But, unfortunately, many companies still call the shots based strictly on the numbers, opening themselves up to the possibility of missing the bigger picture, and potentially spending more in the long run.
The Pros and Cons of Spend Analysis
Corporate spending habits can play a key role in how a company operates. So, not surprisingly, many companies turn to spend analysis to evaluate spending and keep costs down, typically setting a goal to "reduce spend by X percent." While spend analysis can certainly help those companies reduce costs, it leaves out a critical part of the equation. Evaluating the numbers is important, but numbers can have a way of looking you straight in the eye and lying.
Spend analysis helps answer three important questions in managing corporate spend:
1. What am I really spending?
2. With whom am I spending it?
3. Am I getting what's been promised for that spend?
But, the answers to these questions don't tell the whole story. Spend analysis does not account for the "why" behind purchasing decisions. Why does a company work with one supplier versus another? What are the benefits of going with a higher cost supplier? How does that decision impact the company - off of the balance sheets? This is critical insight companies need in order to truly understand the value of a supplier relationship, and to make more informed decisions about where to cut costs.
Why the 'Why' Is Important
Asking the simple question of "why" can reveal a lot about a relationship with a supplier. Some of the key things that the numbers can't tell us about a supplier include:
- The quality of the product/service: You want to offer your customers a quality product, and to do that you need to use suppliers that meet your standards. One supplier may be the logical financial choice, but is it capable of delivering what you need? What are the long-term effects of using with a sub-par supplier? Line item costs don't tell you that, and if companies stick to just what the numbers tell them, they put themselves at risk of losing a high-quality partner for a lower-cost, less-than-ideal replacement.
- The risks associated with a supplier: You may be saving money by using fewer suppliers in high-risk areas, but if you lose one - to natural disasters, bankruptcy, political turmoil, etc. - your business may never recover. All the money saved is less important when you can't meet your customers' demands due to lost supply sources. Companies need to diversify their risks and make decisions based on what's best for the overall operation of the supply chain, not just one portion of it.
- Contract clauses, such as delivery times and payment schedules: If a smaller supplier, or one more expensive than the "obvious" choice, is willing to work within your parameters and works with you to define what success looks like, that can be more valuable than slight price differences.
- History with a supplier: The better you know your suppliers, and the better they understand your business, the more successful you'll be together. Important parts of the relationship equation include how long you have been working together, whether they prioritize you over other customers, and price consistency. These are all factors to keep in mind that the hard numbers won't necessarily show.
Applied Intelligence + Spend Analytics = Win/Win Situation
Spend analytics, combined with applied intelligence, helps companies strike a balance between reducing costs and doing what's right for the company. By looking at the whole picture businesses can better understand their options, inside and out. Taking a 360 degree approach to reviewing supplier spend presents companies with the opportunity to re-evaluate - and improve - their own internal processes for interacting with suppliers. And, more importantly, it can lead to immediate and long-term cost savings in the form of consolidated contracts, locked-in prices, and stronger supply chains. Being smarter about supply chain options will only strengthen supplier relations.
In the end, it's about making smarter, long-term financial decisions. Because with valued partnerships, quality products and diversified resources, you're positioning your business for success - not just cutting costs.
After all, there's more to a supplier relationship than what appears on the balance sheet.
Source: JVKellyGroup Inc.
Keywords: Business Intelligence & Analytics, Sourcing & Procurement Solutions, Supplier Relationship Management, SC Finance & Revenue Mgmt., Technology, Supply Chain Security & Risk Mgmt, Quality & Metrics, Supply Chain Analysis & Consulting, Global Supply Chain Management, what's behind purchasing decisions, analyzing sourcing needs and spending
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