Spend Analysis – The Stepping Stone to Effective Strategic Sourcing

By Kunal Kant (Senior Category Manager), Bhawna Bhatia (Associate Consultant), Infosys BPO Ltd.

The need for continued organizational success in a fiercely competitive global environment will more often than not lead you to optimize spend and operating costs, to comply with regulations and implement spend management best practices. Spend Management is the safest strategic lever to identify and rationalize revenue leakage without exposing the core business operation to any risk.

Spend management spans across the entire “Source to Pay” cycle involving spend analysis, sourcing, compliance and contract management, procurement, receiving payments settlements and management of AP and GL.

Spend analysis forms the foundation of spend management. The analysis itself can be a painstaking and tedious task, but it is critical nonetheless. A robust spend analysis will provide greater visibility into where the spend of an organization goes, including where it goes, who it goes to, and for what purpose, enabling better category strategy leading to lower PO transactions. This transcends into a lower number of invoices and therefore ‘Lower Total Cost of Ownership’. In effect ‘Less Garbage in will lead to less garbage out.

An effective spend analysis solution should go beyond the traditional spend profiling and look at new frontiers in end to end sourcing methodology. The focus should not only be on examining cost and spend but also on examining the vulnerabilities and risks as areas to be managed and reduced. This analysis across multiple dimensions can provide valuable insights that can be used as inputs for developing potential sourcing strategies, therefore bringing in huge savings. The solution should be delivered through a hybrid approach combining the best of automation and process consulting powered by technology to ensure effective analysis and high quality of output. In depth analysis of invoices, spend data and purchasing patterns supported by sourcing insights, enables strategy development & identification of opportunities that will help in maximization of spend savings.

In this paper we showcase how spend analysis can help in identifying spend savings opportunites and help in developing the right sourcing strategy to drive savings through a case study. The company in question has an employee base of over 100,000 employees and revenues of over $4.5 Billion. Every year the company (including its subsidiary) spends more than $ 0.52 bn in buying various indirect items ranging from Building Construction & Maintenance, IT hardware/software, telecom, various kinds of services, general consumables, MRO items, land, rent, stationery, furniture & office equipment for its various offices all across the globe. The entire source to pay activities take place through SAP. The company has a dedicated quality team which focuses on continuous improvement & cost reduction initiatives. Despite the fact that the company has a well established purchasing department, the methods used are conventional in nature and are based on a past tried and tested methodology leading to a great deal of untapped potential savings across the categories.

An 8 week spend analysis and opportunity assessment exercise was undertaken for the client through which we were able to identify various gaps in the existing sourcing process, which if plugged could lead to significant savings for the company. The process commenced with spend data capture from various source systems, followed by data cleansing, normalization and transformation. The cleansed and transformed data was fed into a high end OLAP tool for cube creation and analyzed to generate multi dimensional reports e.g. supplier, commodity, business unit, etc.. After the visibility reports were completed, the category experts as well as the spend analysis team studied various aspects including the supplier and commodity and category visibility reports in order to identify the savings opportunities and therefore prioritize those categories that need to be addressed based on their criticality (Quality, Urgency to the client, Impact on overall business, etc.) and ease of implementation. The next step was to develop a sourcing wave plan to depict which item / category can be addressed during which time-frame.

For each item a proper sourcing strategy was developed and implemented, which ranged from adopting specification routes instead of making routes and introducing global suppliers to item specific strategy e.g. using backhaul in logistics & Vendor Managed Inventory (VMI) in case of power transmission cables. To date, the team has sourced categories such as MRO (electrical cables, energy meters, LED downlighters, Light Fittings), IT (desktops), Office Supplies (Eco Friendly papers, Toilet Paper Products, Office Modular Chair) etc. as per the wave plan and the sourcing strategies which were identifed during the spend analysis phase. The team has been able to deliver average savings in the range of approximately 21%.

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