This week's Wiki-Wednesday topic is Spend Management. Below is an excerpt of the Wikipedia on this topic, and you can click here to connect back and read the full article at its source. Another interesting angle on spend management is 'tail spend management' which you can learn more about by listening to this on-demand webcast by Global eProcure - just 30 minutes, and a good use of your time.
How Spend Management Saves Money
- Decreasing "maverick" spend -- "Maverick" spend is the process whereby requestors (those who are creating a request for an item or service that will be turned into an order to a supplier) buy items or services that are outside the preferred process or system. This often means that a "maverick" purchase typically results in an individual or department buying an item in an ad-hoc fashion that results in paying a 20% premium for that item. Instead of buying from a preferred supplier with which the company has negotiated a contract with discount pricing, an individual goes outside the normal process and purchases that same item at retail.
- This is often hard to enforce unless some control mechanism (often technological) is put in place that:
- 1) prohibits this type of purchasing
- 2) sets up penalties for these types of purchases
- 3) puts into place some type of approval or check and balance system.
- Increase of spend economies of scale -- By directing more spend toward a particular supplier, a company can negotiate more favorable pricing based on how much money it spends with that supplier in a given year. Many companies may purchase like items from many suppliers at different prices. By consolidating this "spend", and directing it toward one or a few suppliers, companies are able to get bigger discounts.
- The activity that a company goes through is called strategic sourcing (also called "supplier rationalization"). This takes a commodity-by-commodity look, taking into account business unit, location, and other requirements to find opportunities foreconomies of scale savings.
- Increase process efficiencies-- Automating sourcing, procurement and payment processes can greatly improve the efficiency of paper based and manual processes. However, different companies have had varying degrees of success in this area. The general idea is not to just automate, but also use the technology to improve upon these processes.
- Process savings can be measured in various ways such as: how long it takes to process a purchase order, how many individuals need to touch the purchase order before it can be sent ("touch points"), how long it takes to reconcile and pay the supplier, as well as many other methods to measure these process improvements.
- Increase procurement efficiency -- This involves using e-sourcing tools for the bidding and contract award process (similar toeBay, in which you may have one buyer and many suppliers, or one supplier and many buyers). These supply chain management tools also help to develop product requirements that can be sent to suppliers (typically called an "RFP" or Request For Proposal).
- A buyer (i.e. an individual at a company that has determined a need for a particular product) will develop a document that lists the need (i.e. the type of product they need and why), specifications, the bidding process (how the process will work and how suppliers will be scored), rules for the bidding process, and other factors.
- Buyers will then invite suppliers to register online, and open the event for a set period of time so that suppliers can bid. At the end, the buyer awards the contract to one of several suppliers. The award can be based on price, delivery time (the time it takes the supplier to fulfill an order), or other factors such as quality or how closely the product meets the needs.
- The e-sourcing of direct items (raw materials) is often much more complex than indirect (office supplies, etc.), as the deciding factor is not just price but also the way the product fits into the overall manufacturing of a product.
- The way a company collaborates and transacts with their suppliers is a critical part of spend management as well. This is sometimes called "Supplier Relationship Management". This term is often incorrectly used in place of "Spend Management".