Category Archives: Spend Analysis

Are You Ready to Get Analytical But Don’t Know How? Read On!

Now that you’ve read our last three posts and understand that you need to get more analytical if you want to get cognitive, hopefully you’re ready to dive deeper but just don’t know how to do that.

The four part answer is almost as easy as it was for optimization, just a bit more nuanced. What’s the nuance? Figuring out if your provider offers a modern spend analytics platform or is still a generation (or two) behind (when you are still behind yourself) is the nuance. So how do you determine if a vendor at least passes the sniff test? We’ll get to that, but first, let’s talk about where you start.

At a high-level, the four-part answer is almost the same as optimization. Just the vendor names change.

1) If you are using a sourcing or analytics platform from a modern provider with modern (next generation) analytics capability, use it (and acquire the module if necessary).

Who are the vendors? While we can’t say this list is thoroughly exhaustive, if you look at Spend Matters Deep Solution map, you see that the following providers make the map: AnyData, (SAP) Ariba, (Opera) BIQ, GEP, iValua, Jaggaer, Sievo, Simfoni, SpendHQ, Synertrade, and Zycus. Not all are equal, and this list is likely not exhaustive, but depending on your organizational needs, a sub-set of these providers is likely your starting point. (What Sub-Set? Depending on whether you are data, function, process, technology, configurability, or services oriented, the sub-set will vary. And practitioners who want to know which vendors match which subset can contact Spend Matters.) And if you are a do-it-yourself type, you could probably start with a platform like Spendata.

2) If you are not using a modern analytics platform or a modern sourcing platform with analytics, get a modern analytics platform or a modern sourcing platform with analytics, your choice.

Again, you can start with the dozen of providers above, which you can quickly narrow down depending on whether you prefer best of breed or sourcing suite and whether you favour technical orientations or service orientations. If the list is still too large, find the subset that bests fits your organizational size, industry, category focus, geography, and culture and focus in on those.

3) If you are using another sourcing or analytics (reporting) platform that is not meeting your needs, and can replace it, do so.

As with the optimization providers, a few of these providers have a considerable portion of their customer base that consist of customers that switched from another provider with a solution that didn’t meet their needs and, thus, have a lot of experience with change management, fear squashing, migrating your data over, and getting you up and running on the right processes quickly. Simply craft the right RFI and you will quickly zero in to the handful of providers that will likely be the best fit for your situation.

4) If you are using another sourcing platform or reporting platform that is otherwise meeting your needs, or can’t be replaced at the present time, or both, augment it with a pure-play deep-dive best of breed modern analytics solution.

So if you are in the situation that you just bought a best of breed Source-to-Contract or Source-to-Pay solution and can’t replace it, or you have a first generation BI tool that produces reports the executives love but doesn’t meet your needs, augment it with a point-based best of breed solution. From the above list,
AnyData, (Opera) BIQ, Sievo, Simfoni, SpendHQ, and Spendata fit that bill.

But what about the “sniff test”?

How do you differentiate a last generation solution from a current generation solution? Three tests. Have them, in front of you, in a live demo:

  • Build a Cube with Derived Dimensions and a new Report on the Cube on the Spot
    if they can’t do so (in 15 minutes), they are a last generation platform that can only work on pre-defined and pre-built OLAP cubes
  • Run a categorization exercise on at least 3 months of your transaction history / invoice data and at least 100,000 transactions
    if they can’t either use their AI, or powerful (collaborative) filtering and priority based rule definition, and get to the 95% mark in an hour, it’s not for you … (and, trust me, you don’t need AI to get to the 95% mark if the rule definition capability is appropriately defined)
  • Map the cube to a new taxonomy, create new derived dimensions, and create a set of filters that will allow comparison reports to be run between the cubes
    let’s face it, there is no one size fits all taxonomy for analysis, and this is the kicker test to see if the platform can support any taxonomy that is needed, run any analysis you want, and allow you to run comparison reports both as checksums and as differentials to figure out where the opportunities are hidden

All this should take less than a morning or afternoon. But it means the provider deserves to be on your short list.

You Want to Get Cognitive? Then Get Analytical!

As per our post yesterday, the new “cognitive” buzzword is getting a lot of people interested in modern Sourcing and Procurement technology, and that’s a good thing, except when it isn’t. (How can it now be? Not all providers truly offer cognitive capabilities, not all are equal among those that do, and not all are right for your organization.)

And unless you truly understand what cognitive sourcing can do, when it should be used, what technologies you need to power it, and how to properly apply it, the answer is no cognitive sourcing is right for you.

In yesterday’s post, we noted that there were five (deep) technology requirements that a cognitive sourcing platform had to meet to have any hope of truly being cognitive and zeroed in the optimization requirement to indicate that before you even think about getting cognitive you better acquire, and master, strategic sourcing decision optimization because you can’t really properly apply what you don’t really understand, and the vast majority of organizations don’t really have a clue what this is because they don’t have it.

But optimization is not the only area that the average Procurement organization doesn’t have a good grip on. Spend Analytics is another area. Most organizations that have “spend analytics” solutions really have first generation “spend reporting” solutions that are nothing more than a set of canned reports and a few mildly alterable report templates that are customized to certain categories or segments of the supply bases. That’s not analytics.

Regular readers of Sourcing Innovation know that true analytics is the ability to create your own cubes, derive your own dimensions, define your own (pivotable, filterable) reports, and drill across data elements until you find opportunities that cannot be exposed by a canned report. (See the Spend Analysis archives for over a decade of great insights.)

Next generation cognitive systems find opportunities by doing more than just running a set of canned reports on a monthly basis and looking at trends. They are regularly running running variations of dozens, if not hundreds, of analytics on purchase data against deep should cost models populated by ever changing commodity and market costs feeds and looking for variations and emerging trends that could signify potential opportunities as they emerge.

But to understand what’s an emerging opportunity vs. a blip and what is small enough to allow automated platforms to procure and big enough to justify a deep strategic sourcing event or second look at the market, you need to understand just what analytics can do and how to best apply the insight gained from, and the capabilities provided by, a modern cognitive platform — and that requires hands-on experience.

So get a modern spend analytics solution and get your hands dirty in the data. Then maybe, someday soon, you can think about getting cognitive.

Scared of AI? Try Auto-Classify!

Last week we noted that if you were scared of AI (and rightfully so, as it tends to over-promise and under-deliver), you should start with Auto-Buy — specifically, auto-buy for certain tail-spend products and services where the platform can at least get you market average pricing on a product or service you’re likely overpaying by 15% or more on. The platform might not be able to match the best expert, but it can far surpass an average buyer, and paying market average is better than overpaying by 15%.

In this post we said that your spend generally breaks down into strategically sourced, bought from the GPO, catalog buy, and the rest falls into the tail. And the way to save significant money quickly and easy is to get the tail out of control … a large tail spend can be costing you 6% against the bottom line. That’s huge. And there’s only one way to get this under control. Auto-buy. And there’s only one way to do better — get the spend out of the tail into the other categories.

This is easier said then done. Tail spend might only be 20% of the spend by dollar, but it’s 80% to 95%+ of spend by volume — trying to classify each and every purchase to a strategically source, GPO, or catalog category it could fall into is a monumental task, and that’s why the tail spend stays high,

But it’s not a monumental task for AI. Remember, we can’t do millions of calculations a second – computers can. And when enough of these calculations are done, and correlated, computers can make assignments that, on average, greatly exceed the accuracy of an average buyer in significantly less time. Plus, the rare-misclassification will be found quickly by a human buyer and re-assigned to the right category — either the product has an equivalent in the GPO, or it doesn’t. Either it has an equivalent in the catalog, or it doesn’t. Or it fits the way the strategic buyers buy, or not. But in the first two cases in particular, the computer will be not only be able to identify the best matches with high accuracy, but even provide its reasoning.

So use the AI for what it’s good at — bulk computation and analysis. And be confident that while it will greatly reduce your tactical workload and make you more efficient, it won’t replace you — in fact, it will make you irreplaceable as you will be freed up to spend more time on the strategic, value generating work.

Category Management Savings Drying Up? Time to Cross-Optimize!

Leaders know that the best way to savings success, especially when the CFO and CEO demand savings today (even though this could sacrifice value tomorrow), is category management — a razor sharp focus on buying like products from like suppliers that allows for apples-to-apples comparison across products on key dimensions of price, quality, warranty, lead-time, etc. so that the best buy that meets the mandatory savings target can be made every time (and as much value preserved in the category as possible).

But Leaders also know, just like the third auction in a row increases costs, good category management sees savings fall rapidly as the fat is quickly squeezed out of the margin and the waste quickly squeezed out of the production, delivery, and inventory process as everything is optimized. This means that as soon as raw material costs go up, category costs go up, and not down.

This can be problematic when (unrealistic) expectations are placed on the Procurement department year after year and savings need to be found even when, apparently, none exist. But here’s the thing, while they don’t exist in the raw materials, or even the overhead, of production, they do exist in the distribution and inventory and still exist in the volume. But only in volume beyond what’s in the category.

This means that the only way to extract them is to increase the volume, which means that you need to simultaneously cross-source and cross-optimize across categories that can be shipped together from the same supply base. For example, while it might be logical to separate brass, bronze, and copper parts from a category management perspective, considering that some suppliers will likely supply parts across these categories (considering brass and bronze are alloys that contain copper), from a sourcing perspective it makes sense to source all three categories simultaneously. This way you can optimize logistics and negotiate additional volume discounts based on spend levels.

This also works in CPG — a supplier may supply computer devices, audio devices, and home security devices — and while you may want to manage these separately, you want to source them simultaneously. And it will work across seemingly unrelated categories if you are buying from suppliers that are essentially distributors (like office supplies vendors, MRO vendors, etc.). All you need to do is find a set of categories where the majority of products come from the same supply base. How do you do this? Simple: use a modern spend analysis tool.

And how do you source multiple categories simultaneously and cross-optimize logistics, inventory, and discounts for the lowest overall total cost of ownership (while maintaining value)? Strategic sourcing decision optimization — the technology SI has been telling you to acquire for a decade. Which vendor? Whichever one suits your needs best. Coupa, Jaggaer ASO, Jaggaer Bravo, and Keelvar are all great. Determine is re-building the Iasta capability on the b-pack platform, and when complete, will join the A-list again … and BidMode is about to hit the scene. Just get one, so you’re not left behind.

Why Bother Classifying Spend? 3 Ways Spend Analysis Will Improve Your Life … Part II

Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.

Yesterday we began our tale of two VARs that have a lot in common. Both serve the same North East region, both offer stellar customer service, and so far the relationship has been good on all sides. Each of your offices comes away satisfied after reviewing their VAR’s track record. But, as we started to discuss yesterday, that’s not all there is to the story. Today we discuss the next two ways spend analytics can change your life … for the better.

Improve Efficiencies

Beyond hard dollar savings, companies stand to save money by building a leaner, more efficient Procurement department. From the benefit described above, we can already see how our total vendor pool will be reduced through consolidation, and fewer vendors to manage means less time devoted to the procurement process. However, we will also learn more about our vendor landscape through the analysis.

Continuing the example above, let’s consider those two VARs a bit more closely. All else equal, we may find out that New York’s VAR offers a vendor-managed inventory program, centralized billing, and an online customer ordering portal. Each of these value-adds will help Procurement be more efficient, even if no hard dollar savings are generated. By properly researching the landscape, we can determine what value-adds are truly important and focus on building up these efficiencies.

Clamp Down on Maverick Spend

So far, we’ve consolidated spend to a single VAR (generating hard dollar savings via negotiated rebates and unit pricing using our newly consolidated spend as leverage) and improved our procurement process (generating soft dollar savings by understanding and implementing best practices).

We haven’t, however, talked about specific items being purchased. As the saying goes, “the devil is in the details,” and the very best supplier relationships can fall prey to maverick spend if employees are left to their own devices.

Consider all of the non-strategic, commodity spend that will pass through our VARs; items like cabling, computer peripherals, office equipment and a whole host of other small purchases are often included in contract pricing lists. But what about an employee who goes off the reservation, and orders off-contract? Your negotiated rates become meaningless. Would the purchase of an off-contract mouse by a single employee that is $5 more expensive break the bank? Likely not – however, this problem can get out of hand quickly if large groups of employees routinely ignore the on-contract equivalents. Analyzing spend and comparing it to negotiated on-contract items allows us to identify the problem and either reign in employee behavior, renegotiate the contract price list, or a combination of both to solve it before it gets out of hand.

Which Camp are you in?

If there’s one thing our tale of two VARs has taught us, it is that “you don’t know what you don’t know.” Neither VAR may look like a poor partner at the outset. However, when you look at the entire picture, room for improvement becomes more obvious (especially if we’re willing to change it up). We simply can’t see that entire picture without performing a spend analysis in the first place.

By performing our spend analysis, we put ourselves in the position of moving between the three-foot and 30,000-foot view quickly, enabling us to look at our spend and supplier relationships from all sides. Only then can we effectively manage our spend.

Thanks, Brian.