Category Archives: Best Practices

So You Want To Do Spend Analysis?

Now that you’ve read my pieces on The Future of Sourcing and Spend Analysis Today you know that spend analysis is key to your continued success when it comes to year-over-year savings. You want to get on with it, but you’re not sure where, or how, to start. In this post, I’ll attempt to answer that question by providing you with a step-by-step process you can use to get your spend analysis effort under way and keep more of those corporate dollars in the corporate coffers, where they belong.

Before I continue, I’d like to point out that this blog isn’t your only source of great information on spend analysis (even though it does have over 20 posts on the subject). There’s also the “Spend Analysis and Opportunity Assessment: There’s Gold in Them There Hills … Of Data” wiki-paper over on the eSourcing Wiki [WayBackMachine], which, in full disclosure, I should point out has yours truly and Eric Strovink (of BIQ) among the co-authors, and the references in the bibliography that it maintains (which, in the spirit of openness has links to public white papers by Ketera [acquired by Deem] and Zycus, among others).

Step 1: Locate Your Data
The first thing you need to do is figure out where all of your procurement data resides. This is harder then you think, even if you have an ERP system. Because even if you have an ERP, chances are that a significant quantity of the data you need is NOT in the ERP system. Some of it will be in the ERP system, some of it will be in other accounting systems (most large organizations have more than one ERP system, or at least more than one instance – a lot more in some cases), some in the AR system, some in your P-card systems, some in your T&E systems, etc. … you get the point. If you don’t know where your data is, you can’t extract what you need – and without the right data, your effort will fail.

Step 2: Adopt a Taxonomy
Once you have located your data, you need to figure out how you are going to integrate it. The commodity structure that is going to be the foundation of your spend analysis efforts should be based on a standard taxonomy. This can be a universal standard such as UNSPSC or your own custom taxonomy (there is considerable debate as to which is preferable, but there is general agreement that the taxonomy should be modified to your particular considerations and needs, not the other way around). As long as you can easiliy map all of your data in your disparate systems to the taxonomy, and as long as the taxonomy doesn’t interfere with the proper grouping of spend for sourcing and procurement purposes (which is sometimes the case with unmodified UNSPSC), that’s what counts.

[Note: Steps 3, 4, and 5 — and usually most of step 2 as well — are often performed by Spend Analysis vendors on your behalf. You would be wise not to overpay for those services; and if you do avail yourself of them, you should understand what is being done, even if you don’t do it yourself.]

Step 3: Centralize the Data in a Single Repository

Step 3A: Define a Master Transaction Record
Across all the various systems that you are integrating into your spend cube, there are some data fields that are similar, and some that have no equivalents. You’ll need to define a “master” transaction format that can accomodate the data from all of your disparate systems. It will have some fields to which most of the feeds will contribute; but it will have other fields to which only one feed contributes. Thus, there will be many more fields in your “master” record than in any of the individual transaction sources that you are including. Note that when you combine “like” fields together from disparate systems, you have to ensure that their values are unique — which means concatenating a system ID to the field. For example, GL code #37 in System A might mean something entirely different in System B; thus, the System A GL code should changed to: “SysA-37”, and the System B GL code should be changed to “SysB-37”. That way, the two (different) 37 codes won’t be erroneously grouped together.

Note that this effort requires a sophisticated “data translation” tool — the “T” of the (in)famous “ETL” that everyone always talks about. The data translation tool should be capable of column (field) manipulation, computation of new columns as a function of existing columns, addition and deletion of columns, and so on. And, the translation tool needs to produce a script that can be re-run again and again, since this translation will need to occur on every data refresh.

Note also that the Master Transaction Record will contain an interesting new field that isn’t present in any of the data feeds — a “source” field. This will enable you to dimensionalize (slice) the data by a single system, or by all the source systems, or by any subset of the systems.

Step 3B: Collect Related Information
This is typically a Vendor Master, or a GL description table, or a Cost Center breakdown, either maintained by one or more of the ERP systems, or maintained independently somewhere else in the enterprise. Just as with the Master Transaction Record, duplicate tables from multiple sources must be merged into a “master” table using the same methodology as in 3A.

Step 3C: Build the Initial Cube
In this step, all of the data that you’ve assembled and translated is loaded into the Spend Analysis system. Files containing related information are related to the Master Transaction Record. One or more groups of Master Transaction Records are loaded into the system. Then, data dimensions (columns) within your data are defined, and hierarchies (implicit and explicit) created. Measures (quantities that are rolled up in the cube) are also identified. Finally, the cube is put together in some initial fashion (this varies by spend analysis vendor; sometimes this initial cube is available to you immediately for preliminary analysis, sometimes it is not).

The tools made available to users for step 3 processes vary; it is fairly unusual for all of them to be accessible to business users, although that is an absolute requirement for power users (see Step 7).

Step 4: Family the Data
If there are multiple ERP systems being combined, then the “GL” column in the Master Transaction Record (as well as others) will contain multiple instantiations of pretty much the same thing — for example, several different varieties of “office supplies” or “contract labor” and so on. It’s necessary, therefore, to create an “uber” GL — a grouping of like GL codes into logical categories, so as to avoid redundancies later. Similarly, the Vendor dimension must also be “familied” so that the (typically many) entries made across all the ERP systems for a particular vendor are grouped together. Familying should be done for any dimension that needs it; cost center is another candidate.

Step 5: Map the Data
Once the key dimensions are familied, it’s time to map spending to the taxonomy you chose in Step 2. The result of the mapping phase is a set of “mapping rules” which constitute a knowledge base for how to assign spending to the taxonomy. Once the mapping rules are created, when new spend is added to the dataset, the rules are applied to each new transaction, and that transaction is moved to the appropriate taxonomy bucket automatically. Spend Analysis vendors vary on their approaches to creating the mapping rules; some sport automated rules generation systems commingled with manual correction, and perform this service for their customers; others allow customers or third parties to build their own rules. In any event, the end result is a spend cube in which it is finally possible to determine how much was really spent in a particular commodity area (a key piece of information that is not available from ERP systems, and certainly not available when there are multiple ERP systems in the enterprise).

Step 6: Pick the Low Hanging Fruit
These days, everyone wants a quick win – and there’s no quicker way to get a win than to drill around a spend cube for the very first time and look for obvious indications of trouble. These include incorrect vendor density (too many suppliers, or too few suppliers for a particular commodity); high spend rates for certain commodities (such as office supplies) compared to similar companies; and so-called “bypass” spending — that is, spending that is not with approved vendors, or that is clearly off-contract. Some Spend Analysis vendors and consultants provide standard reports to assist with this process.

Step 7: Acquire a Real Spend Analysis Tool and Let Your Power Users Loose!
As I pointed out in Spend Analysis Today, a real spend analysis tool is one that truly gives the user the ability to “play” with the underlying OLAP database. For starters, a user should be able to define their own cubes that consist of any dimensions they want, re-order and re-structure the dimensions of the cube at any time, dynamically create their own reports, analyze multiple dimensions simultaneously using multidimensional extracts, define and re-define the classification rules dynamically, and populate their own models with data from the spend cube.

Step X: Get a Good Consultant
At any point during the process, if you are unsure about what to do, you should find a consultant who specializes in spend analysis for a living to help you out. This doesn’t mean call up your favorite Big-5 Consulting firm and asking them to send over their best guy. Rather, it means seeking out the boutiques who do it for a living day-in and day-out and have truly mastered the process (like The Buying Triangle). The real masters will be able to analyze your spend, compare it to current contracts and benchmarks, and find money owed to you – that you are eligible for right now!

Up Next: How To Get The Most From Your Spend Analysis System

It’s your data. Use it!

Great Supply Chain Partners Have What Customers Want

This summer, as reprinted on the companion Supply Chain Brain site, Global Logistics & Supply Chain Strategies ran a special report on the “100 Great Supply Chain Partners” that also included an overview of what customers want from their partners that is worth reviewing. According to the article, the 10 most common qualities that buyers looked for in their vendors were as follows:

  • Reliability
    A buyer’s customers will not accept excuses for service failures, so neither should the buyer. Furthermore, when a vendor has proved itself to be rock-solid, an enduring partnership can ensue.
  • Repeatable Excellence
    While good performance is expected, vendors who go above and beyond what is required are the ones getting accolades – and repeat business.
  • Value and Cost Savings
    The key motivation these days for any new technology or outsourced service is cost savings and the most important financial measure is value in terms of increased sales, production, or other revenue-related metrics.
  • Expertise and Knowledge Base
    Manufacturers and retailers increasingly look to their technology and logistics providers for best practices specific to their industry, market or product. Vendors that have this expertise quickly become trusted advisers.
  • Problem-Solving Ability
    Partners able to deal effectively with unexpected events without missing a step earn the eternal gratitude of their customers.
  • Continuous Improvement
    Buyers want to see a plan for product development, so they know their needs will be met in the years ahead.
  • Support
    Rampant industry downsizing means that most companies must rely on their vendors to implement, train, maintain, and support the technologies and services provided.
  • Positive Culture
    Companies want to do business with vendors that are positive about what they can accomplish.
  • Global Capabilities
    Companies of all sizes are looking for technologies and services that allow them to operate with trading partners all over the world.
  • Strong Management
    Nothing can damage a relationship between a company and its partners faster than an erosion of commitment from the partner’s management.

All of these capabilities can be easy to forget at one time or another, but all of them are important and all of them must be consistently applied in order to win and retain your customer’s business through the ups and downs of the market.

Knowing is half the battle … and we’ll use it to win the war!

Buy Now, Pay More Later (Without Good Supply Chain Finance)

Last month, SupplyManagement.com ran an article titled “Buy Now, Pay Later” that examined the repercussions for suppliers, and ultimately your business, if you fail to settle your invoices on time. According to Experian, the average business takes more than two months (61 days) to pay its bills and evidence gathered by the Federation of Small Businesses (FS shows it is increasingly common for large companies to bully suppliers into accepting extended payment terms of 60, 90, or 120 days from invoice receipt.

As will be further discussed in the forthcoming wiki-paper on Supply Chain Finance on the e-Sourcing Wiki [WayBackMachine], this is counter-productive to the cost savings initiatives such actions are often driven by. For starters, as estimated by the Forum of Private Business (FPD), 40% of business insolvencies in the UK are prompted by late or disputed payments. Furthermore, a European Commission (EC) review recently approximated that over 450,000 jobs are lost each year as a result of such delays.

Late payment can put extraordinary pressure on suppliers, especially small and medium sized suppliers, which often desperately need cash to purchase equipment, raw materials, and, most importantly, meet their payroll. Furthermore, in addition to cash flow problems caused by late payments, many firms incur significantly extra costs for the time and money spent chasing payments and securing interim financing, usually at exorbitantly high rates.

All these costs do nothing but drive up the supplier’s cost of operation, and effectively, the price they will need to charge in the future to maintain enough profitability to survive. So even though it looks like you’re getting a deal in the short term by extending payment terms, in the long term, you’re simply driving up your price – and risking a major supply disruption if your supplier goes out of business while waiting for you to pay.

So instead of extending Days Payable Outstanding, consider looking at other strategies that can lower your cost of operations – such as improving forecast accuracy, just in time production, and low cost financing options that are available to you, as a large company, and not your supplier. Better forecasts lead to less missed opportunities and a reduced need to clear inventory at significant markdowns, just in time production reduces inventory costs, which is much better than just shifting them to a third party, and financing your purchase at prime or less will cost everyone less in the long run that forcing a supplier to take out short term financing at 20% to 40% per annum.

Forecasting, Part II

Back in January, I wrote an introductory post on demand Forecasting that discussed a really good article called Outlook Warm and Sunny that ran in APICS Magazine.

In the post, I noted that the proper combination of judgmental and statistical and statistical methodologies can often be used to create better forecasts than either method alone, because humans can make mistakes and statistical methods are very slow to react to changing market conditions.

Well, a month or so ago, Purchasing ran an article titled “Commodities forecasting: It’s all in your head”, that addressed the subject of commodity price forecasts. The article indicated that of the three types of commodity price forecasts – those based on judgment, those based on historical price data, and those based on commodity futures prices – the judgmental forecasts have the best record of accuracy.

Although this worries me, since the risk of human error is just as real in commodities forecasting as it is in demand forecasting, and I would strongly recommend that you use a good statistical model that incorporated historical prices and futures pricing before making a judgment as to what the price will be in the future, the article does have some good advice.

First of all, it notes that if you are going to use personal judgment in commodity forecasting, you have to base it on the right factors. Specifically, you need to review the right data, and the most critical data is:

  • market intelligence
  • global economic trends
  • supplier safeguards against volatility
  • your own company’s strategies

Market intelligence is probably the most critical. Be sure to watch the international marketplace to determine supply, demand, pricing, and trading trends. Economic conditions that affect supply and prices are changeable, and usually global.

The article concludes with ten forecasting tips.

  1. determine corporate price goals and adjust them to economic realities
  2. reduce purchasing pricing strategies to monthly or quarterly intervals to represent the rapid dynamics of the marketplace
  3. adjust actual timing of buys to monthly or quarterly events
  4. analyze and adjust the structure of supply contract agreements
  5. pay close attention to inventory levels
  6. ensure true supply tie-in with operational action plans
  7. study global pricing and sourcing trends
  8. survey primary suppliers’ operating rates, inventory, and costs
  9. analyze the secondary sourcing market for alternate suppliers
  10. determine potential supply alternatives for commodity products

The Creative Challenge II (Marketing and Procurement)

Yesterday we discussed the key challenges that need to be overcome in order for marketing and procurement to effectively work together, as well as a classification of “Above The Line” (ATL) and “Below The Line” (BTL) marketing spend, as discussed in the recent efficio report “The Creative Challenge: Driving Efficiencies in Marketing Procurement”. This report, which has highlighted on Spend Matters soon after it was released, is a nice companion to the “Magic and Logic: Redefining Sustainable Business Practices for Agencies, Marketing, and Procurement” research report co-sponsored by CIPS (Chartered Institute of Purchasing and Supply), the IPA (Institute of Practitioners in Advertising), and the ISBA (Incorporated Society of British Advertisers) last summer, that I summarized in a 2-part blog post last fall (Part I and Part II).

Today we are going to discuss the 8-step Efficio approach to driving efficiencies in Marketing Procurement, but first we are going to review the addressability of each subcategory and some typical savings levers that a procurement professional can apply to gain savings in each of the categories and sub-categories of marketing spend, since these aspects of the report are quite useful.

The report classifies the addressability of each subcategory so that you can stagger your initiatives in waves, and start by addressing the categories where you are likely to obtain the quickest hits and bolster momentum for future efforts.

According to the report, the easiest subcategories to address are media space buying, free-standing inserts, media planning, and pre-press “above the line” and promotions, pre-press, printing services, and branded merchandise “below the line”. After this, it suggest tackling direct marketing – data management and campaign fulfillment, market research, public/consumer relations, sponsorships, and meetings, incentives, conferences, and events below the line, which are usually of moderate complexity. Finally, as you work your way from the subcategories that can be addressed using mostly tactical initiatives to those that require a lot of strategic planning and cooperation, you would end with the creative agency and broadcast commercial production spend “above the line” and the design agency spend “below the line”.

The typical savings levers that a procurement professional can apply to gain savings, which, depending on the lever can demonstrate savings anywhere from 3% to 50%, are:

  • Consolidation with one media buying agency & fee compensation schemes
  • Develop a cost model and consolidate buys with preferred media
  • Prioritize services, change the remuneration model, and align resources to secure the best talent
  • Change the fee calculation and include the cost model as a negotiation input
  • Pre-select strategic partners and consider production companies’ business models
  • Analyze vendor capabilities and streamline processes to better specify requirements
  • Change the fee model and build it into negotiations
  • Change from cost-per-project to core-team retention and link compensation to results
  • Consolidate from agency management to direct supplier management and improve demand management
  • Consolidate demand and channel to preferred vendors
  • Conduct a structured benchmark of proposed rates, and closely manage time utilization
  • Conduct competitive bidding to select preferred vendors
  • Prioritize and streamline event sponsorship, review contracts, and closely monitor contract compliance
  • Analyze pre-press vendor capabilities and streamline internal processes to better specific requirements
  • Standardize and rationalize print specifications and select vendors based on capability match
  • Standardize range of merchandize and consolidate spend
  • Review and prioritize budgets and implement processes to increase compliance

The 8-step Efficio approach to driving efficiencies in Marketing Procurement is summarized as follows:

  • Objectives
    Determine the project scope and objectives and agree on the team, roles, and responsibilities.
  • Category Profile
    Do a spend analysis on marketing spend, understand current contracts and drivers of variety and complexity, and future requirements.
  • Market Profile
    Understand key market dynamics by market sub-category, understand scope of service offering and positioning of current supply base, and screen the market for potential alternative agencies.
  • (Sub-)Category Strategy Development
    Assess key demand issues and trade-offs and develop a procurement strategy per marketing category.
  • RFP Process and Pitch
    Use a multi-step RFP process where you compile a list of agencies, conduct initial “chemistry meetings”, and invite short-listed vendors to RFQ response submission.
  • Contract Negotiations
    Analyze the RFQ responses, prepare and conduct negotiations with selected agencies/suppliers to submit a final bid, and finalize an agreement.
  • Savings Capture and Compliance
    Institute policy, process, tools, and organization changes to mitigate savings leakage, track savings, and develop a transition plan to change mentality and habits.
  • Supplier Relationship Management
    Hand-in-hand with savings capture and compliance, institute policies, processes, tools, and organizational changes to maintain productive relationships.

The report also contains a Case Study on a Digital Agency Strategy, a Case Study on Market Research, and a Case Study on Printed Marketing Materials that are worth your time as well.