Spend is the flip side of supply. Spend is what you pay – supply is what you get. So, if a CPO is tasked with supply management, he or she is also responsible for third-party “spend management." But the CPO doesn’t really "own" the spend – the budget owners do. So, how can a CPO control the spend? The answer is through better spend influence. This isn’t defined narrowly as spend where procurement is simply involved in negotiations and contracting, or even in downstream compliance, but rather through the application of best practices to the internal process of spending (which starts with business planning and stakeholder needs – not a competitive bidding event), to the internal stakeholders, to the suppliers and ultimately to the resultant spend.
There are many practices to control the spend. Certainly, gaining visibility to historic spend and then eventually to planned spend is a key capability to subsequently influence it. Our 50-part ongoing series for spend analysis is a testament to the importance of spend visibility to highlight opportunities beyond just spend aggregation. But, spend/supply management practices are obviously much broader, and many of the large management consultancies have been good at developing frameworks that can be used. Hackett has its 300+ practice Procurement Capability Maturity Model. AT Kearney used to have its “gemstone” strategic sourcing framework (featuring six elements: volume concentration, best-price evaluation, global sourcing, relationship structuring, joint process improvement and product specification improvement), before transitioning to its Purchasing Chessboard framework. This model organizes 64 spend management methods into 16 levers and ultimately into a 2x2 with 4 main strategies (any framework from a consulting firm is bound to have "levers" and a 2x2 diagram!):
Now, you may roll your eyes at how these methods are graphically compartmentalized, but they are a good list to evaluate yourself against. The chessboard game context also helps simplify its application. Such “gamification” is de rigeur these days, and that includes procurement ramification that can take many forms. Another consultancy, Accenture, “followed suit” with its Winning Hand card game that is also a spend management framework – complete with 48 ‘cards’ (levers) that are organized into 4 ‘suits’ (i.e., value elements) that are themselves broken down into 3 major strategies.
But, if you want to review a good pragmatic set of levers for spend management right here and now, Deloitte’s Global CPO Survey 2013 has a dozen that are worthy of consideration:
- Competition Increase via the invitation of additional suppliers to the bid
- Commodity Price Volatility Management by locking in contracts for the expected length of the volatility
- Consumption Reduction by working with different internal departments and partners to reduce demand
- Outsourcing non-core S&P to reduce time spent supporting tactical systems and activities
- Relationship Restructuring to work with suppliers to find ways to take cost out of the supply chain
- Specification Improvement to streamline production and minimize raw material requirements and wastes
- Spend Consolidation with key suppliers to leverage volume
- Supplier Collaboration on joint design and re-design initiatives
- Supply Base Restructuring to utilize the suppliers, distributors, warehouse operators, etc., as efficiently as possible
- Supply Chain Cost Optimization projects that simultaneously consider spend consolidation, supplier collaboration, product redesign, working capital optimization and other cost-reduction opportunities to minimize overall supply chain cost
- TCO Reduction by reducing inbound costs, outbound costs and internal utilization costs as well as other related lifecycle costs
- Transaction Cost Reduction by automating transaction processing
The particular levers that a CPO (and the broader organization) should consider depends on the situation at hand for a project, for a category or more broadly for a portfolio of spend being addressed. These levers have associated capabilities that a firm can assess in a gap analysis to help prioritize which capabilities will have the most impact on the spend being targeted for improvement.