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- Sources of Spend Data - Turning Data into Information - Identifying Opportunities and Prioritization - Spend Analysis and Managing Categories - Identifying Actions
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©ALL RIGHTS RESERVED - Confidential
Guy AllenFebruary 5th 2014
Making Spend Analysis Work
©ALL RIGHTS RESERVED - Confidential
Introduction
The Real World Sourcing Series is a series of 8 sessions, 4 in Dubai and 4 in Abu Dhabi covering hot topics for procurement professionals.
The series is promoted and supported by Tejari and CIPS MENA, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Limited).
Guy Allen started his procurement career with Ford Motor Company, moving through IBM, SmithKline Beecham and GSK , becoming CPO for Abbey National and VP Global Sourcing at Fujitsu before joining 4C as a Managing Partner. Guy has since left 4C and started his own consultancy, Real World Sourcing Limited.
Making Spend Analysis Work
©ALL RIGHTS RESERVED - Confidential
Making Spend Analysis Work
Agenda
1. Sources of Spend Data
2. Turning Data Into Information
3. Identifying Opportunities and Prioritization
4. Spend Analysis and Managing Categories
5. Identifying Actions
©ALL RIGHTS RESERVED - Confidential
Making Spend Analysis Work
A Core Requirement for all Procurement Professionals:
Know Your Numbers!
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Making Spend Analysis Work
Sources of Data
• Make the most of what is available
• If you can’t get data, nor can anyone else
• Lack of data cannot be an excuse for inaction
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Sources of Data
• AP File – downloaded into Excel
• AP Audits
• Budgets (past and present)
• P Card
• 3rd party website
• Suppliers
Whatever the source, the most effective Spend Information comes from a dedicated Spend Database System, refreshed regularly
Making Spend Analysis Work
©ALL RIGHTS RESERVED - Confidential
Making Spend Analysis Work
DataA collection of text and numbers
InformationCoded data, with relevant reporting
ActionDecisions based on the information
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Making Spend Analysis Work
Data into Information
• Coding – Must code the supplier at least, ideally the transaction
• Parent Child relationships – who owns who?
• Assumptions
• Build using the information into your ways of working
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High
LowHighLow
Making Spend Analysis Work
Even with a Spend Database System, the usefulness of the information will depend on quality of the data going in. GIGO (Garbage In, Garbage Out)
Dat
a A
vaila
bili
ty
InvoiceDescriptions
InvoiceLine
Descriptions
PODescriptions
POLine
Descriptions
Suppliers
GeneralLedgerCodes
CommodityCodes
Categorization Data Quality
Data Into Information
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Making Spend Analysis Work
Do all that and you will end up with something like this
Data Into Information
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Making Spend Analysis Work
Task 1
Work on your tables, and list what uses you might make of well coded spend
information
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Making Spend Analysis Work
Tail Leverage
Category Planning
Compliance Tracking
Pricing Variance
Opportunity Analysis
Fraud Detection
Selecting priorities for the Procurement Function
Measuring actual prices to budget , contract or previous year’s prices
Measuring conformance to preferred suppliers or processes
Preparing the strategy for your category
Managing a supplier reduction programme
Monitoring Key Supply Base information, ie Diversity
Identifying possible fraudulent (or inaccurate) activity
Supplier Base Management
Identifying Opportunities
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Taking on a New Category
A Typical Category Management process
Develop, implement and embed category management
Understand internal
requirements & stakeholders
Stage 1
Define scope and category
structure
Stage 2
Understand market and
suppliers
Stage 3
Develop category
strategy and plan
Stage 4
Select supplier(s)
Stage 5
Implement contracts
Stage 6
Contract and supplier
management
Stage 7
Iterative process
Tail Leverage
Category Planning
Compliance Tracking
Pricing VarianceOpportunity
Analysis
Fraud Detection
Supplier Base Management
Identifying Opportunities
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Setting Your Functional Priorities
Kraljic Matrix (adapted)
Low High
High
Magnitude of spend
Sup
ply
ris
k
Critical Strategic
Acquisition Leverage
Collaboration - close supplier management:
• detailed contract• collaborate• market awareness
Drive for value:
• market pricing• aggressive approach• use leverage
Minimum attention:
• price formula• call-off contract• look to rationalise
Ensure availability:
• long-term contract• price indexes• contingency planning
Making Spend Analysis Work
Opportunity Analysis
Identifying Opportunities
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Opportunity Analysis
Identifying Opportunities
Making Spend Analysis Work
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Home Care Personal Care
Food Medical Products
Marketing
Lab Equipment
Lab Supplies
Review the common categories across the company’s divisions
Opportunity Analysis
Making Spend Analysis WorkIdentifying Opportunities
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Making Spend Analysis Work
• Are we paying what we should be paying?
• Are there different prices for different suppliers for the same product?
• Are there different prices from the SAME supplier for different locations?
• How does the price compare to PPV (Purchasing Price Variance)? In other words are we beating budget prices?
• How has pricing changed since last year?
Pricing Variance
Identifying Opportunities
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Making Spend Analysis Work
Pricing Variance
Identifying Opportunities
©ALL RIGHTS RESERVED - Confidential
Making Spend Analysis Work
Pricing Variance
Identifying Opportunities
©ALL RIGHTS RESERVED - Confidential
Making Spend Analysis Work
• How much leakage is there from the preferred supplier?
• Are some divisions more compliant than others?
• Why is this the case?
• Are there areas of spend that are not being well covered?
Compliance Tracking
Identifying Opportunities
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Making Spend Analysis Work
Compliance Tracking
Identifying Opportunities
©ALL RIGHTS RESERVED - Confidential
Making Spend Analysis Work
Compliance Tracking
Identifying Opportunities
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Making Spend Analysis Work
• Preparing complete spend profile of category
• Analysing which divisions use which suppliers
• Prepare Category Strategy
• Developing your negotiation strategy, including eAuction if appropriate
Category Planning
Identifying Opportunities
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• How long is it?
• Are there opportunities to consolidate by category?
• Can you introduce a supplier reduction programme?
• Do you have appropriate controls to ensure the tail isn't growing?
Tail Leverage
Making Spend Analysis WorkIdentifying Opportunities
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Tail Leverage
Making Spend Analysis WorkIdentifying Opportunities
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• Analyse the profile of orders and invoices
– Are there multiple orders just below approval limits?
– What proportion of orders are after the event?
– Are there duplicate invoices?
• Monitor significant changes in order and payment profiles
• Understand the reasons for the differences
Fraud Detection
Making Spend Analysis WorkIdentifying Opportunities
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Fraud Detection
Making Spend Analysis WorkIdentifying Opportunities
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Making Spend Analysis Work
Task 2 - Searching for Clues
In your workbook there are 4 graphs. Have a look at them and discuss with the people next
to you what actions they might lead you to take.
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Example 1
Spend by Supplier and Organization
(Colours represent the different business units)
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Example 2
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Example 3
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Example 4
[Annoymised Business Units]
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Making Spend Analysis Work
Some Final Thoughts
• Just providing the system isn't enough
• Build usage of your spend system into your reviews
• Expect to see regular analysis of compliance, price variance etc
• Provide simple dashboards to your internal customers
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Graphs are great
PowerPoint is convincing
Action is real
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Real World Sourcing Scholarship
• 10,000AED towards any procurement based training
• You will receive an email with your Tejari Education Network login details
• Complete the online certification programme
• Answer as many questions right as possible
• The top 10 scorers will be invited to the Awards dinner
• The winner will be announced at the dinner!
Making Spend Analysis Work
©ALL RIGHTS RESERVED - Confidential
THANK YOU!
Please feel free to contact me on