Executive Briefings

Spend Analysis: How to Squeeze Every Dime Out of Procurement

Businesses are losing millions during the corporate procurement process, failing to consistently track what they're buying and from whom. But an emerging class of spend analysis tools and services is giving companies a fighting chance in the war against waste.

Ideally, the procurement group within every company should be buying the best quality products at the lowest possible prices. Unfortunately, corporations are stumbling when it comes to procurement, often forfeiting even the lowest hanging fruit when it comes to cost savings.

This doesn't have to be the case.  Businesses could save 2 to 3 percent of their total spend by improving the way that their procurement organizations secure products and services, according to both the Aberdeen Group and AMR Research. That savings would go a long way toward pleasing procurement critics who want more going to the bottom line. Indeed, a 2005 Aberdeen report said CFOs believe corporate procurement suffers from a lack of companywide savings guidelines and limited use of procurement plans, factors that hurt corporate competitiveness.

It's become clear that spend analysis is required to make the most out of corporate procurement solutions. Put simply, spend analysis entails taking the existing information companies track in the form of invoices, purchase orders and receipts and "cleansing, normalizing, categorizing and enriching the data," as marketing research firm Forrester Research defines the process. After doing so, companies will be better able to source opportunities, track non-compliance with purchasing policies and improve data management.

Before embarking on a mission to clean up procurement data, it's important to first understand why businesses fail to collect accurate and useful procurement information in the first place.

Here are a few of the more typical problems that plague the average user of enterprise resource planning systems:

• Different codes are used to describe the same supplier or commodity across divisions or within the same division, making the overall data inaccurate. For example, one plant might code HP as HP, while another might record it as Hewlett-Packard. Without a standard way to name a company, the aggregate totals can be off, weakening your company's leverage over its suppliers.

• Item codes are used to define products, but these codes don't connect an item to an industry standard classification. This makes it difficult to aggregate similar types of data and combine spending across commodities, locations, suppliers and programs.

• Relationships between suppliers aren't defined or are hard to decipher within ERP systems. Understanding these relationships-such as the fact that Lab Safety Inc. is a subsidiary of W.W. Grainger-can help provide leverage when negotiating bulk deals.

• Many crucial bits of information such as the minority status of a supplier don't exist within an ERP system. This information can help a company take advantage of tax breaks or be used for regulatory compliance. Without it, supplier rationalization initiatives can fall short of company-wide goals.

These pain points, familiar to many companies, are leading the smartest procurement executives to initiate spend analysis initiatives. To date, an estimated 8,000 enterprises have purchased e-procurement products. That compares to about 900 companies that are using spend analysis products and services, a smaller pool of users, but one that is growing fast. Forrester Research, for one, estimates automated spend analysis application purchases will grow an estimated 21 percent by 2008 as companies take the steps required to achieve cleaner, more useful spending data. Whether you do it yourself or work with a service provider to help you, there are three key phases companies need to undertake in order to implement a successful spend analysis campaign.

In the first phase of the spend analysis process customers can expect to consider the following:

• Combine spend data that's stored in multiple databases. This data often exists as individual transactions in ERP systems, e-procurement applications such as Ariba and American Express travel and expense reports. It must be extracted and stored in a common location, such as a separate database.

• Map each product to popular standards-based classification taxonomies using the Universal Standard Products and Services Classification (UNSPSC) and eCl@ss. Mapping allows users to aggregate spend information by commodity type - such as five of the same Hewlett-Packard motors coming from two different suppliers--despite the fact that these motors are labeled with different item codes in the ERP system.

• Supply all useful information about a company's suppliers, including parent company name, revenues, credit rating, Standard Industry Code, and diversity status. This data gives buyers the weapons they need to negotiate better deals across their subsidiaries.

Once the data is cleansed and improved, it's time to move on to the second phase: analyzing spending and identifying potential savings.

Using automated spend analysis charts, corporate procurement can pinpoint the areas of greatest potential cost savings and estimate the cultural changes required to achieve targeted results. Before implementing any changes, the company can use its analysis to determine savings potential, determine the amount of disruption expected and assess how receptive the organization will be to the change. So-called "quick wins," changes that will prove easiest, most beneficial or quickest to make, can be implemented prioritized.

If spend analysis shows that one department pays a lot more for a motor than another one does, for example, the company can move to consolidate motor purchases. It can also implement the processes needed to ensure all departments comply with new contract rules regarding purchasing the less expensive motor. By focusing on the elimination of duplicate, equivalent or similar item-analysis companies can achieve significant cost savings. Companies can also add supplier hierarchy, diversity attributes and performance standards into spend analysis.

Finally, in the third phase, the focus turns to supplier rationalization and other spend optimization initiatives.

Here, companies can use the data gathered during the analysis phase to refine their sourcing strategy. Key performance indicators can also be established and used as a way to analyze the company's suppliers. Companies can also identify issues that cause the cost or the amount of time it takes to complete a transaction to spike when working with suppliers during the design, manufacturing and procurement process.

Through adopting the three phases, a large aerospace company was able to reduce its overall purchasing spend by about 5 percent. Throughout the process, the company analyzed procurement rules within 16 systems, including SAP. The company extracted and consolidated a total of 22 million records and standardized more than three million item/service records. It also created a five-level classification scheme for items and services. After finishing the spend analysis initiative, the company was able to reduce its rate of purchase of similar commodities from multiple suppliers at varying contractual prices. The CPO also eliminated maverick buying. After clearing up price variance issues-a prevalent problem throughout the company-the organization reported a $42,000 annual savings on the purchase of just one item.

It's important to keep in mind that spend analysis and optimization efforts not be viewed as a one-off project. Some organizations may view a large spike in savings from doing a spend analysis one time as reason enough to stop. But for most companies, a long-term program will help a company continue its success by preventing maverick buying, encouraging contract compliance and reducing the practice of buying from multiple suppliers at different prices.

Under a long-term program that combines projects with a managed service program through a trusted vendor, clients can build upon a history of data cleansing and analysis work without having to initiate a new process from scratch each time procurement problems escalate. This approach is the surest way to future-proof your initial cost-saving results. 

Ashok Santhanam is president and CEO of Bristlecone Inc., a Milpitas, Calif.-based company that offers consulting in such areas as planning, sourcing, collaboration, execution, analytics and data management.  Visit www.bcone.com

Businesses are losing millions during the corporate procurement process, failing to consistently track what they're buying and from whom. But an emerging class of spend analysis tools and services is giving companies a fighting chance in the war against waste.

Ideally, the procurement group within every company should be buying the best quality products at the lowest possible prices. Unfortunately, corporations are stumbling when it comes to procurement, often forfeiting even the lowest hanging fruit when it comes to cost savings.

This doesn't have to be the case.  Businesses could save 2 to 3 percent of their total spend by improving the way that their procurement organizations secure products and services, according to both the Aberdeen Group and AMR Research. That savings would go a long way toward pleasing procurement critics who want more going to the bottom line. Indeed, a 2005 Aberdeen report said CFOs believe corporate procurement suffers from a lack of companywide savings guidelines and limited use of procurement plans, factors that hurt corporate competitiveness.

It's become clear that spend analysis is required to make the most out of corporate procurement solutions. Put simply, spend analysis entails taking the existing information companies track in the form of invoices, purchase orders and receipts and "cleansing, normalizing, categorizing and enriching the data," as marketing research firm Forrester Research defines the process. After doing so, companies will be better able to source opportunities, track non-compliance with purchasing policies and improve data management.

Before embarking on a mission to clean up procurement data, it's important to first understand why businesses fail to collect accurate and useful procurement information in the first place.

Here are a few of the more typical problems that plague the average user of enterprise resource planning systems:

• Different codes are used to describe the same supplier or commodity across divisions or within the same division, making the overall data inaccurate. For example, one plant might code HP as HP, while another might record it as Hewlett-Packard. Without a standard way to name a company, the aggregate totals can be off, weakening your company's leverage over its suppliers.

• Item codes are used to define products, but these codes don't connect an item to an industry standard classification. This makes it difficult to aggregate similar types of data and combine spending across commodities, locations, suppliers and programs.

• Relationships between suppliers aren't defined or are hard to decipher within ERP systems. Understanding these relationships-such as the fact that Lab Safety Inc. is a subsidiary of W.W. Grainger-can help provide leverage when negotiating bulk deals.

• Many crucial bits of information such as the minority status of a supplier don't exist within an ERP system. This information can help a company take advantage of tax breaks or be used for regulatory compliance. Without it, supplier rationalization initiatives can fall short of company-wide goals.

These pain points, familiar to many companies, are leading the smartest procurement executives to initiate spend analysis initiatives. To date, an estimated 8,000 enterprises have purchased e-procurement products. That compares to about 900 companies that are using spend analysis products and services, a smaller pool of users, but one that is growing fast. Forrester Research, for one, estimates automated spend analysis application purchases will grow an estimated 21 percent by 2008 as companies take the steps required to achieve cleaner, more useful spending data. Whether you do it yourself or work with a service provider to help you, there are three key phases companies need to undertake in order to implement a successful spend analysis campaign.

In the first phase of the spend analysis process customers can expect to consider the following:

• Combine spend data that's stored in multiple databases. This data often exists as individual transactions in ERP systems, e-procurement applications such as Ariba and American Express travel and expense reports. It must be extracted and stored in a common location, such as a separate database.

• Map each product to popular standards-based classification taxonomies using the Universal Standard Products and Services Classification (UNSPSC) and eCl@ss. Mapping allows users to aggregate spend information by commodity type - such as five of the same Hewlett-Packard motors coming from two different suppliers--despite the fact that these motors are labeled with different item codes in the ERP system.

• Supply all useful information about a company's suppliers, including parent company name, revenues, credit rating, Standard Industry Code, and diversity status. This data gives buyers the weapons they need to negotiate better deals across their subsidiaries.

Once the data is cleansed and improved, it's time to move on to the second phase: analyzing spending and identifying potential savings.

Using automated spend analysis charts, corporate procurement can pinpoint the areas of greatest potential cost savings and estimate the cultural changes required to achieve targeted results. Before implementing any changes, the company can use its analysis to determine savings potential, determine the amount of disruption expected and assess how receptive the organization will be to the change. So-called "quick wins," changes that will prove easiest, most beneficial or quickest to make, can be implemented prioritized.

If spend analysis shows that one department pays a lot more for a motor than another one does, for example, the company can move to consolidate motor purchases. It can also implement the processes needed to ensure all departments comply with new contract rules regarding purchasing the less expensive motor. By focusing on the elimination of duplicate, equivalent or similar item-analysis companies can achieve significant cost savings. Companies can also add supplier hierarchy, diversity attributes and performance standards into spend analysis.

Finally, in the third phase, the focus turns to supplier rationalization and other spend optimization initiatives.

Here, companies can use the data gathered during the analysis phase to refine their sourcing strategy. Key performance indicators can also be established and used as a way to analyze the company's suppliers. Companies can also identify issues that cause the cost or the amount of time it takes to complete a transaction to spike when working with suppliers during the design, manufacturing and procurement process.

Through adopting the three phases, a large aerospace company was able to reduce its overall purchasing spend by about 5 percent. Throughout the process, the company analyzed procurement rules within 16 systems, including SAP. The company extracted and consolidated a total of 22 million records and standardized more than three million item/service records. It also created a five-level classification scheme for items and services. After finishing the spend analysis initiative, the company was able to reduce its rate of purchase of similar commodities from multiple suppliers at varying contractual prices. The CPO also eliminated maverick buying. After clearing up price variance issues-a prevalent problem throughout the company-the organization reported a $42,000 annual savings on the purchase of just one item.

It's important to keep in mind that spend analysis and optimization efforts not be viewed as a one-off project. Some organizations may view a large spike in savings from doing a spend analysis one time as reason enough to stop. But for most companies, a long-term program will help a company continue its success by preventing maverick buying, encouraging contract compliance and reducing the practice of buying from multiple suppliers at different prices.

Under a long-term program that combines projects with a managed service program through a trusted vendor, clients can build upon a history of data cleansing and analysis work without having to initiate a new process from scratch each time procurement problems escalate. This approach is the surest way to future-proof your initial cost-saving results. 

Ashok Santhanam is president and CEO of Bristlecone Inc., a Milpitas, Calif.-based company that offers consulting in such areas as planning, sourcing, collaboration, execution, analytics and data management.  Visit www.bcone.com