Daily Archives: June 12, 2006

Strategic Sourcing and Spend Analysis

Since this blog is about sourcing innovation, we are going to start off by defining a basic strategic sourcing process that could proceed as follows:

( 1) Spend Analysis
( 2) Spend Strategy
( 3) Data Collection
( 4) RFI
( 5) Supplier Qualification
( 6) RFP/RFQ
( 7) Auction and/or Negotiation
( 8) Decision Optimization
( 9) Award and Contract
(10) Contract Management
(11) Compliance Management
(12) Spend Management

A careful analysis of this process will produce five critical process-driven phases that can be greatly enhanced by software solutions:

(12&1) Spend Management and Spend Analysis
(4&6)  RFX
(7)    Auction
(8)    Decision Optimization
(10)   Compliance Management

It’s true that supplier management and compliance management can also be greatly enhanced by software, but good RFX and Auction tools will build in basic supplier management capabilities and good spend management and contract management tools will build in basic compliance management tools and these five solutions together will effectively cover a basic strategic sourcing cycle.

Each day this week we are going to focus on one of these processes, starting with Spend Analysis and Spend Management today. 

Spend Analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of cost reduction, performance improvement, and greater compliance.  It is part of the spend management process, which includes the analysis, award, and tracking of corporate spend, and the first and last step of your strategic sourcing process. 

Successful spend analysis relies on three critical factors: access, resources, and powerful analytics.  First of all, you need access to all of the relevant data – this is where good spend management practices that ensure all of your purchases get classified and entered into your core ERP or financial systems comes into play.  Then you need the resources, which includes financial capital as well as human capital, to do it.  Finally, you need a sophisticated solution that can slice and dice the data by supplier, commodity, period, contract, geographic location, or any other meaningful combination thereof.  It should also have the ability to detect spending patterns and variations. 

This is where technology comes into play.  Good solutions, like the solution provided by Biq, can slice, dice, and drill down on multiple dimensions simultaneously, support custom defined filters, interface with Excel, and process data sets of over 100 million transactions.

Spend analysis is important as it is the first step in the identification of possible savings opportunities.  Likewise, spend management is important because it is the only way to insure you capture the savings you negotiate and one of the best ways to insure compliance with relevant regulations.

Furthermore, innovative spend analysis built on advanced analytics and business intelligence can identify savings opportunities you would most likely miss.  Biq’s offering is one of the most innovative I’ve seen.  Most solutions need to be tightly integrated into your existing systems to work.  Biq’s solution can slurp your data in over the internet, slice it and dice it, and spit back meaningful aggregated summaries in any view you desire.

For more information on spend analysis / spend management solutions and the benefits they can bring to your business, I recommend starting with Aberdeen Group which has been producing great research for a number of years on this subject.  For example, you could start with the executive white paper “Spend Data Management: Unlocking the Value Across the Extended Enterprise” in October 2003, “Best Practices in Spending Analysis: Cure for a Corporate Epidemic” in September 2004, “Spend Compliance Management: Implementing and Sustaining Supply Savings” in December 2004, and Spend Intelligence: the Next Generation of Spend Analysis” in May, 2006.

As always, comments, criticisms, and creative insights can always be emailed directly to thedoctor<at>sourcinginnovation<dot>com.