A primary function of strategic sourcing is to reduce the purchase price of direct and indirect goods and services within a corporation. If nothing else, the success of this mission unfolds its impact in significant economic parameters of due diligence. On the one hand, more favorable purchasing prices contribute to improved profits. On the other hand, the available cash flow increases – the saved money is available for other business purposes.
The importance of Spend Management in purchasing
There is a tedious process before procurement success. This means that the starting point, especially in large, internationally-operating corporations, is the identification of so-called bundling potentials. In the divisions, departments and companies it is important to recognize and harmonize in as far is possible all related suppliers, as well as similar goods and services.
The prerequisite for this is to extract product specifications, supplier information and prices for goods and services beyond the region of the group of companies from the ERP / SRM systems(s).
The main challenge lies in cleaning up and consolidating the information, as well as making it comparable and finally, presenting it transparently in a “uniform language” at the corporate level.
The complexity of such a project should not be undermined, since the source data originates from a variety of ERP / SRM systems with:
- different languages,
- classification systems,
- and quality standards (cf. diagram below).
If materials and services that can be bundled have been detected and specified, larger volumes that reduce the price per unit develop by summarizing them. With these forecasts, potential suppliers are informed and the most qualified are asked for price quotes, before several rounds of negotiations with the top two or three commence. In the end, buyers sign framework agreements with the lowest priced suppliers.
Many strategic sourcing departments in large groups of companies believe that purchasing success is secure once the contracts have been signed – this is often a mistake.
A negotiated framework agreement is neither a guarantee that all essential users adhere to the stipulated terms, nor is there any reliance that the negotiated scope lives up to the requisitions over a longer period of time. It is not unusual for suppliers to not honor the agreed on prices and procedures. As a rule, the expected cost savings are not as high because of these reasons.
At this point, the advantage of modern Spend Management solutions becomes clear so that the expected cost savings can truly be secured for the long term with the help of a modern software infrastructure.
Important design principles for purchasing success
- A key to realizing cost savings potentials is the sustainable (not onetime) transparency of the entire procurement volume across all divisions and companies. It is not enough to carry out a onetime spend analysis for this purpose. It is crucial to attain a current and detailed overview of all invoices and payments made to the most important suppliers every month.
- The data quality in most of the ERP systems is insufficient for answering the crucial question of who purchases what goods and services at what conditions globally from the suppliers. For this, elaborate data cleaning and classification processes, which are nowadays based on artificial intelligence methods, are required.
- A onetime or even annual analysis of the procurement volume falls too short to take action against framework agreement infringements and to detect new bundling potentials fast enough. This is only made possible by a company-wide spend data base that is updated monthly. Quality assurance procedures thereby involve buyers and IT experts.
- The breakthrough during the implementation of cost savings cannot succeed with solely a modern information system, i.e. based on integrated procurement software; it also does not succeed through dedicated organization and coordinated processes. Only through the symbiosis of organization, processes and modern IT systems can strategic purchasing be led to success.
But why are the depicted cost savings in purchasing so fleeting?
The answers are justified by the fact that a Spend Management or Spend Analysis system, in particular, is an essential component missing in many corporations.
5 proposals for sustainable success
- A delayed utilization and an adherence to old suppliers and conditions occurs without a medium by which newly negotiated framework agreements can be introduced quickly into the organization.
- If a procurement controlling system that uncovers process violations (such as Maverick Buying) quickly is absent, then the appeal to buy from the old, familiar suppliers is great. The lost cost savings add up over a too long period of time and are irretrievably gone.
- A monthly measurement of the loyalty regarding process and framework agreements, as well as compliance measurements, is based on modern data classification mechanisms as part of a modern Spend Analysis system. A basis of rules developed at one time, which for example allocates invoices without an order reference into the correct procurement categories, is subject to constant change. New materials and supplies that can be incorporated into the rule base are regularly added.
- In organizations of large corporations, in particular, specialists fluctuate or rotate between company groups and departments of the holding company. Well-adjusted systems and processes guarantee that knowledge pertaining to categories, framework agreements and suppliers is not lost along the way.
- According to a study conducted by A.T. Kearney, many companies state that reports of purchasing successes exist. Only a few, however, have implemented a closed spend management process that is the essential foundation for securing successes over a longer period of time.
The diagram outlines the erosion effect of cost savings potentials with and without these measures.
We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.
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In this blog you will find expert knowledge about initiative management and project management in strategic procurement. InitiativeTracker is a software for planning and monitoring your sourcing initiatives, controlling your procurement organization and measuring your procurement performance.