Imagine walking into a car dealership and the first question the salesperson asks you is, “How much do you want to overpay?” It’s a ridiculous question, right? No one wants to pay more for a product than they absolutely have to. Yet, this is exactly what too many corporate buyers unwittingly do, every day.
While most procurement managers would likely concede that there was “room for improvement” in their organizations’ MRO spending execution, few have the visibility and analytics capability necessary to accurately measure what their performance level truly is. If they did, my guess is they would be shocked at how often they overpaid for their indirect materials.
Find out what happened when EqualLevel deployed AI in part of its e-procurement solution to find the best prices.
Tail spend is a growing area of concern for procurement. Given the granular, dispersed and opaque nature of such spend, many organizations find the task of taming the tail daunting.
Purpose-built tools have long existed that adequately address strategic sourcing activities (e-sourcing) and route internal users to pre-approved catalog items (e-procurement), yet technology to support the 20% of spend that is not actively managed by procurement has comparatively lagged.
Instead, the answer for most procurement groups has been to either attack tail spend with a patchwork of variably effective methods (p-cards, marketplaces) or outsource the problem entirely, like to a BPO firm.
Yet neither of these methods is particularly attractive. With the patchwork approach, issues around risk and control are poorly addressed, and while routing purchases under a low threshold (e.g., $500) into a marketplace can satisfy the typical spot buy, this hardly represent a strategy around optimizing tail spend.
BPOs offer expertise and a “set-it-and-forget-it” mentality, but organizations often find that the process efficiencies that they had hoped to gain don’t materialize as promised.
Finding a third way between the patchwork and complete outsourcing is at the heart of how Fairmarkit, an upstart vendor out of Boston, is trying to solve the tail spend management problem.
By using machine learning to analyze purchasing patterns and vendor fit, Fairmarkit automates the RFQ process for variable purchases that fall in the roughly $500 to $250,000 range. In the process, it wants to challenge the status quo for how businesses think about tail spend, enabling procurement groups to automate bidding and analysis on low-value purchases so they can assign team members solely to strategic events. And Fairmarkit already has had success doing so, claiming an average of 6% to 12% cost savings with clients as varied as the Massachusetts Bay Transportation Authority (MBTA), Univision and Yeti.
This Spend Matters PRO Vendor Introduction offers a candid take on Fairmarkit and its capabilities. It includes an overview of Fairmarkit’s offering, a breakdown of what is comparatively good (and not so good) about the solution, a SWOT analysis and a selection requirements checklist for companies that might consider the provider.
We understand that to justify the spend of an e-procurement system, every organization must first show the expected return on investment. To help uncover potential ROI for your organization, check out this e-procurement ROI calculator here, and read the City of Philadelphia case study.
Many of the most effective ways to curb maverick spend — like using e-procurement tools with approved supplier catalogs or better contract management tools integrated into the buying process — still have not been implemented by more than half of most organizations, a survey by The Hackett Group found. And it found that perceptions of the causes and solutions for maverick spend can vary depending on a worker’s role.
Procure-to-pay technology provider Basware used the research for its study, “Perception and Reality: A Report on Maverick Spend,” which examined the practice of making purchases outside the compliant procurement process. Maverick spending can take many forms, including purchases made outside a preferred channel or supplier, or those that do not follow contract terms and miss out on negotiated savings. Some of the rogue purchases happen because employees or their managers consider the transaction to be too small to matter.
It’s the end of the year, time for New Year’s Resolutions, a little vacation time and Christmas Party hijinks. But the Hackett Group, a business consultant and digital transformation specialist, is cautioning against year-end fiscal shenanigans, where money is shuffled around to make it appear that the company has hit the finish line in full stride. A new paper from the group lamenting the yearly “dash for cash” argues that you can look for sustainable, healthy ways of freeing up cash at the end of the year without pulling any three-card-monty tricks. According to the paper on working capital, many companies think it’s too late at the end of a quarter or year to free up significant cash. But it suggests 7 steps you can still use.
Investors, CEOs and suppliers are pushing procurement and finance organizations to improve working capital performance, and this renewed interest in the state of the balance sheet is poised to create a revolution in how businesses approach cash flow, according to Taulia, a provider of financial supply chain solutions. There is $14 trillion in annual spend volume trapped in global supply chains, and for every $1 billion in revenue, working capital programs can create improvements totaling as much as $70 million, Taulia said last week at its 2018 Working Capital Summit in Chicago.
Earlier today, Amazon announced a host of enhancements to its Amazon Business Prime offering. To help procurement organizations understand the implications of these added capabilities, this Spend Matters PRO research brief provides an overview and analysis of the new solution components and offers recommendations to procurement organizations already using or considering Amazon Business.
The emphasis of this PRO analysis centers on the spend visibility/analytics, e-procurement (guided buying) and working capital/payment capabilities of the October 2018 Amazon Business release. While some of these areas are likely to be less interesting for organizations that already use a third-party e-procurement solution that integrates with Amazon Business (either via punch-out or API), Amazon’s enhanced invoicing, working capital and payment components can be applied to all potential users.
But perhaps most important, these enhancement offer some signals of how Amazon may continue to build out the capabilities of its Prime business solution. Let’s delve in.
Spend Matters welcomes this guest post from Bernard Gunther, co-founder of Spendata.
Mergers are rationalized by the expectation of post-merger synergies, a major one being cost reduction. However, cost savings opportunities that are routinely exploited by procurement are rarely a focal point for “clean teams” in pre-merger scenarios, or by the merged organization in the key 100 days of post-merger integration (PMI). In fact, the majority of mergers rarely deliver all of the expected cost savings.[2] In contrast, procurement can play a crucial role in planning for and delivering cost savings typically overlooked during the pre-merger analysis.
In the first installment of this series, we discussed ways to align procurement with the finance function, starting with financial accounting and then moving into cost accounting. Although cost accounting has one foot in the financial accounting world in terms of tracking costs and having them flow to the general ledger (GL), the more important side of cost accounting is its part in managerial accounting and total cost management.
Managerial accounting is about analyzing financials to make good business decisions. It includes analyzing historical costs and spending, but only in the context of improving future spending and reduce total economic costs. One aspect of economic costs is opportunity costs, and procurement must work hard with finance to understand the procurement ROI that comes from strong management of external spending led by the procurement organization. This ROI is measured in triple digits but must be demonstrated with hard numbers.
More importantly, however, procurement’s ability to partner with finance to better influence future spending is the most practical way to influence financial and business results. This comes from procurement aligning well with finance within the financial planning and analysis (FP&A) processes that occur in finance. Hopefully, FP&A is more than just basic budgeting at your organization. Done well, it provides the critical linkage to not only financial planning but also strategic and operational planning that drive success for budget owners, broader stakeholders and shareholders.
Given the importance of FP&A, we’re going to focus on this collaboration area and how to apply it to spend management, which you can think of as “spend planning and analysis” before the spend actually occurs, as opposed to traditional “spent analysis” of spend that already happened. This focus upstream is fundamentally about transformation and changing procurement’s role in the planning and budgeting process. Luckily, this area creates much higher quality of spend influence, which drives proven levels of spend savings.
“Amazon, like any other organization, is not immune to the challenges you all are having with tail spend.” That was Jeff Oar, head of customer success, enterprise, at Amazon Business, speaking on a recent webinar held by Spend Matters (and co-hosted by our own Pierre Mitchell). If one of the 800-pound gorillas has a tail spend problem — and we say that as politely as possible, given the fact that Spend Matters and Amazon Business joined forces on the indirect spend research study underpinning this report and the webinar — chances are, your organization is, too.
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!
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.
