The Cost Management Category

What’s the Cost of Having a Long Supply Tail, and How Do You Determine the ‘Right’ Supply Base?

tail

We recently put up an interactive Ask Spend Matters box so that you, our readers, can tell us about the topics you want us to investigate. One of the first questions that came in was about tail spend: “What is the cost of having a long supply tail, and how are organizations determining the ‘right’ supply base (number and percentage) as relates to spend?” As Spend Matters Chief Research Officer Pierre Mitchell put it, "This is a great question, but it’s a bit tricky to answer.” Read on to hear his reply!

Is the Tail Spend Problem Solved with Technology or with Managed Services?

Tail spend is a thorny problem — and an important one.

Tail spend is an amalgam of more granular spending: one time, low dollar, maverick, tactical by design. It doesn't even have a common definition understood by all, and it is generally a mess.

So, how to solve this problem? The design ideal is the concept of guided buying, where you start with the end customers (i.e., employees who need something) at the time of need and then guide them down to get what they need to accomplish their goals (but also within corporate policy). It’s an entryway to all procurement, not just the procure-to-pay (P2P), process, so you need to get it right and make the experience count.

But, who is the guide? Is it a tactical buying group in shared services or outsourced provider? Or is it a technology solution? Let’s discuss.

So, When Should I Cost Model My Products?

Spend Matters welcomes this guest post from Nick Peksa, opportunities director at Mintec.

Rather than speak about raw material and commodity prices, I thought I would introduce you to some of the ways I encourage people to use Mintec data. Fast-moving consumer goods are manufactured from multiple, potentially volatile, raw materials. With access to raw material prices and to your recipes/specification, you should be able to create a simple cost model.

The Allocation Game — Managing Cost Before Money is Spent

finance

Spend Matters welcomes this guest post form Steven Krueger, principal, and Matt Polvara, senior manager, at Ernst & Young LLP.

With more interest rate hikes a likelihood, banks are poised for growth. But that doesn’t mean they should stop their cost reduction programs. By strategically reducing or eliminating costs, and in particular by optimizing infrastructure costs (which account, on average, for about 40% of a bank’s cost base) banks can be leaner and more agile in a changing economic and regulatory environment. They will be better positioned to face off increasing threats from FinTech firms that are aiming to introduce disruptive technology-enabled business models. Ultimately, banks can reallocate funds they saved to invest in products and technologies to defend or grow market shares.

How to Smooth Manufacturer-Supplier Relationships Through AP Automation

Spend Matters welcomes this guest post from Howie Hahn, senior sales engineer at Esker.

Success in manufacturing depends on the mutually beneficial relationships between manufacturers and suppliers. Each party relies on the other to live up to its obligations, if either expects to move towards long-term success and growth. But business, like life, doesn’t always go as planned. Even relationships based on trust and mutual benefit can get rocky.

The key is to make sure that the inevitable bumps in the road don’t morph into ill feelings, mistrust or, worse, lawsuits. One tool that can help ensure that manufacturers and suppliers maintain smooth relationships is accounts payable (AP) automation.

Procurement Metrics: Understanding the Economic Language of Value (Part 2) — Expenditures, Expenses and Financial Reporting (CapEx, COGS and G&A) [Plus+]

finance

In the first installment of this series, we discussed the term “spend” (the noun, not verb), in the context of supplier spending, in a fair amount of detail. We discussed addressable spend, and what's included and excluded for the purposes of spend visibility/management, but also for the purposes of using spend within procurement performance measurement and benchmarking. In this installment, we dive a little deeper in terms of comparing and contrasting spend to other terms, as mentioned in the title.

Procurement Metrics: Understanding the Economic Language of Value (Part 1) — Spend [Plus+]

buzzwords

One of the challenges that procurement faces is "speaking the same language" as finance, as well as the language of its stakeholders. A marketing department, for example, may use the term “investment” for its spending. Similarly, many procurement organizations categorize some of their added value in a category called “cost avoidance,” even though the term is not taught or recognized formally by the finance function.

Even within procurement, many terms are used inconsistently. Consider the term “addressable spend.” Is all spend addressable, as represented by cash disbursements going to external parties? Or is it supplier spending that is reasonably under the influence of procurement? If you say the latter, what defines “reasonable”?

The friction and misalignment common between various functions often results from stakeholders not having a basic understanding of terms that seem similar but yet can be very different. This problem is exacerbated when the stakes are high and you start getting measured and benchmarked on these metrics. To prevent this, procurement needs to be “business multilingual” and understand the variations of terminology so that it can best speak these languages and help the organization make the best decisions to create value.

This is what we’ll address in this analysis, with a focus on procurement and finance within the enterprise. Clearly defined terminology is the foundation from which higher-level concepts, performance metrics and benchmarks can be consistently understood — and improved.

3 Ways For Procurement to Prove Its Value (Other Than Cost Savings!)

Spend Matters welcomes this guest post from Dustin Cochran, director of member development at Corporate United.

Most organizations are focused on three strategic pillars: increasing revenue, operational efficiency and retaining talent. I would say that procurement is already aligned to these pillars. Where they tend to be less aligned is with the strategy of internal departments. However, what I think that procurement professionals should focus on is better promoting how they align with these areas.

3 Insights for Procurement from aPriori’s Cost Insight Conference

Spending the last 24 hours surrounded by design and cost engineers has taught me quite a bit about operations beyond procurement and supply chain management. Those in the buying and sourcing profession often spend a lot of time thinking about cost, and they sometimes get a bad rap for it. But based on my discussions with attendees, it’s clear to me that procurement is far from the only organizational unit worried about helping revenue get to the bottom line.

Yet procurement struggles with its image: it’s slow, it’s a roadblock to progress, it’s not knowledgeable enough to be valuable in new product development. The practitioners in attendance at Cost Insight, however, have worked doggedly to change perceptions such as these at their firms — to great success, in many cases. Here are three insights for procurement I’ve gleaned from various sessions.

Why Product Cost Management is (Finally) Gaining Acceptance with Global Manufacturers

The background music at this morning’s introductory session to aPriori’s Cost Insight conference said it all: “Never get fooled again.”

Manufacturers big and small waste time and money iterating on product designs, and the gap between “should cost” models and real total cost of ownership (TCO) is known to many procurement groups. But a growing openness to product cost management processes and tools, aPriori says, should end this confusion once and for all.

That’s not just the provider’s narrative either. With 65 companies in attendance this year at Cost Insight, the desire for better platforms for new product development, cost management and supplier collaboration is clear.

The Zen of Spend

zen

As an old Zen Buddhist riddle goes, “If you seek it, you can not find it.” To paraphrase, you'll be miserable if you seek happiness only through specific outcomes rather than attaining happiness merely as a byproduct of living life fully. The same concept applies to cost savings. Procurement groups that only focus on finding purchased cost savings as their raison d’être will not be happy, nor will the stakeholders who own the spending where savings are generated.

Procurement Waste: Why it Matters in Light of Brexit

Procurement organizations are reportedly wasting billions each year due to inefficient practices. U.K. companies, specifically, are losing $79.5 billion a year, according to research from blur Group, a cloud software and managed services solution provider. That’s nearly $218 million wasted each day due to what blur Group called procurement fraud, unmanaged contracts, maverick spending and inefficient internal management and delivery processes.