But what do you need to enact the strategic procurement initiatives that drive costs down and savings up? Two words – spend visibility.
Get Spend Visibility
The key to gaining spend visibility is centralising procurement data in one place – from your ERP and other financial systems – so you have a single source of truth when it comes to how funds are being used across the organisation. Read more on how to get 100% spend visibility.
Armed with your procurement data and visibility into company buying habits, you can see the ways to reduce costs by better managing spending and suppliers. We recommend the following approach to slicing and dicing that data.
Look at Spend & Supplier Data in These 5 Ways
1. Controlled Versus Uncontrolled Spending
Uncontrolled spending – or maverick spending – as we call it typically makes up a large portion of the opportunity for spend optimisation. Seeing total running spend broken down by controlled versus uncontrolled spending helps you understand the landscape of organisational spending over time. This data enables you to devise strategies to change spending behavior, drive more compliance and set targets for getting more spend under management. Ideally, you want to also drill into the details to see who is approving the maverick spend so you can address the issue directly, because let’s face it – sending a mass email to encourage compliance just doesn’t work.
2. Percentage of Spend by Supplier
Strategic procurement requires procurement professionals to know what percentage of organisational spending is occurring across portions of the supplier base. We typically recommend the 80/20 rule – meaning you should be striving to funnel 80% of your spending through 20% of your key suppliers. By understanding which suppliers you’re doing the most business with, you can quickly see who your key suppliers are. That enables you to zero-in on the greatest opportunities for cost savings through better contract negotiations and supplier rationalisation.
3. Spending by Department
Sure, you know your category spend – but do you know how various departments are spending money? Once you see how spending breaks down by department, you can drill into the details to see if departments are buying the same items from different suppliers or buying the same items from the same suppliers at different price points. This means you can identify opportunities to save money through bulk ordering, supplier consolidation and negotiating more favorable contracts.
4. On-Contract Versus Off-Contract Spend
Understanding how much spending is happening in compliance with the contracts negotiated by Procurement is key to success. By diving into the details of contract compliance, you can better understand why off-contract purchases are happening in the first place: Are people spending with non-preferred suppliers? Are the items people need not available on-contract? Are people ordering from non-preferred suppliers because there are speed or quality issues with a preferred supplier that need to be addressed?
5. Supplier Invoice Details
Spend and supplier data is not only helpful for procurement teams – AP can also benefit by looking at how suppliers may be contributing to inefficiency in the payment process. Understanding the causes of manual work in AP – such as paper invoices, invoices that don’t automatically match to contracts or POs, exception handling, lacking data, etc. – allows AP and procurement teams to collaborate better and work with suppliers to eliminate issues. And, improving the AP process ultimately results in better spend control.
Use Data to Drive Strategy
It’s not just about what you know anymore – it’s about what you can see. By looking at your procurement data in these ways, you’re empowered to drive the procurement strategy that produces savings and impacts the bottom line.