Thursday, 2 October 2014

Connecting the Dots- Managing your spend


Authored by Varun Pandey

 

Combining different procurement process together to visualize and realize savings has proven to have higher ROI both in terms of revenue and procurement department performance.

While planning any strategic sourcing project, the first step should always be ensuring you have complete visibility over your money, knowing where savings can be made and where the money is going. “That’s easier said than done” I hear you say which is true as for the majority of the private and public sector companies the Spend and contract information is often incomplete, inappropriately classified for procurement purposes and distributed across different source systems making it difficult to access. Start with target those areas highlighted in particular and you’ll find that you are well on your way to attaining the visibility you need to respond to the challenge of delivering procurement savings and improving efficiency.

The next step, which is arguably more important than the first, is to have a clear view of your expenditure. As a result of Step 1, many questions have already been answered with respect to spend (Where, Whom, When and How much) but having a high level overview of spend by commodity allows you to begin to make sense of the most actionable categories. By identifying each category, the data will tell you what to do next from identifying maverick buying to demand aggregation. You will have lots of opportunities presented to you, but when streamlining your procure to pay operations I would advise to start with indirect commodities like IT or Office supplies wherein you will always have significant spend and a bigger supplier base to work upon.

Now taking this next step will move you ahead of the game, here you will need to start to prepare a robust and efficient contracting project by having a thorough understanding of the demand and spend in a specific category. It is well recognized by industries that long-term contracting under an array of price and non-price provisions will be an efficient response to small-numbers bargaining problems; the only thing you need to take care of is your inventory. Make sure that the commodity enters your supply chain at right time so that your demand aggregation does not turn into added inventory cost. These can be easily taken care of by negotiating appropriate delivery terms with the contractors then we will see positive, long term relationships between procurer and supplier with this efficient procure to pay process.

Last but not the least, tracking how your efforts are paying off over time is almost as important as identifying and implementing the savings opportunity. This will help provide you with evidence of the return on investment showing effective procurement have been delivered. The end user demand and supply, with respect to efficiency of the contract, should also be reviewed and reported on to learn the challenges that need to be taken care of in the next project.

Stay tuned for my next post where I will be demonstrating more detailed best practices in connecting the dots.

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