In January 2018, BeroeLiVE, an on-demand market intelligence platform & service provider ran a poll among its worldwide users, a community of thousands of procurement decision makers, about the extent of their cost savings from the spend analysis exercise. A majority said, they achieved cost savings of anywhere between 3% to 5%. Interestingly, nearly 15 percent said, they have seen cost savings exceeding 10%.
Our experience over last decade and half having dealt with several multinational companies – mid-sized to large organizations, both as an external consultant as well as in the capacity of leading a procurement organization clearly points to the question –
Why is that a small subset of companies, can achieve significantly more than the majority?
Even today, many procurement organizations focus on tactical, request based procurement and do not consider a companywide detailed spend analytics as a critical activity towards creating value.
There is a general misconception that whatever little analysis a buyer conducts for a specific deal is considered as detailed spend analysis. One hears this from far too many procurement professionals when asked about their spend analysis process. A clear indication of this is the confusing numbers and blank faces we see of the buyers and category leads to some basic questions such as –
- What is your company’s current annual Spend on your specific category and sub-categories?
- How has this Spend been trending over last 2-3 years and what is the outlook for next 1-2 years?
- What is your current supply base and who are your key top suppliers?
Also, there are structural issues around getting the right data for analytics –
Multiple ERP systems across business units is a primary issue in many large organizations. On one of our previous consulting assignments with a large US headquartered industrial systems company, it took us near 3 months just to collect the raw data. This company had 5 different ERP systems (SAP, Baan, JDE etc. as well as homegrown ones) with multiple versions totaling about 12 different instances.
Data integrity including granularity and completeness come across as other bottlenecks. Even when data is available, cleansing takes humongous amount of time given how users enter the data. Lack of a standardized commodity or supplier taxonomy creates another challenge for efficient analytics.
Most services companies do not have any item master data taxonomy such as UNSPSC or ECLASS deployed. In such cases, item specification or description is free form that leads to high level of duplication. Similarly, supplier master data has issues around legal entity name or parent-child relationships which is critical to spend insights.
Finally, the knowledge and capability within the procurement organization to turn this data into useful information and actionable insights is the key to successful outcome.
Our experience over a long period and multiple global engagements, has consistently showed that a deep spend analysis is the critical start point that helps identify significant opportunities – above average cost reduction, effective supply risk management, inventory control, optimal working capital, internal demand management etc.
Increasingly, procurement team is expected to be at the forefront of an organizations ability to sustain a profitable growth. It is a no brainer then, that procurement organizations must continually invest in developing a robust spend analysis capability that will get them a seat in the board room.
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