THE COMPLEX SPEND PROBLEM
Every year, companies make millions of purchases that are too small to be handled by procurement or too infrequent to be included in a single vendor catalog. The impact on procurement of this spend is significant. The average procurement professional manages more than 300 suppliers (with over 85% in the tail) and more than 2,500 purchase orders per year. The average procurement professional spends more then half of their time on non-strategic work (Spend Matters). Plus, there is a significant impact on the organization as a whole in terms of efficiency and costs associated with placing purchase orders: with items purchased at inflated prices, mismatched orders and invoices, lost purchase orders, delays on sign off of purchase orders and poor choice of suppliers, as just some examples of where costs can be incurred.
Suppliers are often keen to bypass official procurement processes and employees often find them a burden to be avoided. In 80 per cent of businesses, these categories are often sourced manually using Internet searches, phone, fax, and email, allowing them to bypass the mandated rules or purchasing guidelines. Some categories of expenditure are just harder than others. The complexity could be a result of the high purchase frequency, the low average order value, the importance of specification accuracy, manual sourcing processes from a large number of small (often local) suppliers, the short response and delivery times or the fact that demand may be spread across an organization.
Your tail spend is one of the biggest sources of incremental savings available. In fact, if you stacked up the individual spend on each supplier in that tail, you might find that, taken together, the tail is your biggest supplier. “In an economic and business environment where CFOs are leaving no stone unturned in the quest for cost reduction, no doubt tail spend can help you make your numbers”
WHAT IS SPEND MANAGEMENT?
The art of extracting maximum value from every dollar a company spends while simultaneously maintaining absolute visibility and control over supplier management and procurement is at the core of spend management. Supported by technology like automation and artificial intelligence via a comprehensive procurement solution, spend management strategies touch on every business unit within a company and every aspect of the procure-to-pay (p2p) process. It involves a methodology known as master data management (MDM). The goal of MDM is to improve data quality by centralizing all key information and sharing it with sufficient transparency to facilitate optimal performance across all departments within a company or organization.
In implementing spend management processes, the goal is to address the need every business has for maximum return on investment (ROI) while reducing costs, facilitating spend transparency and communication, preserving or improving competitive advantage, and streamlining internal workflows, policies, and procedures.
BENEFITS OF SPEND MANAGEMENT
DIRECT SAVINGS
All businesses are expected to maximize profits and minimize spend. You may realize unexpected savings with strategic sourcing by switching to preferred suppliers and negotiating volume discounts, by eliminating duplicate orders, or by reducing waste incurred by overbuying – which wastes money, man-hours, and storage space.
RESOLVE CURRENCY CONVERSION ISSUES
Ordering overseas supplies incurs costs over and above price concerns. Once you factor in shipping costs and tariffs, are you saving money over local suppliers by importing base materials? This is a good time to compare.
IDENTIFY AND ELIMINATE MAVERICK SPEND
Some managers may order supplies that fall outside their approved budget, either intentionally or by mistake. If maverick spending is a widespread problem in your company, consider implementing a more controlled centralized procurement process.
ENSURE CONTRACT TERMS ARE BEING FULFILLED
Verify that suppliers are delivering on their contracts, including turnaround times, quantities, and quality.
RESOLVE OVER PAYMENT
Some suppliers will issue duplicate invoices if a payment is later than expected. Make sure you’re only paying once for each shipment.
AVOID LATE OR PENALTY FEES
Look for patterns in the data that indicate late payments, which can add up. When late or penalty fees occur, your company may lose preferred status with suppliers, and that will make them less willing to negotiate or answer customer service issues. You may also be missing out on contractual advance payment bonuses.
MANAGE RISK
Stave off potential vendor issues by keeping track of your vendors annual revenue and credit score. Dealing with preferred vendors may put your supply chain and project progress at risk if the vendor fails. Your company is only as timely as its suppliers.
ENSURE COMPLIANCE
Many industries face complicated compliance issues. Your business may be required by company protocols, or state or federal government laws to comply with certain procedures. Government contractors, for example, may be required to get at least three quotes. Bid data and sourcing information can be stored in your database to make sure you don’t run afoul of the law or betray your company policies.
AUTOMATE AND IMPROVE INTERNAL SYSTEMS
Your spend analysis data can provide the basis for informed decisions on where you can improve processes. If your payment processing is consistently slow, you should consider a system to streamline and speed up the process. A process which automates repetative and regular tasks.