Friday Rant — A New Spend Management Rules Set

One of the most informative books I've read in recent years is Thomas Barnett's analysis of the future of geopolitics and potential conflict, The Pentagon's New Map. In it Barnett argues that a "new rules set" must apply to how we think about engaging future potential enemies -- not to mention where conflicts might arise (and the types of conflicts we should expect to engage in). If you're interested in post Cold War political and military strategy, it's a fascinating read. But more important, Barnett has gotten me thinking about the need for a new rules set for procurement and supply chain today.

Not only are we operating in a very different environment than ever before, the rules of engagement are changing -- what we expect from suppliers, what they expect from us and the risk and variability inherent in managing leveraged relationships that stretch across industries, cultures, and geographies. And I've not even mentioned the new role for technology that will continuously play into the future.

The new Spend Management Rules Set, or Manifesto, if you will, focuses on three key areas: benefits, variability and demand. Traditionally, Spend Management as we think of it today, was focused primarily on cost reduction and cost management efficiency. But the recession has called out the need to think through a more complicated set of benefits and rules. Consider the new rule of variability in Spend Management. Not only must we continuously factor in variability as we traditionally conceive it (SKU proliferation, complicated service level management, etc.) but more important, we must factor in supply chain variability, including supply risk.

When a supplier goes out of business or ceases operations, we must manage effectively through such a transition period, fully taking into account the implied variability that such punctuated equilibrium can bring. By the same token, we are exposing ourselves to greater and greater variability in underlying commodity prices, as markets rise and fall with greater frequency and volatility than ever before. Because of this, variability must become a new cornerstone from which we conceive and approach today's Spend Management.

Demand is another new rules cornerstone we can't afford to ignore. Not only has the recession proved out the need to better understand customer demand variability as orders have declined in many industries, it's also called into question the need to better understand demand forecast variability around new product launches (especially in markets such as wireless devices that are increasingly becoming winner-take-all) not to mention internal demand management for consumables and services (e.g., indirect materials, IT support services, etc.). If we can better manage, anticipate, shape and react to demand -- both customer driven and internal demand that we can control -- we'll all be the better for it when it comes to driving future Spend Management success in our organizations.

The third new pillar of Spend Management is nothing new, although we need to expand our understanding and definition of what we think of as beneficial to our approach. Indeed, benefits should not be a new rule. But how we conceive of the benefits of Spend Management to our organization is something that we need to expand and better articulate. Consider, for example, not only those benefits from traditional sourcing implemented cost reduction, invoicing auditing, and P2P programs, but also new types of cost savings and balance sheet benefits ranging from transfer pricing optimization to working capital management focused programs -- all of which require procurement involvement as much as finance and other functional areas.

In short, as Spend Management professionals, we must challenge ourselves and our companies to better understand and master these new operational rules. On the most basic level, this might result in greater responsibility -- including enhanced supply assurance for the organization. But true leaders will look at the situation at hand as a chance to change how the entire company looks at the role of buying and Spend Management as one that must become a true competency that not only delights shareholders when it comes to margin, but can also help change the basis on which we compete and preserve -- and even grow -- our top line as well. Welcome to the new Spend Management rules set.

Jason Busch

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