This is the second in a series of posts by Matt Holzapfel on salient topics in procurement analytics.
Our previous post discussed the challenges procurement must overcome to improve its productivity. Fortunately, overcoming these challenges and showing dramatic improvements in performance is within reach for most organizations. One specific opportunity is improving spend under management, an effort worth a potential 1-2% of additional savings annually.
The average organization has only 55-60% of its spend under management, while best-in-class performers manage close to 85%. If procurement can achieve 5-10% savings on spend under management, an increase from 55% to 75% can generate an additional 1-2% of savings — and put procurement on a path to exceed its typical annual savings of 7%.
But promises of savings are easy to make. There must also be a realistic way to capture the savings for the idea to matter. The challenges with increasing spend under management include:
Spend that isn’t under management is hard to analyze because information is scattered throughout the organization, in different formats and varying levels of quality
Companies lack expertise around the spend categories that aren’t under management
Sourcers are already pressed for time managing their current spend
Solving these problems and generating new savings requires a different approach than the one used to manage top spend categories.
Automated spend analytics is essential
Sourcing managers can survive using manual analytics when they’re only looking at a small sliver of spend. Automated spend analytics is needed when organizations want to start looking at more spend categories, but can’t justify adding headcount to do it. Implementing an automated spend analytics system has the dual benefit of freeing up sourcing managers to manage more spend, while making it easier for them to have fact-based discussions with suppliers and colleagues. The use of data science and technology are being widely recognized as important competitive advantages, making it easier for procurement leaders to gain internal support to put powerful tools for analytics in the hands of managers looking for new ways to generate savings.
A “light touch” model needs to be adopted
Procurement leaders can’t expect sourcing managers to operate at the same level of depth for long-tail spend items as they do for top spend categories. However, sourcing managers can still generate considerable savings by using spend analysis to decide the most effective way to manage the category, whether through simplifying the supply-base and putting pricing agreements in place or outsourcing the category completely.
For these categories, sourcing managers must learn to lean heavily on spend data rather than their expertise, so that they can execute quickly. Managers won’t be able to fully optimize spend in these categories, but the savings can still be significant.
Procurement leaders should make it a priority of multiple data-driven managers in their organization to contribute in getting this spend under control. Sharing the work across multiple sourcing managers enables procurement to increase its spend under management without putting sourcing managers at risk of losing focus on their top suppliers.
The effort required to expand savings under management is not trivial, but the reward of 1-2% additional annual savings is a powerful incentive for procurement leaders looking to give their businesses a positive surprise that can be used to invest in growth.