If you’ve recently joined an organization or moved into a new role that is directly related to procurement, it can be challenging to know where to start. Even if you’ve been in the role for a while, the whirlwind of daily activity can distract you from having a strong holistic view of your organization’s relationship with the supply base.
There are hundreds of valuable metrics to help you better understand your company’s supply chain. But like any professional, you have limited time, and reporting requests can distract your team from critical activities. If you’re in procurement and trying to better understand the commodity or category you’ve been assigned, understanding the numbers is especially important to getting off to a great start.
Here are the top five spend-analytics measures, along with how to define them, where to find them, and what impact they have on your company:
Total Vendor Spend
From the beginning , you need a trusted source to track total vendor spend (which doesn’t include things like employee payments) and a date that allows you to be consistent with reporting. It can be tempting to run reports simply on approved purchase orders, but this might not be inclusive of different payment methods, such as purchasing cards and suppliers who are paid as part of a transaction — not to mention invoices that might not have been paid.
Engage with your finance partner to determine the company standard for considering something a vendor expense, and aligning your number with the company’s general ledger dates and categories. Be sure to account for multiple systems and the company structure, keeping an eye on recent mergers or acquisitions. This is a number you need to be solid on, especially if you’re going to mention it in the company of executives. This should apply to all of the following spend analytics metrics as a foundational rule.
With total vendor spend, you need to ask yourself: How big is the pie? How many companies does it cover, and how many systems of record? How hard was it to get?
These answers will help you to understand the complexities that procurement has to navigate to accomplish its objectives, and how difficult it might be to apply policies against the organization.
If you want to really impress, you should also know how this number stacks up as a percentage of your organization’s revenue, and how that compares to industry standards.
Direct vs. Indirect Spend
In the simplest terms, direct spend refers to purchases directly incorporated in your company’s products, and indirect is those that aren’t. It’s widely understood in manufacturing and retail, but could be harder to define in other industries, especially services. If your company is fulfilling its customer obligations via subcontracting, or if a vendor product is being directly resold to your customers, you should consider this a direct expense. Direct spend must be sourced more carefully, in tight cooperation with product designers, but it can represent great opportunities when considering the supply chain. (Lean/Six Sigma approaches often yield great results). It’s very important that your procurement and sourcing team understand the impact of their decisions on the quality of the product you provide to your customers.
Indirect spend is where you can take on substantial savings challenges — the things your company buys to support its operations. This is often less industry-specific and ripe for savings if you leverage the marketplace. Try not to focus only on the strategic spend, but also look all the way down the report to your tail spend — the 20 percent of spend that’s usually spread out across 80 percent of your vendors.
Bottom line, you should understand what percent of your spend is direct and indirect, and be able to break down all of the following metrics for both.
Influenceable and Managed Spend
Influenceable spend is spend that procurement has the ability to change, either through negotiation, choosing different suppliers or changing demand. This is primarily an organizational decision which varies significantly between companies and leadership. Loan payments, rent or lease payments, employee reimbursement, charitable donations, postage, taxes and more may fall into areas that leadership has marked “out of bounds” for procurement. Sometimes this is a surprising conversation, where assumptions can be costly.
Managed spend is the amount of spend that procurement actually has its hands on. This is usually defined as spend under contract, but really it represents any transaction where procurement has been involved in the sourcing or negotiation.
Strategic suppliers are a combination of your highest-spend suppliers and those who your company depends upon to deliver products or services to its customers. You should be familiar with the total spend, commodities provided, number of departments buying from the suppliers, and, most importantly, the risk those suppliers pose to your company’s operations. These are the suppliers whose performance really matters to the operations, security and reputation of your organization.
At minimum, review the suppliers who provide 80 percent of your purchases. You might be surprised at how few there are. From there, engage with your risk or business continuity partners to understand how they think about supplier risk, and who they consider to be the most critical suppliers for each organization or business unit.
On the other side of your strategic suppliers data is the tail. These purchases represent only 20 percent of your spend, but often 80 percent or more of your vendor count. The tail can be both a productivity killer and a great way to save money. Is there a way for you to better automate your tail spend management and consolidate suppliers? Tail spend is a great place to look for automation opportunities.
Questions to ask yourself: How is your company currently working to manage this? Is it using catalogs, and if so, are they actually driving down costs? How much time is spent “pushing paper” to manage these small dollar transactions?
Good data can help companies save as much as 12 percent on their tail spend. But regardless of your area of spend, understanding top spend analytics and metrics will allow you to make smarter purchasing decision and mitigate risk.
Erin McFarlane is head of strategy and execution for Fairmarkit.
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