Category Archives: Best Practices

Spend Analysis – How Do You Get It Right?

As an expert in optimization and analytics, I’m regularly asked, with respect to spend analysis, where do I start, which solution is best, how do I get fast savings, etc. All good questions, and as per the dozens of posts on this subject over the years, they all have multiple answers, highly conditional on the skill of the analyst, the solutions available, the data available for the solutions to act on, the categories that can be impacted in the short term (as some contracts are effectively unbreakable and some vendor contracts all but prevent cost recovery), etc.

More sophisticated analysts ask what built-in reports are necessary and the most useful, how much real-time slicing and dicing capability they really need, how much can be automated, etc. Also good questions, but questions which, depending on the particulars of the situation, also have multiple answers which are dependent on what the organization is buying, who the organization is buying from, where the products and services are coming from and going to, how much data is available with respect to the product and service cost components and composition, how powerful the data amalgamation and computation engines are, how variable their spend patterns are, etc.

Which leads many people to believe that it’s almost impossible to get it right, when the reality is that, with the right type of tool and the right mind set, it’s easy to find success, but very hard to predict where and when you will find success. It’s like being a skilled professional during a market boom where the demand for individuals with your skills outstrips supply. While you don’t know who will offer you a job, if you have good references, work hard, and apply yourself to finding a job, offers will come. Spend analysis often works the same way – if you have the right tools, work hard, and apply yourself to finding opportunities, they will present themselves. It’s just a matter of digging until they materialize.

As I’ve said time and time again, you’re not likely to find your best opportunities in the canned top-N reports which for many years were the staple of spend analysis solution vendors. Because, as I’ve pointed out for years, if you go to manufacturing and ask a handful of buyers who the top 10 suppliers are, you’re going to get a set of overlapping lists which will easily allow you to identify the top 7 or 8 suppliers. The same for categories and commodities. And the AP system tells you who the top departmental and individual spenders are. You may not know the exact spends or exact volumes, but you can quickly get a pretty good idea and focus your negotiation efforts on those categories while you work towards improving your data. The net result is that these reports will only identify a few opportunities that you missed, which you will quickly identify, attack, and capture within 6 to 18 months. That’s why the year-over-year return of most spend analysis efforts falls flat within two years. The biggest opportunities are not in what you know, they’re in what you don’t know. They’re somewhere in the next 20 or 30 suppliers or the next 20 or 30 commodities that can be consolidated into moderately high spend categories that when effectively rationalized and sourced can deliver 10%, 20%, and even 30% savings as well as process efficiencies that deliver further organizational savings still.

A consolidation that will only happen if you can define category groups and supplier families and analyze collective spend and compare it to market rates and identify patterns of overspending not detectable using only top n spend reports or traditional organizational categorizations and supplier codes (where the same supplier has four different entries in the vendor master because, as a non-top n supplier, no one bothered to make sure all spend associated with that supplier was with a single vendor entry in the ERP). And you can only do this if you can slice, dice, and rearrange the data on the fly in non-traditional ways only you, as a creative intelligent being, can do. A rule-based system can only check for previously identified transgressions. It can’t check for unknown transgressions or future transgressions by organizational buyers.

So if you want a short answer to the question of how do you get spend analysis right, you make sure you buy a tool that gives you a lot of different flexibility in the amalgamation, organization, and analysis of the data available to you. It should let you build, in technical terms, “multiple cubes”, allow you to create multiple roll-ups and reports on these cubes, using multiple analysis techniques. It should let you build a cube, appropriate roll-ups, and reports that answer any question you care to ask. If you see a spending pattern or trend that is not in line with what is expected, you need to be able to dive into the data and find out why. That’s how you save money. Flexibility, a toolkit of techniques, and the creativity to apply them in different ways until you stumble on the big savings or value generation opportunity that everyone else has missed.

Now That You’ve Taken Responsibility, Get Sustainable Results

In our recent (re)post last week, we told you that if you do not get sustainable results, blame yourself. By now, you’ve owned up to your shortcomings and are ready to do something about it. Today we are going to overview steps you can take to make sure you maximize the chance of a perfect order, which, by definition, is acquired at just the right cost (which means there are no savings to be had).

As per this post, for savings to materialize, the following necessary (but not sufficient) conditions have to be met:

  • the order has to be placed with the contracted supplier
  • with sufficient lead time
  • and then shipped by the supplier on-time
  • using the approved carrier and shipping arrangement
  • with the required third party and government fees promptly paid
  • and paperwork promptly filed
  • so there are no delays and the product arrives at the warehouse on time
  • where it is properly received, inventoried, and shelved
  • and then the invoice is verified against the good received and the PO
  • and paid at the right time when everything is okay.

This is a tall task, taller than accepting the tall tale of Jonah and the whale, but not an impossible one, and no miracles are required to make it so. Just the acquisition of the right technology, implemented in the right framework, supporting the right processes, and tailored to support your organizational talent. It will take some terrific transition management to get the right organizational alignment, but such alignment is possible (and we’ll be discussing this in more detail next quarter), and the leaders will get there over the next seven to ten years.

So where do you start? Acquire the core technologies you need to streamline your supply management practices.

  • an e-Procurement solution that only allows orders for products on contracts from approved suppliers
  • a demand planning solution (which may be part of a next-generation ERP solution) that integrates with your e-Procurement solution and notifies you when order deadlines are approaching and automatically submits auto-fill orders
  • a 3PL solution that tracks shipments in real-time
  • a Trade Management solution that automatically generates the required paperwork, computes the required fees, and manages, tracks, and confirms their submission
  • an Inventory and Warehouse Management System that integrates with the e-Procurement Solution that manages receipt, shelving, and distribution
  • an e-Procurement solution that also does invoice management and m-way matching
  • an e-Payment solution that integrates with the e-Procurement solution and includes Supply Chain Finance Capabilities (including dynamic discounting, supplier financing, and pre-shipment finance, for example) to help the company determine the best payment time

It’s just the beginnings, but it’s a good start.

Too Many Marketing Fingers in the Procurement Pie? And if You Need Help, Get It.

Let’s face it. If Marketing hasn’t let you put your fingers in the Marketing Procurement Pie, then you don’t have any experience executing and managing Marketing and Agency projects in your organization. Furthermore, given the more traditional role of Procurement and Supply Management, all of the training and expertise that has been imparted to you has probably focussed on direct and indirect materials management, and not ephemeral creative services.

If you want to be taken seriously, you have to not only be an expert in your function, but very knowledgeable in the Marketing function as well. You have to know their process, KPIs, and lingo and speak it like a pro. Otherwise, you look like a n00b in a l33tsp34k forum, and you won’t be taken seriously.

If you don’t make the cut, then you better bring in help, get up to snuff, and make sure you are putting your best foot forward before taking on your first Marketing Procurement project. As per our previous post in this series, you will be put on probation and likely only get one chance to succeed. Fail on even one task, and you’ll be blamed for everything and not allowed back in until there is a change in leadership. (It’s harsh, but you need to remember where the biggest concentration of egos typically are outside of the C-Suite.)

A third-party experienced in marketing procurement can not only help you understand the lingo, the relevant KPIs from a Marketing viewpoint, and the process customizations that are likely to get Marketing’s attention, but can also help you with:

  • Analysis & Benchmarking
    Chances are you are struggling getting enough clean and current data just to analyze and breakdown Marketing’s current spending — how are you going to benchmark the industry when Marketing never bothered to save bids and quotes from agencies that didn’t win the bid?
  • Subject Matter Expertise
    In addition to helping you with lingo, KPI definition, and process customization, they can also help you prepare the SoWs (Statements of Work), MSAs (Master Services Agreements), and Rate Card templates that make sense for your organization.
  • Time Bank
    Chances are that your team is already “time bankrupt” and barely has the time to do it’s job, yet alone learn another function. Bringing in the appropriate expertise not only minimizes the amount of time you need to identify the relevant subject matter, but to run the first project successfully as you will have an expert guiding you each step along the way. In addition, an outside third party can help you with the time-intensive data collection, cleansing, and benchmarking, freeing your team up to focus on what is important.

For more information on what a third party can bring to the table, check out Source One Management Services’ new white-paper on “Fueling Effective Collaboration: How Strategic Sourcing Delivers Results for Marketing Groups”. There aren’t many resources out there on Strategic Sourcing for Procurement (and SI knows this as it’s been talking about the importance thereof since it started back in 2006), so take advantage of what there is when something comes your way.

Too Many Marketing Fingers in the Procurement Pie? Then You Need To Run a Successful Event.

Once you get Marketing’s attention, you’ll probably be put on probation. Just because the CFO views you positively because you are helping the organization identify 5% to 20% savings annually in every category you touch, this doesn’t mean Marketing does — even if Marketing acknowledges that they need to get their spend under control and deliver more value. So you’ll be given permission to help with one or two “pilot” projects, and if you want to get on Marketing’s good side and take back the Procurement Pie, you will have to succeed and impress. This sounds easy enough, since you already have a standard five/six/seven step sourcing process which is generic enough to be applied everywhere, but, as always, the devil is in the details! Unlike most indirect purchases, it’s not as easy as searching a database or sending out a Request for Interest. Different agencies have different strengths, and different capabilities. Some can manage third party production houses, some can’t, for example. You need to have a firm understanding of what Marketing needs to help identify the right agencies. Second, evaluating an agency pitch is not like evaluating a physical product or manufacturing plant. What are you looking for, and what aren’t you looking for. Again, you need to have a firm understanding of what Marketing needs and a solid understanding of the lingo used by the Agencies as well as Marketing.

And you need to present Marketing with a clear picture of the process you are going to follow up-front and make sure that Marketing understands the process you are using and the critical importance of not circumventing the process, no matter how many times the incumbent Agency representative uses his direct-dial rolodex and asks someone in Marketing to let a requirement slide or just skip straight to the pitch. To get Marketing’s commitment, the process should look like it has been customized to them and use terminology they understand. If you need a good starting point, a recent paper by Source One Management Services, LLC. has a great process graphic you can use in their recent Marketing Insight Report on “Fueling Effective Collaboration: How Strategic Sourcing Delivers Results for Marketing Groups”.

Be sure to pay special attention to the following tasks:

  • Scope of Work (SoW) Definition
    This is what the agencies respond to and will determine not only whether or not the right agencies respond but how accurate their responses are.
  • Agency Identification
    You don’t want to send the SoW to an agency that you know is not appropriate or that would present a conflict of interest (especially if they are working with your direct competitor).
  • Market Assessment
    You have the RFI/RFP process down pat, but you are not necessarily experts in the Agency Marketplace or in what the standard rates are (or should be). This is where your benchmarking skills are really going to come into play.
  • Pitch Evaluation
    You have to make evaluations a qualitative and deliberative process on your terms, not a seat-of-the-pants decision in the Agency’s boardroom, which is what The Crazy Ones want you to do. You have to work with Marketing to build a quantitative scorecard that will be consistently applied to all pitches and select your finalist(s) based on the scorecard.
  • Negotiation, SoW, and Contract
    You know better than everyone that the way to avoid a contract dispute is to address and negotiate the issue up front because, as the saying goes, if you have to reach for the contract, then you’ve already lost the argument. This means leaving no “i” undotted, no “t” uncrossed, and no potential risk, no matter how small, unaddressed. This is your forte. You can make sure no stone remains uncovered, which greatly increases the chances of unblemished project success. (Which, to be honest, is often all Marketing really cares about.)You also know that you have to move Marketing away from just handing over the account and letting the agency run with the account to specifying detailed contracts, statement of work, budgets, and rate-cards as well as processes for selecting and managing third party vendors. You have to help Marketing make the agencies understand that while they can run free on creative within the boundaries specified by Marketing, print, production, etc. has to be managed according to guidelines and budgets.

While you won’t be thanked for your many successes, even though proper benchmarking and reporting will have you recognized by the CFO and CEO, you will get all the blame for any and all failures if you screw up just once.

Too Many Marketing Fingers in the Procurement Pie? First You Need To Get Their Attention.

Does this sound familiar? The CFO has mandated a 10% across the board spend reduction, and it’s Supply Management’s time to shine. You want to help, but, as expected, Legal and Marketing are refusing your help because, when it comes to litigation, you need the rain maker and when it comes to creative, you can’t put a process behind it and get results. As a result, Legal and Marketing costs are still spiralling out of control while you watch millions being wasted on e-Discovery, cookie cutter legal services, print, basic media production services, and unmanaged third party spend. Getting this spend under control could save Legal and Marketing so much that they could afford to pay even more for the rain-makers and creative geniuses they so covet, but still deliver savings and ROI to the business. But how do you get your point across?

The process is two-fold. First, find out who in the C-Suite wants you to get your message across and help the Marketing organization save money and have them strong-arm the Marketing leaders into a meeting with you in a wireless-signal free zone where these Marketing leaders will be forced to give you their undivided attention. Second, have a firm grasp of what you can bring to the table to help Marketing enhance their organizational performance and make sure you can convey it to Marketing in a crisp, clean, clear, and concise presentation.

Specifically, make it clear that you don’t just bring cost-cutting to the table — you also bring value generation support services which include, but are not limited to:

  • Decision Support
    Your expertise in supplier identification, profiling, and evaluation can help Marketing evaluate current relationships and identify new agencies that might more closely align with Marketing needs.
  • Benchmarking
    Your expertise in spend analysis and visibility can help Marketing get a grip on what it is spending compared to what it should be spending (according to existing contracts and rate cards) as well as a breakdown on how much is being spent on each category (print, media production, creative, etc.) and what opportunities there are for consolidation and spend reduction by leveraging volume and disassociating physical product-based spend from creative spend. (Since Marketing generates value based upon the power of the campaign they deliver, it makes sense to pay Phillippe or Eduardo the $500 an hour he wants for his creative genius if it generates a campaign that gets you noticed more than the competition. After all, he’s just one guy and even if he works 3 months on the campaign, that’s only $240K on what could be a 10M campaign. However, it doesn’t make sense to pay $50 an hour to a guy running the printer at Kinkos, especially since you probably are producing so much paper over the year that you are paying the equivalent of 5 guys at Kinkos to sit there full time and run printers, who should be paid $15 an hour. Net result, you’re overspending $350,000 for copy services — way more than the $140,000 you might save by hiring a second-rate creative genius who might end up generating a second rate campaign that actually hurts your brand and costs Sales $1,000,000 by cutting the wrong corner.)
  • Contracting
    You deal with negotiations and contracts day-in and day-out. As a result, you have the methodology to keep the process moving nailed down, the knowledge to know what needs to be addressed, the ability to work with Legal to create a standard Master Services Agreement template to streamline every negotiation, and the skills to put together an all inclusive Statement of Work that protects both parties and includes rate cards that are fair and beneficial to both parties.
  • Strategic Focus
    Marketing’s strength is in campaign management and strategic brand and product positioning, not in the tactical Procurement process, contract negotiation pitfalls, or the back-end project management, that is often left up to the agency. Your presence lets Marketing focus on it’s strength and not waste time on areas that don’t increase its value to the organization.

Of course, this is just the first step.