Over on Sourcing Innovation, Bernard Gunther of Lexington Analytics does a good job tackling the subject of why procurement data inside many companies is a mess. His guest post highlights a number of areas on how data collection and analysis should happen inside procurement organizations -- not to mention the actions that organizations can (but rarely fully) take based upon the insights gleaned from their investigative work. The valuable portion of his post highlights a situation that I'm sure hundreds of organizations across the globe have unfortunately come to realize. The category, not surprisingly, is office supplies. The situation follows: "The vendor processes the orders, ships the items, and presents invoices for payment. The invoices are approved in the PO system and the vendor is paid per the contract. The contract was written 2 years ago and allowed for fixed (discounted) prices for the top 500 items being bought. When the contract was signed, 250 items were on the list. The new contract offered price reductions on certain items which the sourcing team projected would save 12%. Since the contract signing, most prices have been stable, with some exceptions for paper."
But 2 years into the program it became very clear -- at least to the consultants -- that something was very wrong. To wit, "For 20% of the items purchased, the item numbers recorded in the PO system did not match the item numbers in the contract … the [company] could not state what percentage of the spending was for items with contract prices and what percentage was off-contract … the [company] had agreed to price changes, but did not track those changes and could not calculate the impact of those price changes on overall spending … [and] the buyers had shifted their demand so that, of the 250 items in the contract, over 75 were not being bought anymore and of the top 250 items being bought, there was no contractual price for almost 100 of the items." While many issues clearly compounded to allow these problems to manifest in little or no savings, perhaps the most important lesson is to set up an ongoing spend analysis effort that refreshes data on a monthly -- or at most, quarterly -- basis to provide insight into contracted pricing and compliance along with demand drivers that suggest when it might be time to put a new contract in place for additional items. Thanks, Bernard (and Michael), for sharing this excellent case example that I know for a fact is rampant inside organizations.
- Jason Busch