Category Archives: Spend Analysis

BravoSolution: Making Spend Analysis More Useful to the Average Supply Management Professional, Part II

In yesterday’s post we discussed how, for one reason or another, spend analysis is not used enough in the average organization. But, as I said before, this doesn’t have to be the case. Spend Analysis can continue to deliver value year over year if it is properly integrated into daily supply chain activities. And the key to making this happen in your average Supply Management organization is integrating spend analysis not only into the (e)Sourcing process but the e(S)ourcing suite.

In BravoSolution’s Collaborative Sourcing Suite, Spend Analysis is integrated into the Contract Management, Compliance (& Spend) Management, and Performance Management solutions and will be integrated into Risk Management in the next version of the solution that is currently under development. In todays post, we will discuss the benefits of integrated spend analysis and what is available in BravoSolution’s suite.

By integrating Spend Analysis into the Contract Management solution, BravoSolution assists an organization in achieving a global view of sourcing and spend. From day one, an organization can not only track the contract details, but can track forecast data (total spend, cost reduction, demand management, etc.) and spend on an on-going basis by business unit and time-period (by setting up the periods for which spend is to be tracked). Then, on a regular basis, current and forecast saving reports can be (re)run with the click of a mouse button. For selected contracts, the actual savings report will summarize forecasted spend, actual spend, spend variance, expected savings (to date), actual savings, and variance, and the forecast savings report will summarize cost reduction, demand management, process savings, cost avoidance, cost increases, and total savings.

By integrating Spend Analysis into the Compliance Management solution, and matching all the way down to the unit level to find variance from contracts, Spend Analysis can help the Supply Management organization quickly pinpoint negotiated savings leakage and stem the losses. More importantly, the reports can be configured to report leakages and variances by supplier and contract (against the contract value and invoiced cost). If the variance calculations factor in discounts, rebates, and pricing tiers, then actual losses can be quickly computed. Then the recovery process can begin. BravoSolution’s suite, which includes integrated messaging for supplier performance tracking and hooks into performance management, includes the ability to track amounts paid and overpaid by supplier and contract to assist in recovery.

By integrating Spend Analysis into Performance Management, not only can spend be tracked by supplier, but spend can be broken down into high, average, and low performing suppliers. These reports can be high-level, based upon overall performance scores, or by individual KPIs from supplier scorecards. In addition, trends can be analyzed and the organization can determine whether spend to high performing suppliers is increasing, holding steady, or decreasing and whether or not action has to be taken. These trends can be plotted or (spider) graphed automatically, and benchmarks can be built and tracked over time.

And by integrating Spend Analysis into Risk Management, Risk Management can be taken to the next level. But that’s the subject of a future post.

So how successful can you be if you integrate Spend Analysis into Contract Management, Compliance Management, and Performance Management? Theoretically, the sky’s the limit (as spend analysis is now doing more than just measuring spend). Practically, the results are looking very promising. While BravoSolution only finished the initial integration of their core suite components with Spend Analysis last year, BravoSolution’s first four case studies are looking quite promising.

After an initial 3 month roll-out to a handful of advertising and marketing groups in a large media organization, the organization decided to roll out the contract and compliance management solutions to all 30 of its global groups. A second organization was able to get 50% of its spend in a compliance program in less than six months. A third organization was able to develop a performance management solution that it could roll out to thousands of franchisees to determine the appropriateness and effectiveness of its global contracts. And while the final savings numbers won’t be known for a while, the savings are tracking in the range enabled by High Definition Sourcing, 10% to 30%.

BravoSolution: Making Spend Analysis More Useful to the Average Supply Management Professional, Part I

For reasons I don’t quite understand, spend analysis is not used enough in the average organization. More often than not, even basic spend reporting — that would tell an organization what is being spent, on what, with whom, and when — is not run. Even though most organizations can probably name seven of their top ten suppliers, categories, and organizational units by spend if you just ask them, chances are that not only will they be surprised by the other three, but they won’t quite comprehend the magnitude of the spend. And until an organization understands the magnitude of their lack of comprehension, getting spend analysis adoption in the organization is likely to be a problem.

However, that is only the first obstacle. Once a solution is adopted, chances are it will only be used by a small number of senior analysts. Just like decision optimization, there seems to be a common misconception that it is “hard”, requires “math skills”, or “takes too much time” — as a result, many users are intimidated or can’t find the time to try it. The “hard” and “math skills” misconceptions can usually be overcome with a demo or two on a properly implemented, easy to use, tool, but unless it’s easy to import data and generate reports, the “takes too much time” stigma may stay.

But if you get past the stigmas, if all it does is generate a few canned reports, you hit the real problem. It’s usefulness quickly comes to an end. Once you’ve attacked the Top N suppliers, Top N categories, and Top N spenders in the organization and reigned in costs and performance, unless there is a way to identify the next N opportunities, the usefulness of the tool has come to an end. That’s why the traditional spend analysis value curve flattens out within a year and spend analysis never reaches wide adoption.

But this doesn’t have to be the case. Not only can spend analysis reach wide adoption throughout the supply chain organization, but it can continue to deliver value year over year if it is properly integrated into daily supply chain activities. And the key to making this happen in your average Supply Management organization is integrating spend analysis not only into the (e)Sourcing process but the e(S)ourcing suite. From eBidding through Decision Optimization and Contract Management through Supplier Performance Management, Spend Analysis can play a vital role.

In BravoSolution’s Collaborative Sourcing Suite, Spend Analysis is integrated into the Contract Management solution, Compliance (& Spend) Management, and Performance Management and will be integrated into Risk Management in the next version of the solution that is currently under development. In tomorrow’s post, we will discuss the benefits of integrated spend analysis and what is available in BravoSolution’s suite.

A Great Case Study on Spend Analytics in Healthcare

Health Leaders Media recently ran a great study on Spend Analytics that is a must read for any (health care) organization that doubts the savings opportunities that a good spend analysis tool can discover. In “elevating the spend analysis” function, the author clarifies that when it comes to effective capital management at your hospital, a spend analysis is the under-utilized tool that can transform your bottom line and bolster the strategic vision of the hospital.

The case study, about the Mount Sinai Medical Center in Miami Beach, FL, demonstrated how the project management office was able to employ spend analytics to quickly transform a an operating loss of 15.7 Million (in 2008) into a net surplus of 14.5 M (in 2009). What was a negative operating margin of 3.2% quickly became a positive operating margin of 2.95% for a total improvement of 6.15% in operating margin, which is very significant in a trouble economy. Plus, continued use led to even better results in 2010,when the hospital posted a 9.3% operating EBITDA margin.

For more details, see the case study on elevating the spend analysis function, but the message is clear. Spend analysis saves.

Don’t Forget The Most Important Principle of Performance Measurement

SIG just ran a great article on the “Three Guiding Principles of Performance Measurement” that hit upon a key point that is regularly and repeatedly overlooked. Simply put,

Your data is good enough. Really, it is.

As the author says, your data will always be murky. No matter how many times you clean it, massage it, enrich it, transform it, and polish it up, there will always be errors. There will always be omissions. There will always be inaccuracies.

But that’s okay. Remember the 80/20 rule, which is just as appropriate here as it is everywhere else. (In fact, more appropriate.) The law of the vital few states that roughly 80% of the effects come from 20% of the causes. This says that only 20% of your data is vital anyway. And since it is expected that at least 80% of that data will be clean, it’s going to be quite straight forward to spot important trends. (That go just beyond who your top suppliers are, but which items are ordered the most. What types of purchases are regularly bought off contract. What products are really selling best. Etc.)

And if the decision being made is critical or risky, the data will always come up short. There will always be some flaw, some missing piece of information. Because if there wasn’t, the proverbial pointy-haired boss could be an effective manager. Executive decisions will always require a bit of a risk, but they will be much better when there are data to base them on then when there aren’t. So measure, manage better, and manage some more.

Next Generation Sourcing

As stated in yesterday’s post, for Sourcing to continue to have an impact in a modern Supply Management organization, it needs to be taken to the next level. And I’m not just echoing the statements of The Altimeter Group, AMR, CAPS, Greybeard Advisors, The Mpower Group, Purchasing Practice, or my own persistent ramblings over the years (as I have been pushing for Total Value Management and Next Generation Sourcing strategies since day one). A modern supply management organization truly needs to take their sourcing practices to the next level if they are going to continue to distill value from Sourcing.

When you consider that:

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), or additional demand (that increases the economy of scale).
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no more on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no more off-contract leakage to be stopped.
  • And once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker.

As a result, in order for a mature Supply Management organization to continue to extract considerable value from (e-)Sourcing, e-Sourcing needs to be taken to the next level. Whether you call it DDSN2 (Demand-Driven Supply Networks), Next Practices, or Total Value Management, the message is the same. Take your Sourcing to the next level, or risk decreasing returns.

So where does one start? Upgrade or bring in a modern e-Sourcing platform. For some organizations, who are already using a top-tier provider and who have purchased a suite license, this will just mean learning how to take full advantage of the end-to-end integrated functionality and improving processes. For others, using point solutions from top-tier providers, this will mean buying licenses to the whole suite and/or integrating the point solutions with other solutions they already have. For the market majority, this will likely mean either replacing existing first generation systems (from providers who haven’t made any updates to the base functionality in the last five years) or, in laggard cases, skipping first generation e-Sourcing systems entirely and starting off with modern systems that have better, integrated, functionality.

And then, once these systems are in place, processes are updated to capture more data and consider more information in sourcing decisions, in a process that one vendor on the leading edge likes to call High Definition Sourcing.

Since this process is the closest to what Sourcing Innovation believes is necessary for organizations that want to take their sourcing to the next level (and, in the words of CAPS, become value-focussed), this will be the subject of the next series of posts (starting next week). Stay tuned!