spending anlaysis

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Session # 2006

Brian Corry, Senior Managing Consultant, IBM

Saul Goldberg, Managing Consultant, IBM

April 15, 2008

3:20 p.m. – 4:20 pm.

Building a Spend Analysis Program

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Session Agenda

• Defining the Program• Building the Spend Analysis Program • Lessons Learned Building a Spend Analysis

Program• Spend Analysis as a Procurement

Transformation Platform

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Defining the Program

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What is Spend Analysis?

• Spend analysis is an in-depth review of an organization’s expenditures focusing primarily on detailed expenditures by: – Individual items– Vendors– Contracting methods employed

• These three focal points are further detailed based on unique operational characteristics and needs of the organization.– When additional data sets are offered for review, the opportunity for

focused stratifications is increased. • Spend analysis results are used to enable strategic decision

making at all organizational levels.• Automated tools are often employed to enable spend analysis

efforts, but they are not required.

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Why Perform Spend Analysis?Required Due Diligence for Improvement Initiatives

• Most Supply Chain improvement initiatives require spend analysis at some level to define the scope of the opportunity as well as baseline the current state.

– Defines and baselines past expenditures – price, spend, TCO, frequency of procurements/contracting activity, supplier base

– Baselines operational performance metrics– Uncovers workload and workforce management issues– Identifies gaps in reaching socio-economic goals– Reveals stakeholder collaboration opportunities– Justifies resource devotion to supply chain improvement initiatives

Spend Analyses Facilitate The Accomplishment of Supply Chain Initiatives

StrategicSourcing

CommodityCouncils

InventoryManagement

CRMInitiatives

Make-vs-BuyDecisions

Prime VendorInitiatives

PBLInitiatives

SRMInitiatives

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Key Activities & Tasks

Collect DataNormalize

DataValidate with BU

AnalyzeData

Define Data Elements

IdentifyOpportunities

Collect data from systems

Collect hardcopy data (e.g., invoices, orders)

Talk to stakeholders

Talk to suppliers

Compile data into database tool

Cleanse data

Categorize purchased items

Identify gaps & inconsistencies

Produce high level spend baseline and priority listing

Check results with relevant stakeholders

Adjust data if necessary

Fill in gaps

Agree on priorities for further investigation

Analyze data across each dimension (e.g., product, supplier, location, negotiable vs. non-negotiable, etc.)

Based on spend analysis, validate findings against initial hypotheses

Refine opportunity assessment

Focus on specific opportunities and drill down

Determine what data needs to be collected

Identify data sources

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Typical Findings Revealed by the Initial Spend Analysis

Strategic decision making is currently flawed, possibly fatalOpportunity loss is high

• Organizations have little understanding of what is being bought across the entire enterprise

• Buying power is not fully exploited

• A small proportion of negotiable spend is covered by long-term agreements

• Spend data is not readily available and/or accurate to support supplier management

• Structured approaches to services and material classification and categorization are rarely employed

• Multiple specifications exist for the commodities with the same functions

• Prices vary among the same items• Forecasts and budgets can be

improved through utilization of spend analyses

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Long Term Spend Analysis Benefits• Identify key cost drivers and breakdowns of acquired items and services and key

suppliers to achieve lower cost/prices – Incremental value achieved is real and substantial, ranging from 3.6% to over 20% of

spend.• Achieve a better understanding of what is being bought across the entire enterprise

– Improved purchasing efficiency– Consolidate buying power and fully leverage it– Negotiate more advantageous prices and terms– Bundle high demand spend with low demand items under long-term agreements– Reduce maverick spending

• Supplier rationalization• Identify data collection methods and improve upon the process (e.g., consolidate

internal purchasing processes)• Develop standard internal taxonomies for categorizing commodities and services and

improve enterprise reporting• Improve forecasts, budgets, delivery schedules, and inventory management• Customizable executive dashboards

Improved strategic decision makingIdentify competitive opportunity improvements

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Spend Analysis Program

The combination of people, managerial directives, tools, and organizational will to enable repeatable efforts to identify opportunities to improve the competitive position and enable better decision making.

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Building the Program

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Gaining Buy-In

• CEO / Director / Secretary

• CFO• CPO• CIO• LOB/Program Office• Procurement

professionals• Suppliers• Clients

• General awareness

• Targeted calls• Stakeholder

interviews• Validation and

verification requests

• Savings opportunities in cost, sourcing pipeline, maverick spend reduction, and demand management opportunities

• Profit improvements, higher EPS, and extended budgets

• Procurement visibility leads to better negotiation positions and compliance

• Executive visibility• Integrated procurement approach

with business operations leads to improved SCM (e.g., supplier performance, reduced inventory)

• Improved customer relationships• Consolidation of spend data into a

single interface• Reporting and analytics

Identify Stakeholders Perform Outreach Articulate Value Propositions

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Overcoming Objectives

• Spend analysis has no ROI

• We have reporting tools

• Our policies already require competitive sourcing

• We did it once before, with little return

• Our data is too dirty

Source: Majority provided by Emptoris

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A Framework for Moving Forward1 Assess Existing Capabilities• Define the spend analysis program• Data sources, completeness, schemata• Spend analytic tools and processes• Staff resources / spend analysts• Understanding of industry and market

dynamics

2 Plot the Course • Identify required capabilities• Map the process and potential areas of value• Bridge the capability gaps • Adopt common taxonomies• Train personnel and/or acquire spend

analysis software/partner • Identify quick win opportunities

3 Establish Repeatable Processes• Establish benchmarks and continuously

reassess progress• Keep the data current• Increase the frequency • Enhance spend data with business

intelligence – factor in qualitative data

4 Expand the Program• Build on quick wins and proof of concept

results• Phase in operating units• Expand use of the data and analyses• Couple analysis results with other market

driving information

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Desired Capabilities for a Spend Analysis Solution

• Experience and expertise in analyzing spend in your industry• Ability to cleanse, normalize, and categorize spend data from a variety of

sources• Efficiency of the analysis engine and its ability to handle the amount of

data while quickly generating accurate results• Structure of analysis engine:

– Rules-based engines work best on direct and indirect materials– Neural network engines are best for services– Manual: High level of expertise in spend analytics and commodities

• In-house solution or outsourced service– Adequate security if the data is exported into a hosted solution

• Integration with sourcing tools• Portfolio of analytical reports and data views• Language and currency support for multi-national entities

Source: Majority provided by Forrester Research

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Technology Approaches• Performed internally or by external consultants• Labor-heavy utilizing generic software such as basic

spreadsheet applications to classify and analyze spend• Generally used as a proof of concept or due to lack of

budget

Manual

• Outsource the bulk of the effort• Software is not licensed or installed• Analytical technology usually hosted and accessed

through the web browser• Lower total cost

Managed Service

• Organizations run their own program with the use of licensed specialized software tools to automate the process

• Installed behind-the-firewall• Highest total cost

Software

• Simultaneous use of a combination of the other three approaches

• Additional resources needed to combine/coordinate data and resources

Phased

• Low cost• Inconsistent results• Limited enrichment• Lack of scale – not easy to repeat• Use of transactional system data

• Performed by experts, best practices applied – quicker ROI, faster results

• Minimum resources needed, allows org. to focus on core procurement

• Least flexible to customize, and incorporate into SCM toolkit

• Security issues exporting data

• Complete in-house control• Most able to incorporate into SCM

toolkit; customization possible• Significant recurring resources• Longest time to results

• Combination of advantages and disadvantages of other approaches

• Quick ROI• Costs may shift as the approach shifts

Source: Majority provided by Forrester Research

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Spend Analysts Bring Specialized Skills Separate From the Buying Function

• “The line between data analysis skills and advanced knowledge of technology to help analyze data has blurred.”

• “Buyers need to learn how to manipulate data out of large databases because most canned reports do not give you the information that is needed in the daily purchasing, or planning activities. The data is in the systems but you need to be able to access the data and use commonplace tools to get what you need out of the data.”

• “Buyers must be able to select the important data from the large amount we are exposed to daily, rather than expect someone to hand us a list of numbers to stick into a spreadsheet.”

• “And once the data analysis is complete, we must understand what the output means and how to employ it in a real world application. Thinking is still the most critical skill we bring to the party."

Source: Majority provided by Purchasing.com

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Spend Analyst Job Profile• Data collection

– Lead the spend data collection and analysis process; work to refine and verify spend categorization results; develop and implement categorization rules

– Set-up, manage, and document sourcing databases– Cleanse, validate, and analyze sourcing, spend, forecast, performance

metrics and other varied supply chain data • Analyses

– Conduct recurring and ad-hoc market analysis, benchmark analysis and spend analysis for select categories of spend

– Analyze spending patterns and other associated costs relative to the total cost of ownership related to the goods and services

– Analyze current spend and vendors used through source systems – Understand and develop volume and growth patterns and assumptions

necessary for sourcing any individual category– Identify opportunities for improvements

• Sourcing– Assist Commodity Manager to develop sourcing strategies, spend reduction

recommendations, and targets for associated savings

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Spend Analyst Skill Requirements• Professional

– Analysis experience in business environment and exposure to procurement strategies– Experience in conducting complex financial, spend, and market analysis– Knowledge of strategic sourcing methodologies– Supply chain management orientation– Business transformation focus

• Technical– Deep expertise in data management and warehousing (MS Access/Excel, COTS Reports)– Talent for building cross-functional relationships & developing cross-functional understanding– Strong analytical, business process analysis and problem solving capabilities– Experience in multiple business sectors/spend categories– Strong project management and quantitative skills– Business process analysis and design

• Behavioral– Exhibits high energy and the enthusiasm to establish a new approach to sourcing– Ability to work independently and in a matrixed environment – able to “juggle” priorities– Effective time management and organizational skills– Effective oral and written communication skills– Customer service ethic and orientation and ability to interact with others

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Spend Analysis Program MaturityMeasures Laggards Industry Average Best in Class

Buy In• Initial interest but lacks commitment • Commitment present with some

support• Executive level sponsorship

• Full stakeholder involvement

Analysis Tools

• No standardized analysis tools

• Analysis performed on ad-hoc basis

• Manual data collection

• Analysis performed on centrally stored information

• Tools are local and non-standardized (e.g. Excel, Access)

• Analysis performed using data warehousing solutions

• Standard analysis and reporting tools to support executive decisions

Procurement Tools

• No standard procurement tool

• Locally maintained by buyers

• Centralized procurement and spend analysis tools

• Integrated sourcing and procurement tools with spend analysis

• Robust capabilities to provide information

Data

• No centralized data storage

• Data stored on individual machines

• Fragmented procurement databases

• Excel, Access or other local database store data with manual and automated populations which are transmitted and centrally consolidated

• Databases standardized within org.

• Integrated procurement knowledge bases based on robust databases

• Consolidated sourcing and procurement data across business units

SA Processes

• High level

• Ad-hoc / sporadic or non-existent

• Not easily repeatable

• Partially or fully automated

• Infrequent (e.g., annually) but repeatable

• Fully automated

• Repeatable and continuous at a micro level

• Continuously improved

Next Steps

• Strive for greater program buy-in– Demonstrate results using

rudimentary approaches to justify further investments

• Increase automation and data centralization

• Increase automation of spend intelligence gathering and processes

• Further consolidation

• Standardize SA processes

• Establish SA routines

• Strive for more detailed visibility into spend, with end-to-end spend intelligence software

• Strive for full automation, especially auto-classification of data

• Ensure that data is correct and up to date in the master data system

Connect spend analysis with business processesSource: Majority provided by Aberdeen Group

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Spend Data Classification MaturityMeasures Laggards Industry Average Best in Class

Traits

• Annual aggregation of high value commodities and/or top suppliers

• Supplier-based classification

• High-level assessment

• Supplier-based spend categorization

• Focus on top-leverage commodity categories

• Consolidated view of spend

• Data classified at the item level

• Deep visibility into purchases

• Actionable analyses

Benefits

• Identifies most obvious opportunities for aggregation

• Deeper view of spending within high-level categories

• Used to drive commodity strategies

• Detailed view of spending by company, division, site, and buyer, item, vendor, and contracting method

• Enables optimal sourcing strategies based on timely and accurate intelligence

Challenges

• Fails to examine complete spending position

• Provides only high-level summary data

• Relies more on instinct and experience of purchasing team than real data

• Overlooks diversity of spend with a supplier

• Can give inaccurate view of spending position with a supplier

• Too high a level (commodity families) to develop and execute real strategies

• Requires access to 100% of spending data.

• Requires deep expertise of commodities and suppliers

• Requires sophisticated analytical tool support

Continuous drive towards deeper detailed data visibility

Source: Majority provided by Aberdeen Group

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Challenges to Building the Spend Analysis Program

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Organizational Barriers

• Organizational culture and people

• Technological investments

• Competing priorities

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Data IssuesChallenge Solutions

Poor data • Decentralized locations• Not geared towards spend analysis (financial data)

• Standardized taxonomies• Automated ETL• Data warehouse

Data is not meaningful• Little classification of all sources• Inconsistent formats, quality, and consistency (e.g., vendor

name spelling, free form text)• Incomplete data

• Data normalization during and after input• Automated classifications• Continuous improvement in classification and

normalization

Data format - hardcopy data is more difficult to analyze! • Adopt electronic procurement records using standardized solutions

• On-line capture of pertinent spend data

Cleaning the data – intense efforts due to inconsistent coding • Improve data entry• Automated classifications

Resource constraints • Realign staff• Acquire assistance

Reluctance to share information • Adopt electronic procurement records using standard solutions

• On-line capture of pertinent spend data

Identifying the real issues and opportunities - Sometimes identifying opportunities is beyond the data

• Experienced spend analysts

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Developing Repeatable Processes

• Frequency

• Automation

• Feeding the beast

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Spend Analysis Considerations in the Public Sector

• Socio-economic business goals• Transactional, not holistic, approach to

savings is the priority• Procurement operations are not spending their

own money• Past performance input• Security concerns

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Lessons Learned Implementing a Spend Analysis Program

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Lessons Learned Implementing a Spend Analysis Program• Secure executive sponsorship

– Find champions to support the program• Properly plan the program

– Allow sufficient time and resources– If you can’t start big, start small

• Build a cross-functional team– Involve internal customers, buyers, A/P professionals and, if needed, suppliers

• Demonstrate usefulness of the spend analysis– Achieve early wins– Apply 80/20 rule - focus on the high spend and strategic items first– Provide continuous value to stakeholders by looking for opportunities and new value

propositions to support stakeholder goals• Working with the data

– Validate the data by involving the customers and gaining their buy-in– Continuously expand data capture and accuracy and increase frequency of analysis– Match the tools to the data compilation and management effort– Employ standard service and material classification and categorization schemas where

possible

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Spend Analysis as a Transformation Platform

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Spend Analysis as a Transformation Platform

Spend Analysis

EducationalOpportunities

ContinuousProcurementImprovement

Address Data &

TechnologyGaps

StrategicSourcingInitiatives

BusinessOrganizationRealignment

SCMImprovements

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Wrap Up

• Questions

• Share your stories

spending anlaysis

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