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A smarter way to spend your money

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When executed properly, a spend management strategy can save cash and accelerate return on investments—even in a down economy.

Over the course of the past year, organizations across the globe have faced unprecedented economic challenges. The impact of the systematic collapse of the banking industry has been felt worldwide. Even China, the global leader in manufacturing, is reporting a rapidly deteriorating economic situation; Chinese factories are scaling down production to combat the rising inventories that their customers are now carrying due to reduced consumer demand. But China is not alone. Enterprises across the globe are taking steps to ward off financial distress and ride out the economic turbulence.

No one, of course, is happy about the pain caused by the global recession, yet there may be a positive side to the current situation. Companies now have an opportunity to go beyond simple cost cutting and realign to improve their spend management practices— that is, the methods by which they control the money they spend and manage the activities associated with external purchases. By doing so, they can achieve sustainable savings that can not only help them weather today's economic storm but also ensure the health of their businesses long after the recession ends.

Article Figures
[Figure 1] Framework for spend-analysis solutions
[Figure 1] Framework for spend-analysis solutions Enlarge this image

A dynamic process
Conversations with procurement and finance executives around the globe over the past several months indicate that companies have focused their efforts on reducing costs, accelerating their return on investment (ROI), and improving efficiencies. Some are adopting tactics like closing manufacturing plants and laying off workers, which are static, short-term reactions to periods of slowing demand and volatile market conditions.

Spend management, by contrast, provides a continuous, dynamic process for meeting an organization's changing business requirements. A formal spend management strategy lets companies more efficiently analyze opportunities for savings, identify opportunities to choose the right suppliers, enter into favorable contracts, monitor compliance, and evaluate supplier performance in relation to an organization's long-term objectives.

Concurrently, spend management technology streamlines, links, and integrates an organization's procurement processes. Examples of software solutions within the spend management category include spend analysis, contract management, and sourcing management. These solutions help enterprises analyze, manage, consolidate, control, and track spend data—often across multiple languages, sources, and currencies. These capabilities enhance visibility, reduce costs, increase savings, and improve contract and government/enterprise compliance.

When executed properly, a spend management program helps companies accelerate ROI and improve the bottom line—even during uncertain economic conditions. This is borne out by the results of a recent Aberdeen Group study, which found that spend management initiatives helped global corporations increase their contract compliance by 30.6 percent, yield savings of 92 percent from improved sourcing activities, and boost their return on investment by some 40 percent.1

The value of visibility
For many companies, visibility provides the missing piece needed to develop a spend management strategy. In the current economic environment, it is especially critical that enterprises have visibility across their expenditures and their contracts. This gives them the ability to proactively monitor compliance with those contracts. It also allows them to capitalize on the negotiated contract terms, which might include terms and conditions that could reduce the price they currently are paying for a product, commodity, or service.

That was the case for a 350-year-old conglomerate in Europe with operations in more than 40 countries. The company faced severe challenges to the profitability of its businesses, including increasing global competition, the emergence of private labels, rising raw material prices, and stagnating market development. The company's competitors, meanwhile, were bringing in new suppliers from low-cost areas.

By implementing an enterprisewide spend management strategy, the conglomerate was able to identify and address the significant overlap that existed across its sourcing groups and develop a strategy that leveraged its size and scale. The artificial intelligencebased spend-analysis solution the company implemented exploited the benefits of scale and facilitated the optimization of resources and knowledge across the many segments of the organization, providing:

  • Harmonized information in a common sourcing hierarchy;
  • Centralized data capture at the transactional level;
  • Consistent data extraction, classification, and analysis; and
  • Sustainable, routine spend visibility and analysis.

The company subsequently was able to narrow its supplier base from well over 1,000 to just 0.4 percent of the original number. It also achieved savings by identifying and contracting with the most cost-efficient suppliers globally. Bottom line? The implementation of a successful spend management strategy ultimately contributed 68 percent of the overall savings in a cost management initiative across several business units, resulting in an increase in overall EBITDA (earnings before interest, taxes, depreciation, and amortization) exceeding 16 percent.

Spend analysis and transparency
The right spend management strategy helps global organizations effectively analyze, source, and contract their spend. (See Figure 1.) The first of those steps, spend analysis, is defined by the Institute of Supply Management as the process of identifying a company's current spend to determine what is being spent, with whom, and for what. The output of a spend-analysis exercise is a summary of purchases by various variables, such as category, supplier, and business units. With the average US $500-million company estimated to have 20,000 to 40,000 contracts under management, it is easy to understand why this step is so important.

Effective spend analysis fosters transparency, or the sharing of accurate data and information with all organizations and departments to support fact-based decision making and execution. As one large biotechnology pioneer found out, this is difficult to achieve when operations are spread across the globe. The biotech company's management recognized that the rate of accuracy in its spend classification was very low. One reason was that, because of the nature of its distributed enterprise operations, it took several weeks to perform any kind of global spend analysis. The situation was further complicated by having multiple vendors and classification systems in many countries, resulting in a lot of guesswork and inaccuracies in the data. In fact, the company estimated that 50-70 percent of all spend-related data in its systems was incorrectly classified.

To rectify the situation, the biotech firm deployed a spend-analysis solution with automated classification and analytics capabilities. The software required little formal training to use and supported multiple languages. These were important considerations because the company's spend was spread across 34 countries and facilities. By using a single, automated solution worldwide, the company has greatly increased the accuracy and consistency of its spendanalysis data and made it easier to share that information throughout its supply chain. By improving data accuracy and accessibility, moreover, the company was able to improve users' and stakeholders' perceptions of the validity of the information. In addition, the enterprise has seen greater adoption of spend management practices in all its major departments. The company estimates that the classification and analytics solutions will save at least 10 percent of its total global spend, equating to several millions of dollars in savings over time.

Take a holistic approach
What factors lead to the success of a formal spend management program? There are several, but perhaps the most important are gaining executive-level support, deploying easy-to-use technology, and achieving enterprisewide adoption.

Chief procurement officers are, of course, the best leaders to undertake spend management initiatives. But executive support at the highest level is also important because it encourages companies to adopt a holistic approach that encompasses the entire enterprise and represents their shared short-term and longterm objectives. Placing sole ownership of spend management within a single department, such as purchasing, can make it more difficult to achieve enterprisewide adoption and maximize benefits.

In addition, spend management solutions that are easy for global organizations to access, use, and understand are critical if a company is to achieve widespread adoption. These solutions will be used by many individuals in many organizations, with varying skill levels and languages. The development of the software- as-a-service (SaaS) deployment model reduces the total cost of ownership and the implementation time, so that users can get up and running quickly when multiple sites and countries are involved.

In tough times such as these, an effective spend management program could reduce a bad economy's impact on an enterprise. And even when economic factors are less severe, the kinds of business improvements and savings provided by spend management solutions will continue to improve shareholder value and provide a competitive advantage.

No doubt market conditions will continue to require companies to take difficult, short-term actions, such as plant closings and layoffs. Still, a holistic approach that focuses on managing a company's overall spend will provide the greatest gain— both in the short term and over the long term. By implementing a sustainable spend management program that provides a "single version of the truth" that is accessible to all users, companies will enjoy financial benefits in both good times and bad.

Endnote:
1. Spend Analysis: Pulling Back the Cover on Savings, Aberdeen Group, October 2008.

Anurag Dixit is vice president of global marketing at Zycus.

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