Spend Matters welcomes another guest post from Richard Waugh, Vice President of Corporate Development at Zycus Inc.
Spring cleaning is just as appropriate for most procurement organizations as it is for each household. Here then, is a checklist of procurement’s spring-cleaning chores, with potential to yield far more than just a little loose change in the sofa and better visibility than Windex applied to windows obscured by streaks and grime.
Time to dust off contract documents to search for any agreements that have expired or are due to do so soon. Preventing even one auto-renewal of an evergreen agreement or discovering maintenance agreements on long discarded assets or software licenses pays for itself. While you’re at it, a review of contracts with rebate provisions could uncover enough savings to make any effort exerted well worthwhile.
Refresh old spend analysis with new data to uncover hidden savings opportunities. If your organization is only performing spend analysis once a year or even less frequently, recognize that nearly 70 percent of the reference accounts surveyed as part of The Gartner Group’s Strategic Sourcing Suite Magic Quadrant from 2013 – typically among the most advanced procurement organizations – are refreshing their spend data at least quarterly in order to uncover changes in spending patterns that reveal potential savings opportunities.
Focus on immediate cost recovery opportunities such as an analysis of purchase price variance – paying different prices for the same item, sometimes from the same supplier, or Payment Term Rationalization – standardizing on contracted payment terms with preferred vendors, as “quick hit” opportunities to generate cost recovery or working capital improvements.
Root out “supplier creep” (or perhaps creepy suppliers while you’re at it), which could have occurred during the long, cold winter. Any categories where spend has become fragmented across too many suppliers – for example, where the top 20 percent of suppliers account for less than 50 percent of the total spend – should be earmarked for supplier rationalization to gain increased leverage over category spending.
The typical procurement organization has approximately 3,000 active suppliers per $1 billion in spend. And that doesn’t even include those inactive suppliers still in the vendor master, which may not have received a payment for the last 12 to 24 months.
Sort through and de-clutter the supply base by removing duplicate and inactive vendors from the vendor master.
Check for up-to-date insurance, quality, diversity, or other certifications.
Segment suppliers by categories such as strategic (high impact or investment), critical (sole source or difficult to replace), important (cost-focused relationship), or tactical (highly transactional, commodity-focused).
Pay particular attention to the first three categories, which typically comprise just 20 percent of the supply base but 80 percent of the spend.
There should be a supplier manager assigned to each strategic supplier and regular scorecards and strategy reviews produced. According to Hackett Group benchmarks, top performers allocate one FTE per eight strategic suppliers as compared to one per 47 strategic suppliers for the overall peer group, and these organizations realize almost 10 times higher returns for their investment - $1.1 million savings per strategic supplier vs. only about $120,000 per supplier in the peer group.
Survey your Tier 1 suppliers on their own spending with diverse suppliers in their supply chains so as to identify any diversity spend that can be consolidated for your own reporting purposes.
A resurgent economy – at least in the US, if not globally yet – may portend dramatically different market conditions than those that existed during the economic downturn, when deflationary commodity price pressures may have made cost savings almost unavoidable. Consider refreshing category strategies and infusing them with external market intelligence, such as commodity price trends and forecasts, to stay out in front of dynamically changing market conditions
Test the market by renewing past sourcing events – especially for those categories where price increases are projected – in an effort to lock in lower contract pricing in advance of expected price hikes.
Finally, since spring cleaning can be a lot of hard work, why not take a moment to bask in the glow of all the value that has already been contributed to the organization?
Consider producing a scorecard that informs the business of the value contribution from both procurement and business users by highlighting recent gains in spend under management, realized cost savings, increased user adoption, cycle time reduction, contract compliance, supplier enablement, and the like.
Benchmark your own performance against the overall market. Even if you know you have a lot that has been stuffed in closets or piled up in the basement, chances are your house may be a lot cleaner than the neighbor’s, which always helps make you feel better, as will a plan to remove the clutter and start afresh.