas of spending. Boston Scientific works with Emptoris.
"We were able to use the data to show senior management of functions within Boston Scientific that we weren't supporting that were significant opportunities for savings," says Hartman. "Going to senior management armed with this data makes the compelling case for change that much easier."
At Vertis, Hughes has compiled and categorized all of the company's data on its indirect spend for the past four years. It works with spend analysis provider Ketera.
"I feel more confident today about the decisions we are making and the direction we are taking," he says. "Looking at history can be very useful in helping to understand what's happening in the present. The data continues to get richer."
Hughes now is involved in pulling together this data with that of the supply operation at American Color Graphics, a company acquired by Vertis in 2008.
The basics
While sourcing operations at mid-size companies may not have all the resources of their colleagues at bigger companies, they do recognize the importance of knowing what they are spending and with whom.
In fact, new research by Purchasing for software company Ariba finds that spend analysis is at the top of the to-do list for sourcing operations at mid-size companies.
Forty-four percent of the more than 500 mid-size companies polled for the research say their companies will be investing in spend analysis activities in 2009. Just supplier performance management, at 49%, received more mentions.
The research finds buyers at mid-size companies face many of the same challenges as their colleagues at big companies. Asked about the economy, 31% say they see recovery coming later this year; 41% say it will occur within the first six months of 2010.
In this economic climate, the majority (65%) says management is looking to purchasing to lead cost reduction efforts. And that is the number-one reason purchasing operations undertake spend analysis activities: Cost savings. Another, buyers say, is to consolidate the supplier base.
At big companies typically, purchasing uses the information generated by spend analysis activities to determine which categories to source strategically. When Hughes joined Vertis three years ago he says he "needed to know the biggest categories that were consuming the majority of our indirect spend dollars and to develop a game plan that would allow us to systematically tackle each one of these projects from highest to lowest impact over time."
What Hughes and other buyers find is that their companies often have seven or eight (or more) different sources of data. Sources include ERP (enterprise resource planning), purchasing card, travel card and other financial systems.
"Acquiring data from various sources, rationalizing the data, synthesizing it and getting it to a level of quality that a spend analysis software provider can use is the biggest challenge," says Hartman at Boston Scientific.
When selecting a software provider, he suggests choosing a supplier with a similar philosophy, pointing out that there are companies that offer a soup-to-nuts approach and those that simply provide the tools so buyers can do the analysis themselves.
Purchasing operations generally use proprietary coding systems to classify direct materials and the UNSPSC code or another standard industry classification code for indirect materials.
When Hughes arrived at Vertis, the company was using Standard Industry Classification codes, which can be helpful to identify suppliers by product line. He made a switch to the UNSPSC code, which provides more detail on products provided by suppliers. "That was critical for us to get a better understanding of how we were spending our money," he says.
When all is said and done, purchasing organizations should have visibility into about 85% of their companies' spending. But spend analysis is never really complete, says Hughes. "The best thing we have going for us now is a more robust database of spend history and we can start to identify trends across the years."
In fact, spend analysis enables companies to look at spending from either a finance or sourcing taxonomy that becomes a Rosetta Stone for speaking the same language says Hartman of Boston Scientific, referring to miscommunications that can occur between the two groups. "Spend analysis helps to build understanding that strengthens the relationship between purchasing and finance," he says.
Pandit agrees that now the two can speak the same language. "Data becomes a source of truth," he says.
quoted from: Purchasing.com
