A spend analysis/spend review helps companies to understand what they have bought, through which channels, how their suppliers are performing and to what degree the procurement organisation has reduce costs. But how do you ask and address the most appropriate questions in the shortest possible timescales for quick returns?
There are a growing number of analytic applications, strategists and consultants able to demonstrate why tools must be necessary, and how to fit them with the organisations broader business intelligence strategy: helping to cleanse and classify procurement transaction detail, deliver business rules to identify duplicate suppliers and correlate financially related suppliers, and assign attributes to each transaction such as class code, and so forth.
However, before embarking on an extensive data cleansing and enrichment exercise or acquisition of procurement analytics applications to deal with the relevant issues, first consider restricting the approach to a spend review (e.g. a high level examination of invoice transactions). This is a rapid exercise that can flag-up areas for immediate improvement and deliver cost savings and efficiencies.
Example: Spend Review for a Public Sector Organisation
Recently, PROACTIS was commissioned by a public sector organisation to undertake this style of spend review and analysis exercise. In just a few weeks, in excess of £566,000 savings per annum were identified (in isolation to process efficiencies) and a set of action-orientated recommendations put in place.
The analysis was restricted to:
Profile of Invoices by Supplier:
The organisations expenditure exceeded £60million, represented by 54,000 invoices from 3,800 supplier accounts. High level analysis indicated that the top 20 suppliers in terms of spend, accounted for almost half of all expenditure, yet accounted for only 8.2% of invoices.
The profile of invoices by expenditure value increased significantly for invoices in excess of £1k. In fact, invoices with a value between £1k-£250k accounted for 81% of all expenditure. In contrast, invoices by volume indicated that 79% of all invoices were for less than £500. This demonstrates a significant opportunity for cost savings.
Low Value, High Volume Invoices:
Invoices less than £99 account for 2% of total invoice value however result in 48% of all invoice volume. This indicates the public sector organisation is often spending more on processing invoices than the actual value of the invoice itself.
Further analysis highlights that the top 10 suppliers account for 33% of invoices less than £100 with 3 suppliers accounting for 16% between them. By targeting, as a priority, these suppliers for electronic invoicing cost savings of up to £96k for low value invoices alone could be achieved.
Additional cost savings could be realised by adopting mechanisms for electronic communication, such as Supplier Punch Out, Purchase Order Flip, Document Scanning and eInvoicing.
If complete electronic mechanisms (ordering, catalogues and invoicing) were combined this would generate costs savings of up to £210k for these suppliers.
Overall, if the 20 suppliers utilised electronic end to end means for Purchasing, there is a cost saving of up to £566k.
Purchasing Policy Adherence:
The organisation acknowledged difficulties in purchasing policy adherence amongst their employees and the impact it may have on their potential buying power.
Transaction data confirmed a relaxed buying culture with 17%, nearly £10million, of expenditure being identified as outside of contract agreements. Potential savings could be created by transferring spend to current contracts and further price reductions and discounts negotiated.
Whilst there were many more cost and process efficiency savings identified this example demonstrates how a spend review can identify the most important issues procurement teams should address, without needing to undertake an overly obsessed data management project.
The next step for the organisation is to implement the recommendations and ensure a regular set of procurement analytics to provide effective oversight of spend.
There are a growing number of analytic applications, strategists and consultants able to demonstrate why tools must be necessary, and how to fit them with the organisations broader business intelligence strategy: helping to cleanse and classify procurement transaction detail, deliver business rules to identify duplicate suppliers and correlate financially related suppliers, and assign attributes to each transaction such as class code, and so forth.
However, before embarking on an extensive data cleansing and enrichment exercise or acquisition of procurement analytics applications to deal with the relevant issues, first consider restricting the approach to a spend review (e.g. a high level examination of invoice transactions). This is a rapid exercise that can flag-up areas for immediate improvement and deliver cost savings and efficiencies.
Example: Spend Review for a Public Sector Organisation
Recently, PROACTIS was commissioned by a public sector organisation to undertake this style of spend review and analysis exercise. In just a few weeks, in excess of £566,000 savings per annum were identified (in isolation to process efficiencies) and a set of action-orientated recommendations put in place.
The analysis was restricted to:
- A high level detail of what goods and services are bought, by whom, from where
- Suppliers providing similar goods or services and potential for consolidation/ rationalisation
- The volume of invoices per supplier, highlighting areas for reduction
- Off-contract spend volumes and purchasing policy adherence
- Identification of critical goods and services
- Electronic trading capabilities of suppliers and lead times
Profile of Invoices by Supplier:
The organisations expenditure exceeded £60million, represented by 54,000 invoices from 3,800 supplier accounts. High level analysis indicated that the top 20 suppliers in terms of spend, accounted for almost half of all expenditure, yet accounted for only 8.2% of invoices.
The profile of invoices by expenditure value increased significantly for invoices in excess of £1k. In fact, invoices with a value between £1k-£250k accounted for 81% of all expenditure. In contrast, invoices by volume indicated that 79% of all invoices were for less than £500. This demonstrates a significant opportunity for cost savings.
Low Value, High Volume Invoices:
Invoices less than £99 account for 2% of total invoice value however result in 48% of all invoice volume. This indicates the public sector organisation is often spending more on processing invoices than the actual value of the invoice itself.
Further analysis highlights that the top 10 suppliers account for 33% of invoices less than £100 with 3 suppliers accounting for 16% between them. By targeting, as a priority, these suppliers for electronic invoicing cost savings of up to £96k for low value invoices alone could be achieved.
Additional cost savings could be realised by adopting mechanisms for electronic communication, such as Supplier Punch Out, Purchase Order Flip, Document Scanning and eInvoicing.
If complete electronic mechanisms (ordering, catalogues and invoicing) were combined this would generate costs savings of up to £210k for these suppliers.
Overall, if the 20 suppliers utilised electronic end to end means for Purchasing, there is a cost saving of up to £566k.
Purchasing Policy Adherence:
The organisation acknowledged difficulties in purchasing policy adherence amongst their employees and the impact it may have on their potential buying power.
Transaction data confirmed a relaxed buying culture with 17%, nearly £10million, of expenditure being identified as outside of contract agreements. Potential savings could be created by transferring spend to current contracts and further price reductions and discounts negotiated.
Whilst there were many more cost and process efficiency savings identified this example demonstrates how a spend review can identify the most important issues procurement teams should address, without needing to undertake an overly obsessed data management project.
The next step for the organisation is to implement the recommendations and ensure a regular set of procurement analytics to provide effective oversight of spend.
