Making Spend Analysis Work

©ALL RIGHTS RESERVED - Confidential

Guy AllenFebruary 5th 2014

Making Spend Analysis Work


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.




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



A Core Requirement for all Procurement Professionals:

Know Your Numbers!



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


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




DataA collection of text and numbers

InformationCoded data, with relevant reporting

ActionDecisions based on the information



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


High

LowHighLow


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



Do all that and you will end up with something like this

Data Into Information



Task 1

Work on your tables, and list what uses you might make of well coded spend

information



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


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



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









Home Care Personal Care

Food Medical Products

Print

Marketing

Lab Equipment

Lab Supplies

Review the common categories across the company’s divisions


Making Spend Analysis WorkIdentifying Opportunities



• 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




Pricing Variance




Pricing Variance




• 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




Compliance Tracking




Compliance Tracking




• 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



• 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



Tail Leverage



• 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



Fraud Detection




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.


Example 1

Spend by Supplier and Organization

(Colours represent the different business units)


Example 2


Example 3


Example 4

[Annoymised Business Units]



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


Graphs are great

PowerPoint is convincing

Action is real


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!



THANK YOU!

Please feel free to contact me on

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