Spend Matters welcomes a guest post from Pawan Thakkar of Archstone Consulting.
The traditional merits of conducting a spend analysis are well known. Knowing what and where an organization spends is absolutely critical for sourcing. It allows the procurement organization to consolidate suppliers, reduce maverick spend, leverage volumes, and negotiate more favorable contracts. There are, however, a number of benefits that spend analytics can have outside of sourcing. More specifically, the spend visibility that this initiative provides can do wonders for optimizing an organization's procure-to-pay ("P2P") process, affecting both the bottom line and the efficiency of the process as a whole. While there are myriad benefits a spend analysis can provide to the P2P process, three stand out: Channel Strategy, Supplier Enablement and Management, and Payment Terms.
Building a Better Channel Strategy
Effective channel strategies are influenced by distribution across commodities and vendors. Having clear visibility into how spend is distributed allows an organization to devise an optimal buy-pay channel strategy. An organization that invests heavily in IT among a handful of key vendors may decide to implement a catalog with pre-negotiated pricing to make requisitions seamless. Another example would be to take advantage of punch-outs for oft-purchased, low-risk items (e.g., office supplies) that can be provided efficiently through a single vendor, the frequency and volumes of which can be ascertained through a detailed spend analysis.
Channel strategy may employ the usage of procurement cards as a cost-effective way to consolidate high-volume, low-dollar spend. P-cards are also useful for paying one-time suppliers to eliminate the need for invoicing and avoid the supplier enablement process. Spend analysis makes identifying p-card opportunities readily visible.
Improving Supplier Enablement and Management
A key outcome of a spend analysis is knowing an organization's spend base fragmentation, providing insight into how fragmented each commodity is. Having this insight is the first step towards consolidating the supplier base and controlling the initiation of new suppliers. This concept works hand-in-hand with developing a channel strategy in two ways:
- Pushing low-volume, low-spend suppliers to a P-card reduces the number of suppliers requiring initiation, as well as reducing the number of invoices that need to be processed.
- Channeling more volume and spend to larger suppliers allows for increased leverage and cost savings, supporting strategic sourcing efforts. Added volume with select suppliers could also strengthen the relationship and allow increased flexibility to the desired channel strategy.
Optimizing Payment Terms
Transaction-level data on which a spend analysis is based allows an organization to determine how quickly or slowly its suppliers are being paid. Examining this on a vendor-by-vendor basis can facilitate an organization to prioritize with which suppliers to negotiate discount terms or extended terms. In the same vein, the organization can narrow down the appropriate method of payment for engaging this supplier. Meeting early payment discounts would almost certainly mean using electronic payment methods, while extended payment terms could allow for the usage of checks, if desired, to extend the float.
Being armed with the knowledge provided by a spend analysis is essential for effective sourcing, but some of the more understated benefits it can provide to the P2P process can be just as effective in driving bottom-line benefits and uncovering efficiencies. Applying spend analysis should be a key consideration when enhancing the process.