spend data - ipshk hk a pre-requisite to spend analysis for... · • spend data classification...

Spend DataClassification

-- A Pre-requisite to Spend Analysis for Strategic Sourcing

By: Babhui Lee3rd Nov 2007

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CONTENT

Introduction – The Need for Spend Data Classification

The Hurdles of Spend Data Classification

Alternative Solutions of Spend Data Classification

Standardization of Spend Data Classification

Implementation of Spend Data Classification

Conclusions & Recommendations

Question & Answer

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Executive Summary

• Spend data classification results in better spend management, and is a pre-requisite for supply management and business success.

• Sufficient, accurate, and timely insight into corporate spending information is vital to the success in cost reduction.

• Leading spend data management initiatives rely on access to all spend data sources; a common classification schema; category expertise; efficient and repeatable data cleansing and classification capabilities; advanced reporting and decision support tools; and sufficient resources and executive support.

Key Takeaways

The Need For

Spend Data

Classification

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• How much do we spend?

Can You Answer These Questions?

…inadequate spending analysis capabilities arecosting businesses $260 billion in missedsavings opportunities annually.

Aberdeen Group, “The Spending Analysis Benchmark Report: Dissecting a Corporate Epidemic”,January 2003

• On which products?• From which suppliers?

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Create governance framework

Align with mission and objectives

Assess risk

Support customer needs

Leverage opportunities

Identify metrics

Determine quality of competition

Implement process, policy & cultural transformation

Develop communication plan & training requirements

Measure & report performance

Leverage supplier relationships

Refine demand planning

Communicate results

Adjust & Re-initiate

Capture, validate corporate-wide spend & suppliers

Segment data

Understand data (who, what, when, where, how, why)

Analyze market

Identify opportunities

Spend Analysis is the first Step to Successful Strategic Sourcing

Spend Analysis & Strategic Sourcing

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Spend Analysis – 10 Best Practices

Classify spending at a detailed levelClassify spending at a detailed level

Enhance core spend data with vital business

intelligence

Enhance core spend data with vital business

intelligence

Increase frequency and coverage of spending

analysis

Increase frequency and coverage of spending

analysis

Utilize advanced reporting and decision support toolsUtilize advanced reporting and decision support tools

Continuously expand uses and scope of a spend data

management program

Continuously expand uses and scope of a spend data

management program

Access all spend data sources from within and without the

enterprise

Access all spend data sources from within and without the

enterprise

Adopt a common classification schema enterprise-wide

Adopt a common classification schema enterprise-wide

Establish efficient and repeatable data cleansing and

classification capabilities through the use of software or

services

Establish efficient and repeatable data cleansing and

classification capabilities through the use of software or

services

Audit existing spend capabilitiesAudit existing spend capabilities

Augment category expertise to ensure data and classification

accuracy and validation

Augment category expertise to ensure data and classification

accuracy and validation

Best Practices in Spend Analysis, Aberdeen Group, Sep 2004

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Impacts of Inaccurate Spend Data Classification

Inaccurate Spend Data

Classification

Poor Spend

Management

Sourcing and Supplier

Management

• Lost Leverage on volume buy

• Missed savings from fragmented buy strategy

• Supplier Proliferation

Compliance

• Reduced use of preferred suppliers with contractual terms

• Difficult to enforce supplier compliance to pricing, rebates and volume discount

• Reduced accuracy of financial reporting

Inventory Management

• Excess stock • Redundant Orders • Inventory Depreciation • Increased interest payment• Reduced Cash Flow

Product Management

• Part Proliferation • Limited Part Re-use • Design, Sourcing and

Manufacturing disconnected

91 Average incremental gains achieved by 750+ survey respondents

22%43 days55 daysSourcing cycle time

33%59%44%Contract compliance rates

75%11.7%6.7%Ave. Savings from strategic sourcing

34%62%42%Spend under management

IncrementalGain1

AfterBeforePerformance Area

Source: Aberdeen Group, Aug 2007

Benefits of Better Spend Management

The Hurdles Of

Spend Data

Classification

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Restricted ROI from Spend Management initiatives

IMPL

ICA

TIO

NS

Implement Category Management

Increase compliance

Enterprise spend visibility and control

Increase eProcurementadoption

Manage Change

Set up best practices

CPO CIOPurchasing IT

Deliver ROI from existing systems

Improve Master/Spend Data quality across Multiple systems

Ensure adoption and user satisfactionBU

SIN

ESS

MA

ND

ATE

SH

URD

LES

Spend Data Quality

Corporate Spend Data Management Initiatives

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Framework for Spend Data Management

DataWarehouse

PLM

ERP

We are facing big hurdles in these areas

Additional Manpower is needed to Validate and Cleanse. Whose Responsibility?

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Why Poor Quality Data?

Disparate Data sources

ManualClassification

processes

Limited Data enrichment

capabilities

•Data quality varies within each system

•Data in multiple languages

•Manual code assignment in the source systems lead to inconsistencies and inaccuracies

• Faulty mapping processes

• Reliance on supplier data enrichment

Restricted spend visibility due to inaccurate, inconsistent and non-granular classification

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COMMON ROW LCD DRIVER, PQFP80.Display, LCD26000

DOT MATRIX LCD CONTROLLER/DRIVDisplay, LCD26000

LCD CONTROLLER/DRIVER, BGA225.Display, LCD26000

LCD PANEL 31.5,AU SKD, V2,VV3ADisplay, LCD26000

LCD PANEL 31.5,AU SKD,VV3ADisplay, LCD26000

Item DescriptionCommodity Code DescriptionCommodity Code

“million $$$ IC Driver spend classified under LCD Display”

Inaccurate Classification: Business Implications

Erroneous view of SpendReduces the negotiable spend with IC Suppliers

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Spend Visibility - Where Are We Now?

We Are Here…

Alternative Solutions

For Spend Data

Classification

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Better Data: Different Approaches

Spend DataClassification

Consulting Services

HostedSolutions

In-house Semi Manual

SoftwareTool

SupplierContentServices

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How Automation Is the Best Choice?

LOW HIGH

HIGH

Leveraging existing Infrastructure

On-DemandVisibility

Consulting Services

HostedSolutions

In-house Semi Manual

SoftwareTool


19LOW HIGH

HIGH

Repeatability

DetailedVisibility

ConsultingServicesHosted

Solutions

In-houseSemi Manual

SoftwareTool



20LOW HIGH

HIGH

Time to Value

TotalCost Of

Ownership(TCO)

ConsultingServices

HostedSolutions

In-houseSemi Manual

SoftwareTool



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Automated Spend Data Classification

ScalableTaxonomy independentLanguage & Domain independentIndependent of description quality

Seamless integration capabilities

Powerful scheduler featuresExposed Java API’sIntegrates with eProcurementtools and DW

User friendlyRapid implementationEase of use“Self Learning” mechanism keeps operational costs very low

Automated ClassificationAccelerated bulk Classification rate150-300k/hrReal Time classification<2 secondsRepeatable & on-demand classification

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Spend Analysis Automation Advantage

46%63%69%Contract compliance rates

10%12%13%Ave. Savings from strategic sourcing

51%66%78%Spend under management

ManualPartial Automation

Full Automation

Performance Area

Source: Aberdeen Group, Aug 2007

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Automated Classification Is Inevitable

For accurate and detailed visibility over a period of time.

For “On-Demand” Spend Analysis leveraging existing IT infrastructure.

For faster time-to-value

For implementation of Supply Management best practices.

Standardization of

Spend Data

Classification

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• United Nations Standard Products and Services Code”

• An open standard

• A taxonomy of products and services

• A practical business tool

What is UNSPSC?

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UNSPSC StructureEach Level contains a 2-character numerical value and a textual description as follows:

SegmentThe logical aggregation of families for analytical purpose

FamilyA commonly recognized group of inter-related commodity categories

ClassA group of commodities having a common group of function

CommodityA group of substitutable products and services

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Data Synchronizationacross company divisions,

suppliers, & global locations

Process FlowIntegration

from RFXs, to ordering,to accounts payable,

to general ledger

Part DataSynchronization

from design to manufactureto procurement& other systems

Benefits of UNSPSC

StandardCoding System

for Products& Services

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• Automate the gathering and analyzing of spend data• Provide a uniform, enterprise-wide view of spend• “Roll up” analysis identifies contractible groups, opportunities

for strategic vendor relationships• Centralize procurement function, leverage volume for better pricing

• Collaborate with Customers or Suppliers through use of a common classification system

• Control maverick spend: reduce off-contract spend at higherprices

• Reduce inventory through product standardization

Values For Enterprise

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• Facilitate sales function, particularly through Internetexchanges

• Qualify as preferred supplier to customers with e-procurement initiatives

• Speed up new product introductions using Web services,XML, etc.

• Facilitate globalization of your business• Collect consistent sales data across channels, regions• Collaborate with customers to improve contractcompliance, increasing the supplier’s market share – awin-win situation

Values For Suppliers

Implementation of

Spend Data

Classification

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7-Step Spend Analysis Implementation Methodology

1. Identify Your Business Needs

2. Determine the Corresponding Visibility Needs

3. Determine the Appropriate Solution Elements

4. Determine the Appropriate Delivery Method

5. Gain Internal Support (ROI Case)

6. Evaluate Alternative Solutions

7. Select and Implement a Solution

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Step 1 – Identify Business Needs

• Show accurate spend by supplier across different naming conventions (Supplier Rationalization)

• Roll up spend by ultimate supplier parent

• Tracking of procurement process bottlenecks

• Provide consolidated view of new company (M&A) spend by supplier and commodity

• Quantifying of savings potential • Identification and eradication of

Maverick spend• Financial Reporting – Accurately

shows where funds are going and for what

• Identification of sources of potential savings

• Reduction of supply base • Enforcement of supplier compliance

to pricing, rebates and volume discount

• Reduction of Excess and Obsolete Inventory

• Promote part re-use instead of creating new part

Future Business NeedsImmediate Business Needs

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Step 2 – Determine Corresponding Visibility Needs

1. Supplier Master Cleansing • Normalization of Supplier

Name2. Enriched Supplier Visibility

• Financial Information, Credit Ratings

1. Item Data Validation • Completeness and accurate data

2. Item Data Cleansing • Eliminate errors and discrepancies

3. Item Classification• Auto and Manual methodology

Future Spend Management Needs Immediate Spend Management Needs

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ETL stands for extract, transform, and load. ETL is a software that enables businesses to consolidate their disparate data while moving it from place to place, and it doesn't really matter that that data is in different forms or formats. The data can come from any source. ETL is powerful enough to handle such data disparities.

Garbage In• Inconsistent• Inaccurate• Non-granular

dataERP

PLM ETL

Analytics

DWHistoric

Spend Data

ACTUAL SCENARIO

Garbage out• Faulty Reports• Low reliability• Lower ROI

Spend Reports

DW = Data Warehouse

The true picture: Data is the culprit

Step 2 – Determine Corresponding Visibility Needs

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ETL

Analytics

DWHistoric

Spend Data

IMPLEMENTING BEST PRACTICES

Quality In•Consistent•Accurate•Granular

data

Quality Out•Accurate Reports•Increased

reliability•Higher ROI

Garbage In•Inconsistent•Inaccurate•Non-granular

dataSPEND

REPORTSPLM

ERP

• Normalization• Classification • Supplier Enrichment

Complete Solution Architecture

Step 3 – Determine Appropriate Solution Elements

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• Close IT-Procurement relationship

• Want to “own” data• Want to customize solution to

existing process

• Slowest approach • Requires significant up-front

organizational commitment • Requires permanently

dedicated resources

• Max insight into own spending • Min reliance on 3rd party • Data security • Max ability to customize• Max integration with other spend

management application

Self -Service

• Poor IT-Procurement collaboration

• Desire to focus on core competency

• Want to implement an effective process, not customized to fit existing process

• Continual subscription fee• Limited customization • Limited integration with

other applications• Data security issue

• Quick ROI• Minimal Internal Resources

needed • Minimal Internal commitment• Best practice imbedded in vendor

process

Managed Service

• Limited spend to be analyzed• Restricted budget • Short-term outlook

• Inconsistent Classification• Limited Enrichment• Not repeatable• Does not scale

• Lower initial cost • Limited Budget Approval

Manual

Company Characteristics Appropriate for

DisadvantagesAdvantagesApproach

Our Approach: We would like to take the hybrid approach. First, manual approach with self-service approach phasing in at the later stage.

Reason: Need Quick Result, Plan in integrating with future application (SAP), want to “own” data with minimal disclosure to external parties especially our supply base.

Concern: This approach requires permanently dedicated resources though resource could be reduced with self-service phasing in.

Step 4 – Determine Appropriate Solution Delivery Method

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Step 5 – Gain Internal Support (ROI - Cost)

Total

Total Cost of Ownership (USD, K)

Consultation Fee Hardware Investment Additional Hires

Data Enrichment Services

Software TrainingSoftware Integration

Software Implementation

Software LicensesYr 4 +Yr 3Yr 2Yr 1

Cost Element

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0.5%

1%

1%

1%

3%

Percent Savings

Improved Parts de-duplication & Inventory Level

Improved Supplier Consolidation and Performance

Improved Purchase Efficiency

Improve Contract Compliance

Increased Sourcing Savings thru’ effective negotiation

Benefit TypeSavings (USD, K)

602602512482Total

4242363460%

112112959080%

12612610710090%

112112969080%

210210178.516850%

Yr 4+Yr 3Yr 2Yr 1Affected Spend

100%85%80%% of Company Adopting Solution

Year 3+ Year 2Year 1

Basis of Calculation : Company Yearly Spend = $14 Billion

Sample Calculation: Savings = Company Spend x Percent Savings x Affected Spend x Adoption rate

Step 5 – Gain Internal Support (ROI - Benefits)

Benefit/Cost Ratio = (Total Benefits)/ (Total Cost of Ownership)N/B: Since benefits increase over time while cost decreases, the returns are greater in future years

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Step 6 – Evaluate Alternative Solutions

Short-list Vendors for Spend Data Management Software Evaluation

WIPSubmitted for Evaluation

Scheduled in Nov

WIPDONE 10. ZycusWIPWIPWIPWIPWIP9. Analytics WIPWIPWIPWIPWIP8. D & B


WIPWIPDONE7. Austin TetraWIPWIPWIPWIPWIP6. Vertical Net WIPWIPWIPWIPWIP5. Ketera


WIPWIP DONE4. i2WIPWIPWIPWIPWIP3. Frictionless


WIPWIPDONE2. EmptorisWIPWIPWIPWIPDONE 1. Ariba

Request for Quotation

Request for sample Evaluation

Request for Demo

Request for Survey

Request for Information

Vendor

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Survey Questions Development

Data Enrichment - Service Levels (Only applicable if service delivery)

a) Service Level Terms (Only apply for service delivery):1. What % of spend do you guarantee classified?2. What % accuracy is associated with the above term?3. Do you guarantee a minimum % of spend classified per source system?

If so, what %?4. Are errors identified corrected retroactively or only to future data?5. Please describe any other service level terms you offer.

b) Briefly describe your data enrichment service process, including all phases.

c) Describe the integration of all elements in your data enrichment service process.

d) Provide a project timeline, indicating all key milestones and dependencies (both external and internal). What risk factors may affect scope?

e) Describe the process for error-correction (e.g. correcting classifications).

Step 6 – Evaluate Alternative Solutions

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Data Enrichment - Data Normalization / Classification

a) Does your solution offer automated data classification?

b) Which of the following types of data does your automated solution consider for classification purposes?

1. Supplier Information:2. Customer-specific codes (i.e. General Ledger, Material Codes, etc.):3. Item Descriptions:4. Other (Please Specify):

c) If your solution uses multiple types of data in making classifications, are the different types of data used in parallel (all available information considered before providing a final classification) or in series (classifications based on one type of data with other types only considered when no match found)?

d) What commodity taxonomies can your solution map data to? Can custom customer structures be used?

Step 6 – Evaluate Alternative SolutionsSurvey Questions Development

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Data Enrichment - Data Normalization / Classification (Continued)

e) How does your solution ensure consistency of classification of similar items acrossdata systems and over time?

f) Can you effectively classify direct materials spend? If so, how?

g) Do you utilize a supplier database for classification purposes? If so:1) How many unique suppliers are in it?2) What is the geographic distribution of suppliers?3) Is the database integrated into your product?4) If a customer's supplier is not in your database, is it researched and added for

future classification use?

h) How are item descriptions used in classification?

i) Describe the feedback process for customer-requested changes to classifications.

j) Describe how quality assurance (QA) testing on classifications is conducted with your solution.


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Data Enrichment - Supplier Enrichment

a) Does your solution offer supplier enrichment capabilities?

b) How many suppliers do you maintain in your database?

c) What is the geographic distribution of the suppliers in your database?

d) What sources feed your supplier database?

e) Indicate if the following types of enrichment are provided for suppliers:1. Parent / Child relationships:2. Credit ratings:3. Revenues:4. Other types of enrichment (Please list):


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PreKick-off

Requirement Scooping

User Acceptance Test

KickOff

• Hardware Sizing

• Estimate no. of Users

• Hardware Budget

• Application Environment: DEV, TEST, PROD

• Level of integration

• Project Goal • Implementation

Plan • Roles and

Responsibilities

• Data to be collected

• Data customization

• Application configuration

• User reporting requirement

Software Roll out

• Training • Test taking

by power users and core team members

• Desktop Application Installation

• Users roles and permission

• Go Live!!!!

Step 7 – Select & Implement Solution

Action Plan

Conclusion &

Recommendations

46

Conclusions

　Spend data classification is key to successful spend management to realize cost reductions.

　Spend data quality or integrity is a key challenge in most enterprises. Data validation & cleansing can be time-consuming.

　Effective & efficient data classification (through automated artificial intelligence) can result in detailed and repeated enterprise spend visibility.

　Standardization of spend data classification such as UNSPSC can reap significant benefits to enterprise.

　Data enrichment capability is a critical criterion in evaluating any spend analysis solution

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Recommendations

　Standardize and automate processes by adopting a standard classification schema & auto-classification.

　Gain executive support and build the business case.

　Use spend analysis to improve contract compliance.

　Leverage spend analysis & improved visibility to develop strategic sourcing plan.

　Enhance category and sourcing expertise to take action on the spend data.

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