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

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.

Let’s face it, you and your team have your collective hands full keeping the Procurement trains running each day. Adding a spend analysis initiative on top of everything else being juggled? Well, that may be one ball too many to keep in the air. It seems like an unnecessary added step you simply don’t have time for and, really, what’s the point?

Through years of working with clients to develop and execute strategic sourcing initiatives, I have found there are two camps I can sort organizations into. Which side a client lands on is indicative of how much work lies ahead in terms of helping them truly control spend. Organizations will either be pro spend analysis… or barely spend time on the subject, if any at all.

To be fair, many organizations run a tight ship in terms of managing spend – but there’s still room for improvement for a good number of others. There are some great reasons to make a proper spend analysis a priority. As such, I wanted to take a minute to extol the virtues of this process to show some of the benefits you may be missing out on. See below for my top three reasons a proper spend analysis should be the next initiative you spend some time on.

A Tale of Two VARs

(Value Added Resellers)

First, I’d like to set the stage a bit. Consider the relationship between an organization and its IT hardware/software value-added resellers. In this scenario, we have two such VARs; one servicing the organization’s New York branch, the other servicing Philadelphia.

These two VARs 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 office comes away satisfied after reviewing their VAR’s track record. But is that all there is to the story?

Generate More Savings

One of the most apparent (if not THE most apparent) reasons to analyze your spend is the impact such an analysis has on strategic sourcing initiatives. At the most basic level, an organization needs to know several key facts before developing a strategy around cost savings:

  • “How much money are we spending, and who is spending it?”
  • “Who is that money going to?”
  • “When are these transactions happening?”

These seem like simple enough questions, but getting the answers can be tricky. To kick off our VAR example, one great way to save money with such VARs is to leverage your spend volume to negotiate rebate structures and develop reduced unit pricing for all purchases. The more you spend, the bigger the rebate and the greater the incentive for VARs to offer unit price discounts – and these things can add up quickly. Consolidating spend to as few VARs as possible helps to maximize this strategy, and both our VARs service the same region. However, because New York and Philadelphia each use two separate VARs, neither will be able to negotiate as strong a rebate, and we likely won’t make much progress in commanding discounted rates. Each location may have a great relationship with its respective VAR – and Procurement wouldn’t know they were missing out on a savings opportunity until a spend analysis revealed this missing piece.

But this is just one way spend analytics will change your life.

Thanks, Brian.

Finally … A Good Use for Drones!

A recent article on Yahoo! Finance indicated that MIT researchers use drone fleets to track warehouse inventory specifically to help employees find particular items faster.

But the best use is regular inventory checks and fraud prevention. If the warehouse is lined with RFID readers and every inch is covered, then a system can be designed to flag when a palette is dropped at the wrong location, or when a signal expected to be there is not. But what a system can’t do is double check that a RFID chip is actually there. Once the palette has been read at the right location, and the inventory recorded, who’s to say the system will note when the inventory has been moved and used if a refresh is not performed on a regular basis or that
a hack has not been performed that can trick the system into believing the palette is still there when it has been moved.

In other words, the drone can make up for the inefficiencies in the non-mobile system. It can be programmed to traverse the entire warehouse every night and identify the errors in the system, which can immediately be investigated and corrected. While there is no sure way to prevent hacks that can lead to theft, any thefts would be identified much more quickly, which could increase the chance of recovery and, if the theft is for restricted / hazardous materials or technology, allow for responsible reporting that would keep the organization out of lawsuits and the CXOs out of handcuffs.

It’s a good use for drones. And one even the doctor can get behind.

Agile Procurement Can Work in the Private Sector … but the Public Sector?

A recent article over on the Public Spend Forum on Agile Procurement for the Public Sector – A Primer noted that Agile Procurement might just be what is needed to solve the complex challenge of public Procurement and solve the problem of the myriad of rules, processes, policies, and templates that became more and more complicated over time in the public sector.

According to the article, the answer is to adopt the best practice of agile development and move away from contract-oriented competitive Procurements to approaches that provide more flexibility for competitive dialog and negotiation (allowing requirements to be discussed, clarified, further defined, developed, and improved) using the iterative, collaboration, and change-oriented aspects of agile development.

This sounds great in theory, but we have to remember why we have a i>myriad of rules, processes, policies, and templates that became more and more complicated over time. As the author notes, Procurement mistakes would lead to trade complaints and lawsuits, and so more rules would be added, more contingencies, more processes layering on top of one another to reach where we are today.

Just imagine what would happen if all the rules were dropped in a flexible environment where the requirements of the contract could change each round. Since the changes would likely always favour one bidder over another, or at least be more aligned with the suggestion of one bidder over another, imagine the trade complaints and lawsuits that would arise. It would be chaotic! In order for an agile Procurement process to work, we’d need to revise not only our procurement principles across all levels of government, but also our legal system that made the requirements for filing trade complaints very restrictive.

In other words, agile Procurement for the public sector is a great theory, but the doctor doesn’t think it will be a reality for quite some time. However, there’s absolutely no reason to avoid it in the private sector. It’s a great way to get the best proposal(s) for the organization, and as long as your organization is open and transparent about the process it intends to use, quite resistant to legal challenges, as private organizations, unlike public organizations, can pretty much do what they want, especially if they are transparent about it and don’t break any laws. (And being collaborative vs. combative, in most jurisdictions, does not break any laws.)

So, if you’re private, be agile. If you’re public, be careful. You can be agile in your market research, but once you start the formal Procurement process, you better be traditional … at least for the time being.

Logistics is the new Black, but Procurement is the Rodney Dangerfield of the corporation!

the doctor recently stumbled on a piece published last year by Jeff Ashcroft over on LinkedIn where he said Logistics is the New Black where he noted that the word “logistics” has subtly worked its way further and further into the common lexicon thanks to massive marketing campaigns of courier, rail, and forwarding companies. This is making it the new black.

However, while it was never the Rodney Dangerfield of the Corporate World, as that distinction is reserved for Procurement, it was the black sheep. Needed, but kept at arms length … just in case.

However, now that savvy merchants are realizing that in their logistics function may lurk the well spring of the truly exceptional customer experience they seek, and must now deliver, logistics is taking center stage. This is good, and bad.

It’s great in that good logistics is a necessary condition for supply chain success, and if it’s not successful, the supply chain will never be, but it’s bad in that it’s only one half of the coin for supply chain success, the other being good Procurement. But, as SI has been saying for years, Procurement is the Rodney Dangerfield that don’t get no respect in the average organization (otherwise, why would almost half of Procurement organizations be without modern platforms).

When there is no easy correlation to the average consumer, when organizations like the Dairy Farmers of Canada say they are supply management, when HR organizations say they do Sourcing, and when even Apple, which has been repeatedly recognized to have the best supply chain in the world doesn’t talk about it (with the closest they come being Supplier Responsibility, probably as a result of breathing all that California smug), how is anyone to be expected to understand what a modern Purchasing, or Procurement, organization does? Especially when the term procure is often used in stories about rebels procuring supplies from the government (and this is the example of procure used on the urban dictionary, the military procuring what it needs from the private sector, or, even worse, often linked to prostitution. And purchasing, that’s what the office manager (in charge of office supplies) does.

In fact, all things considered, Procurement is probably lucky to even be the Rodney Dangerfield of the corporate world. While it might not get any respect, at least it gets recognition.

Maybe someday someone will find a way to bring sexy back to Procurement and then it will get some respect, and take the first step towards becoming the new black.

Fifty Years Ago Today …

Great Britain gets one heck of an endorsement when the territory of Gibraltar, a 6.7 km2 region on the southern end of the Iberian Peninsula which shares its (only) northern border with Spain votes 12,138 to 44 to remain British (and not revert to Spain).

Gibraltar, which has a constitution that allows it to govern its own affairs on a day to day basis (while ceding power such as defence and foreign relations to the British Government), is strategically important as it essentially controls the entrance and exit to the Mediterranean sea (which is only 13 km wide at this naval “choke point”), where half of the world’s seaborne trade passes.

Gibraltar serves as a reminder that it’s not always who you share a border with that matters, but who you share a cultural bond with. That’s why sometimes your best trading partner is half a world away and you need to effectively manage your global supply chain to make it happen.