Closed-Loop Spend Analysis: A Missed Opportunity for Many Organizations (Part 1)

Spend Matters welcomes a guest post from Jim Wetekamp of BravoSolution.

Spend analysis -- in its most basic form -- is a common practice used throughout the procurement world. It provides immense visibility into enterprise-wide spend, answering crucial questions like:

  • How much am I spending?
  • Who am I spending it with?
  • In which categories do I spend the most?
  • Where are my opportunities for saving and spending more money?
  • Can I achieve better terms of service?

As economic volatility dominates, there's never been a more important time for spend analysis. Management demands that the procurement team know which levers to pull on supplier costs, where additional savings and efficiencies can be achieved, and how the organization can continue to deliver quality products and services at margins that support growth and profitability.

A closed-loop approach to spend analysis can provide sources of previously unrecognized value. The progression from basic spend analysis to a progressive closed-loop program involves just a few key themes:

  1. Get Grounded -- Develop a baseline of spend analysis that can be leveraged to gain visibility into current purchasing facts and identify potential sourcing opportunities. This visibility can be used to rationalize suppliers to a base of preferred relationships, take advantage of demand leverage to negotiate better pricing, or minimize the cost of cross-business/location variances in price or terms.

    This baseline enables procurement to provide the critical organizational support necessary to fuel savings programs with new opportunities.

    A simple example of the type of activities that can be supported with this level of visibility can be found in the information technology category. For one of our clients, a comprehensive view to global spend within the IT category identified the use of non-preferred suppliers and un-negotiated arrangements to acquire hardware such as laptops, PCs, and servers. Follow-up sourcing activities in this category yielded savings up to 25% depending upon the range of product acquired.

  2. Toe the Line -- Augment this baseline to support compliance and governance initiatives that support the realization of identified savings targets. Additionally, this framework provides a basis to support cross-functional initiatives such as supplier diversity, social responsibility, or risk management.

    This framework supports the operational excellence necessary to drive sustainable value through procurement operations.

    Combining contract information with global spend details, a large hospital network was able to identify millions of dollars in savings by identifying and correcting over-payments made over an eight month spending window.

  3. Adapt, Improvise, Overcome -- Incorporating a broad corporate perspective into spend analysis provides procurement with the opportunity to enable the organization to identify, respond, and in some cases even predict changes.

    Strategic advantage is attained by those organizations that can harness and leverage the information around them into a structure that enables timely, agile, and expansive decision support.

Procurement has a leadership role in the process of risk analysis and related action planning. By incorporating spend information such as the category of spend, purchase amounts, supplier management processes, contract analysis, and performance details, the procurement organization can support finance, supply chain, distribution, and customer-facing business segments with key risk analysis. For example, one project supports a four-step process encompassing: 1) Identify the categories at risk upon which action plans must be launched and suppliers must conform to a specific qualification process; 2) Gather and assess the qualifications of critical suppliers; 3) Audit the qualification using external market data such as financial performance information, 4) Compare and mitigate risks across categories, organizations, and geographies to manage supplier relationships consistently on a global level.

Closed-loop spend analysis has been proven to deliver immense savings for companies of all sizes, which makes it hard to believe that so many companies are failing to leverage spend analysis to its fullest potential. Some of the largest organizations in the world are using spend analysis at only the most basic level -- to cut the "low hanging fruit" -- and infrequently, at best. By only tapping the surface of spend analysis, a procurement team's ability to drive value through the procurement process is seriously limited. So what's getting in the way of implementing a closed-loop spend analysis process that truly drives value?

  • Limited Data Sets: Many procurement teams don't have all of the necessary data and are limited to accounts payable, invoicing and purchase order details.
  • Process Inconsistency: Perhaps due to limited resources or a lack of education, many procurement teams don't have plans in place to make spend analysis a continual process. They approach spend analysis infrequently, or on an ad-hoc basis, which fails to provide a complete and current picture.
  • Inflexible Analytics: Insufficient tools or technology can get in the way of deep analytics to go beyond the surface and solve core spending issues.

While basic spend analysis can be an effective tool for cutting costs, the impact on the organization is minimal compared to what the organization could be saving with a more advanced approach. In my next post, we'll take a look at what's needed to take spend analysis to the next level, and the bottom-line business results that follow.

For more information on implementing a closed-loop spend analysis strategy, check out BravoSolution's latest brief.

- Jim Wetekamp, BravoSolution

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