A.T. Kearney recently released the results of their Indirect Procurement Study (IPS) that analyzed indirect procurement across 94 multinational companies with a combined indirect spend of $134 Billion which suggests that indirect procurement categories like IT, marketing and advertising, facilities management, MRO, Logistics and professional services have become increasingly important to Chief Procurement Officers. This is good news considering the huge savings opportunity it represents as indirect spending accounts for 60% of third-party spend in non-manufacturing companies, more than 90% in the financial services industry, and sometimes 50% of spend in manufacturing organizations.
Like any other A.T. Kearney or Big Consulting study, it’s jam-packed with lots of results, statistics, findings, and conclusions, but there’s one finding in particular, which was picked up by this recent article in logistics management, that really gets the message across:
The most successful indirect procurement organizational model was a central-led organization with collaboration across business units. Users of this model achieved savings greater than 10% over the last two years in 47% of categories.
In other words, if you’re best in class, you can expect to save at least 10% on at least 25% of your spend, or 2.5% of your total spend. (Worst case, you’re manufacturing with only 50% indirect spend. You save 10% on half of those categories, which is 25% of all of your categories.) If you’re spending at least 100M annually, that’s at least 2.5M, and that’s nothing to scoff at! And if you’re using a real data analysis tool, it won’t take you long to find it either!
For some great tips on where to look for indirect savings, if you haven’t already, download the recent Sourcing Innovation Illumination on Strategic Spend Visibility. It’s definitely worth the read.
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Mostly Harmless, Part XIV
Reconciliation challenges and best practices.
A payment is the transfer of wealth from one party to another. The payment is usually cash or cash equivalent, such as cheque, money order, or electronic funds transfer. The payment must be recorded, tracked, reported and assigned to an invoice. Despite all of the focus on e-Payment (P2P, EIPP, etc.), it’s actually the simplest part of the e-Procurement process. The AP clerk simply sends a cheque or instructs a payment to be made, and then records the debit. All of the complexity comes before (which should now be apparent after reading this far in this series) and after (which will become clear). Nevertheless, there are still some challenges to be addressed, some best practices to streamline processes, and some benefits to getting it right.
- Paying on Time
For even a moderately sized company with hundreds of payments to process every week, it can be hard to keep track of which payments are due and which payments are approved. While the organization might choose to make some payments late, others may need to be made on time to avoid penalties.
- Automating Payments
If a contract specifies a regular, recurring payment, if a payment can be automatically approved, or if the organization has chosen to pay off a debt in an instalment plan, the payments should be automated.
- Rules-Based Automation
The system should allow one time, limited-time recurring, and regular (repeating) payments to be automatically queued according to whatever rules the organization has in place.
- e-Payment / Accounting System Integration
e-Payments generally need to be made through bank systems, or through accounting systems that are integrated with, and authorized to use, bank systems. As a result, the system should be capable of being integrated with these systems. This integration can be as easy as exporting a (differential/update) XML file at an hourly interval (with information to be propagated to the accounting system) and importing a (differential/update) XML file at an hourly interval (with information to be propagated [back] to the e-Procurement system).
- Cost Reduction
Without good system support, payment processing is a very time consuming, and somewhat error prone, task. A good system that automates payment processing saves time (and processing costs), prevents late payments (that generate penalties), and reduces the chance of human error (that can lead to more penalties or costly recovery initiatives).
- Increased Savings
Automating payments not only reduces costs, which contributes to savings, but allows payments to be scheduled in a manner that allows for early payment discounts, which increases the savings available to the organization.
Once the payments are made, it is time to try and recover the tax payments that can be refunded to the organization, which is the subject of the next post.
Next Post: Tax Reclamation, Part I
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