Spend Analysis - Process, Methodology

Strategic Sourcing Webinar Series Spend Analysis – There’s always money to save!

Mar 14, 2015

Copyright © 2015 BCube Global Solutions All Rights Reserved

Agenda for Today

introductionThe presenter, Spend Analysis1

Types of spend, data & categoriesData sources, categories & sub-

categories2Spend analysis – the processSteps involved in performing a comprehensive

analysis3Common types of analysis

Possible templates – limitless opportunities4

Tools and technologyIntroduction, tools, challenges5

Summary, Question & Answer sessionType in your questions or raise your hand.6

Introduction

Ram Raghuraman is a skilled Supply Chain professional with an MBA degree from the reputed Purdue University, USA. He has worked at Terex Corporation (Forbes 500), a $ 10 Billion global manufacturer of earth moving equipment, Frost & Sullivan, USA and has extensive global experience executing projects successfully.

Achievements

Managed over $ 100M of Global Spend across multiple categories spread across Europe and North AmericaDeployed Global 3PL network involving 50 + plants/suppliers in Asia, NA & EuropeImplemented lean manufacturing system at a plant that saved $48 millionTrained peers on ERP implementation, lean manufacturingConducted seminars on Negotiation and Leadership within Terex CorpCPSM Certified (held by less than 1% Supply Chain professionals)

Learning

Leadership

Director, ISM India – Chennai Chapter. The Institute of Supply Management is the premier institution in the world for Sourcing and Procurement Professionals.

Spend Analysis – The Basics


DIRECT SPEND (MATERIAL)

Spend on Goods and Materials that directly influence the product/service that the company is selling. Easier to find and classify!

Commodities Parts and Sub-assemblies ……

Types of spendINDIRECT SPEND (ENABLING SPEND)

Spend on Goods and Services that enable its primary activity

Travel IT MRO & Utilities Capital Goods and Consumables…..

TAIL-SPEND

The bottom 10% of your Indirect spend is known as Tail-Spend

One-off purchases that fall below a certain threshold (say $10,000)

Purchasing done at the plant level by other departments

ACCOUNTS PAYABLE DATA

Quite possibly the most widely used source of data. Integrity of data cannot be questioned.Easily covers more than 95% of company spending.

Data sources

OTHER SOURCES

If an organization wants to get close to 100% understanding, they should look at other sources. Very challenging and resource-intensive

INTERNAL (Invoices, HR data) EXTERNAL (Supplier spend, Data in

public domain)

Input Data

Must Have’s Nice To Have’s

Field DescriptionInvoice No The unique identifier of the invoice

Invoice Date Issue date of invoice

PO Number The unique Purchase Order identifier

PO Date Date on which Purchase Order was issued

Product Code Unique item code set by buying company

Product Description

Description of item/service

Category Name Name of Commodity (eg. Travel)

Business Unit The BU/division responsible for the spend

Supplier Name Name of the Supplier

Supplier Code Unique code to identify the Supplier

Supplier Parent Ultimate parent supplier

Supplier Location

City/Country (or) address of the Supplier

Purchased Quantity

Number of items supplied

Unit of Measure Unit by which supplied items are measured

Unit Price Price associated with the Unit of Measure

Currency Currency with which the invoice is made

Invoice Amount Amount listed as due on the invoice

Field DescriptionContract No The unique contract identifier

Expiry Date Date on which the contract expires

Payment Terms Number of days within which the payment is made

INCO Terms Terms under which Title of goods will be transferred from Supplier to Buyer

Category/UNSPC Code

UNSPC Code for the Commodity/service

Sub-category Name of the Sub-commodity (Legal services is a sub-category to Professional Services)

Delivery Location Location/Plant the supplier delivers to

Cost Center Code Cost center to which the payment applies

Cost Center Desc Cost Center code description

G/L Account Number

The General Ledger account number to which the payment is made

G/L Account Description

General Ledger account description

Payment Date Date on which the invoice payment was made

UNSPSC ® (www.unspsc.org)

The United Nations Standard Products and Services Code is an open, global, multi-sector standard for efficient, accurate classification of products and services.KEY FEATURES: Most commonly used categorization across the world – helps if everyone speaks the

same language Managed by the UNDP (United Nations Development Program) Open Standard, free for everyone Over 20,000 categories available. Five level hierarchical code set Responsive – constantly updated

categorization

OTHER SOURCES

FSC (Federal Supply Codes published by US Government) NAICS (North American Industry Classification System) NIC (National Industrial Classification published by Ministry of Statistics and Program

Implementation)

Spend Analysis – The Process


Spend Analysis – Benefits

Lower Overall Costs

Identify Areas of Opportunity

Increase Productivity and Efficiency

Better Decision-making

Greater Visibility Improve Relationships

Track every Rupee you spend across multiple categories including

Indirect Spending

Obtain insights from your historical

spending and create savings opportunities

Focus more on your key deliverables rather

than mundane data analysis

Make fact-based decisions with data

made available at your fingertips.

Improve 360 degree relationship –

suppliers, customers and stakeholders


AP Data

AP Data

Extract

Cleanse

Enrich

Classification

Analysis

Insight

Automate the input from your ERP system into our flexible solution.

Custom Web Interface

CSV Format Data


AP Data

AP Data

Extract

Cleanse

Enrich

Classification

Analysis

Insight

We use a variety of automated tools and manual checks to ensure the quality of the data. A system is only as good as the

data it uses!

Data Extraction• Mapping and extracting

required data fields to data source

Manual Validation• Data availability under correct

headers and GL Account

Supplier Normalization• HCL Bombay, HCL Mumbai,

HCL BOM, Hindustan Computers Ltd.


AP Data

AP Data

Extract

Cleanse

Enrich

Classification

Analysis

Insight

Classify your spend into Industry accepted categories or create your own based on the need.

Custom Web Interface


AP Data

AP Data

Extract

Cleanse

Enrich

Classification

Analysis

Insight

Insights that drive decisions. Dashboards, Charts, Reports

and more!

Spend Analysis – Templates


Spend analysis should help you answer

The Spend Cube

What are we buying?From who are we

buying?For who are we

buying?

DATA

From Who?

For

Who?

What?

DATA

Vendor Cost

Center

Category

THE SPEND CUBE

Common Types of Analysis

Cost per unit weight Analysis

Cost per unit weight is performed to compare the similar parts. The inherent assumption is that these parts are similar, and their cost/unit weight should be similar. This helps to identify the outliers which contributes to different costs.

Part Price History Analysis

Plot the trend of a part’s price over 2 years and identify opportunities to re-negotiate lower price in cases of unjustified price increases in the past.

Pricing Brackets/ EOQ Analysis

Analysis identifies the optimum bracket quantity for cost reduction within the available brackets. Can only be done on parts that have contracts that include pricing brackets.

Indexed Pricing Analysis

This type of analysis helps identify the relationship between material prices and part cost and helps us identify opportunities for index-based pricing and re-negotiation.

Currency Opportunity

Analysis

The analysis identifies the cost reduction opportunity by switching prices between currencies. The assumption is that the manufacturer should be paid in the currency of manufacturing country.

Common Types of Analysis

Freight Analysis

Analysis identifies a way to obtain visibility into freight costs associated with procuring parts from suppliers. It helps in selecting a best approach to optimize freight costs.

VAT Analysis

VAT is a tax that is assessed at each phase of the process where value is added to components or services by different suppliers. It is usually recovered when a supplier sells his product to the next supplier in the chain. Leakage can sometimes occur when trying to recover the VAT from foreign governments.

Warranty Cost Recovery

Warranty cost incurred due to defective supplier parts. This could include both labor and part cost.

Payment TermsAnalysis

Analysis identifies deviation to standard payment terms. The intent is to negotiate with the suppliers to pay them on Standard Terms so that we realize savings from holding the cash (Cost of Money)

Part Family Analysis

Analysis identifies the optimum way of categorizing parts into a family and then identifying potential parts for cost reduction which do not belong to the part family due to different processes or alternate processes that could be used. It also helps in identifying cost outliers within the same family of parts

A logical extension of Spend Analysis is helping track benefits and drive PO compliance. This will help recover costs and minimize leakage as well as help the Finance/Budgeting organization in projecting future cash flows

An extension of spend analysis

Savings & Compliance Tracking

Cash Flow

Met

als

Cylin

ders

Tire

s

Axles

Engin

e

Hydra

ulics

Castin

gs

Indire

ct0123456

0%

20%

40%

60%

80%

100%

Compliance % Across Categories

Contract Compliance

Spend Analysis – Tools


Currently, there are many tools available in the market that offer spend analysis solutions.

A few popular tools include:1. Ariba2. SAP3. I2 Technologies4. Procurian Software (Acquired by Accenture)5. Bravo Solutions6. Zycus7. SMART by Global eProcure……. And many more!

Spend analysis tools

While the differentiation between them will be limited, the following should be kept in mind:

1. DATA SOURCES: The ability to handle multiple data sources, providing data in multiple formats

2. COMPATABILITY: Compatibility with multiple ERP systems3. CUSTOMIZATION: Almost all tools are customizable, but require a lengthy

implementation. The required capability must be very well defined upfront else it will be hard to work in modifications

4. VISUALIZATION: Ability to provide information in a clean, crisp manner. Different profiles need different information – the charts and tables should be different for different hierarchies

5. CLOUD: This is a must – especially for large corporations who would want data to be stored on their existing cloud (or) in a cloud located in the same region as their HQ for legal restrictions

Key considerationsCOST

Enterprise Tools very expensive

1implementationComplex & Time Consuming2integration

Individual Tools need to integrate

3automation

Still lots of manual intervention

4

SERVICE-BASED APPROACH TO

SPEND ANALYSIS

ALTERNATIVE

Thank You!


Ram RaghuramanFounder, BCube Global Solutions

Director, ISM India

Mobile: (91) 95000 17385

[email protected]

mailto:[email protected]

http://www.bcubeglobal.com/

Spend Analysis - Process, Methodology

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