Journey of procurement transformation begins with..….. Part II

 Original Blog post - https://www.linkedin.com/pulse/journey-procurement-transformation-begins-part-ii-prashant-mendki

Procurement transformation journey is complex, cross functional, time consuming and even frustrating at times. The very basic but a strategic step to start this journey is “Spend Analysis”. Again – this has to be done in a right way to get the potential benefits. We talked about that in first part of this article https://www.linkedin.com/pulse/journey-procurement-transformation-begins-part-i-prashant-mendki
By definition – Spend Analysis is an analysis of your spend (invoice paid), what items you are spending on (product), who you are paying to (supplier). It looks really simple – no?
When I worked with one of the large Media Entertainment company few years back, they had thousands of suppliers, millions of transactions, good amount of Maverick spend. It’s a global business with more than $2Bn in Spend, 12 different global systems. Thousands of transactions gets recorded every day by hundreds of business users. In that scenario, imagine getting answers to few simple questions like -

1. What is your direct & indirect spend? Do you know if this ballpark or close to actual?
2. Who are your top 100/1000 suppliers in terms of amount spent with them?
3. Who are your top 100 grouped suppliers (with same parent company) with highest spend? Ever checked if you negotiate at the group level you can save 5% probably?
4. Which items are in top 100 spend?
5. How many suppliers for top 100 items and what’s pricing variation?
6. Which Geography spending with whom and on what product?
7. Which business unit spending with whom and what product?

Nobody really asked these kind of questions – since everybody was working on that “Big transformation initiative”. And everybody thought they have answers to these questions. After struggling with existing excel sheets for few days to find answers, procurement director realized – this needs to be done with a holistic view and focused efforts. Then a big question came – where do we start? My answer – Your DATA.
The first step of spend analysisis to get the data out of your systems. All kinds of data which talks about spend. Suppliers, materials, invoice, PO, contracts, master data – all of it. You put a good data scientist to a job – and your data will start telling you story on what’s going wrong. For example -

1. How many vendors do we have with same or similar names? Most popular example in this is – IBM. If you cleanup all versions of IBM, I.B.M, IBM Inc., International Business Machine, I B M – and make it as one IBM – probably it will come up in your top 100. Imagine when you do this for those thousands of records and supplier base starts shrinking to a manageable levels. Simple deduplication might do the trick as well.
2. How many subsidiaries do I deal with for a parent group? Is there a way to negotiate at a parent group level to save spend? When you look at T&E spend – how many Marriott’s you can find in it? Courtyard, Fairfield, renaissance, JW, Ritz, Residence Inn et al. Assign “Marriott” as a parent company to each of these and it may come up in top 100 suppliers. You have now better negotiation power.
3. Spending on what? Do I have standardized terminology for all products? May be you have inventory at one location but you don’t have visibility because product numbers are different or typos in product names for the same product
4. What category of your product are your highest spend? If you classify your spend as per a classification taxonomy – either UNSPSC, customized one or other industry standard – you will have visibility towards category spend – when you link it with vendor data and look at it – may be its too scattered across vendors. Can you consolidate some of it, better negotiate and save?

Still question remains – what is starting point for all this. There are few steps –

1. Data Extraction
2. Data consolidation
3. Data Profiling
4. Cleansing
5. Standardization
6. Enrichment
7. Classification
8. Analysis

The result after all this – 2Bn $ organization identified – 3% of potential savings with a low hanging fruits in year 1. You can imagine savings after implementation of measures in its strategic sourcing program over years.
Let’s look at these steps – and how to implement those in next article.
Follow on Twitter - @pmendki