Spend analysis and e - procurement

Nilendra Singh Pawar

SPEND ANALYSIS
 Understanding your spend
• Spend Analysis: Analysis of ALL purchases made Monthly
by an organization, in a specified time period savings in One
(include capex / opex, products / services) time Spend
• Performed at a company level analysis

• Usually spend data is highly fragmented, and

poorly designed for analysis
– Diff teams plan and execute procurement with diff
classification of products, spend categories, GL codes
etc. Processes
and systems
• Organizing the data well followed by a deeper aligned to
analysis shows up areas of opportunity support
spend
analysis as a
(“Spend visibility can save ~11% with a modern discipline
spend analysis system”- Aberdeen Group)
 Understanding your spend
• Critical questions that need to
answered on spend:
–Which categories accounted for
how much spend ?
–Which suppliers received how much
business, in each category, and
overall ?
–How do the prices compare across
businesses and across comparable
categories ?
–Are there opportunities to combine
spending volumes across different
businesses ?
–Can the specifications across
businesses be standardized ?
• Benefits of conducting spend analysis:
–Improved buying due to standardization of
specifications and vendor base
–Identifying strategic vendors and moving
toward vendor consolidation for purposes of
volume discounts and higher quality
–Reducing maverick spend through preferred
suppliers and better processes
–Avoiding spend leakage by monitoring
compliance to negotiated terms
–Institutionalizes the process for savings
tracking
–Clean up of master data and better
management reporting
Typical Contract to Pay (C2P) process
• C2P process begins with
signing of a contract with
the supplier and ends with
payment to the supplier

• Organizations generate
spend related data across
all these transactions
 Steps in performing spend analysis
1. Get executive support

2. Understand capabilities • The spend data may reside with different business units
and gaps in spend data
management • Interpretation of the data may require support from
different departments
3. Identify the raw data
sources
• May create discomfort in the existing user departments
4. Define Schema for final
database
• Would require alignment across purchase categories for
5. Map and classify each spend classification
transaction into
meaningful categories
• Getting executive support will help in overcoming these
6. Analyze – Assess - Report
obstacles
 Steps in performing spend analysis
1. Get executive support
2. Understand capabilities
and gaps in spend data
management
3. Identify the raw data
sources
4. Define Schema for final
database
5. Map and classify each
transaction into
meaningful categories
6. Analyze – Assess - Report
• Review how is the spend data organized, reported and analyzed.
– How are the material codes/GL codes / Cost centers organized (Why do we
need GL codes?)
– What reports are available in through the system
• Gaps/Errors in the data – may require extensive data cleaning:
– Incorrect vendor classification
– GL code alignment
– Cost Centre definitions
– Incorrect/multiple commodity codes
– Text POs
– Incorrect segregation of prices, transportation charges, penalties and
deductions
• Reporting tool limitations
– Inability to create different classification hierarchies and refresh the data
 Steps in performing spend analysis
1. Get executive support

2. Understand capabilities • Data sources:

and gaps in spend data
management
–Accounts Payable data : Multiple ERP systems
–P-Card spend
3. Identify the raw data –Reimbursements
sources
–Directly booked expenses
4. Define Schema for final
database

5. Map and classify each • Data Format

transaction into
meaningful categories –Various fields, definitions etc.

6. Analyze – Assess - Report

 Steps in performing spend analysis
1. Get executive support
2. Understand capabilities
and gaps in spend data
management
3. Identify the raw data
sources
4. Define classification
system for final analysis
5. Map and classify each
transaction into
meaningful categories
6. Analyze – Assess - Report
• Any purchasing related record may
have several dimensions associated
with it : Vendor, Commodity, Cost
Center, GL Code, Date/Period
• Spend analysis should enable the user
to view the data at any level of
aggregation along the above
mentioned dimensions.
• An appropriate categorization system
for EACH of the dimensions needs to
be created (spend taxonomy)
 Steps in performing spend analysis
1. Get executive support • Data Cleansing: Incorrect/incomplete information like product
description, supplier name, buying cost center etc.
2. Understand capabilities
and gaps in spend data • Map each transaction to an appropriate category
management

3. Identify the raw data

• Usually accomplished through the following fields, or a combination
of them
sources – Material Codes, Vendor codes, GL codes, Cost centers etc.

4. Define Schema for final

database • The classification happens in stages, creating more precise
classification with each iteration
5. Map and classify each
transaction into • Aim for classification of ~95% or more of your spend
meaningful categories
• AI/ML tools are used for classifying large data sets
6. Analyze – Assess - Report
 Steps in performing spend analysis
1. Get executive support
2. Understand capabilities
and gaps in spend data
management
3. Identify the raw data
sources
4. Define Schema for final
database
5. Map and classify each
transaction into
meaningful categories
6. Analyze – Assess - Report
• Analyze and cross-tabulate the data
• Explore opportunities for
– Cost saving (compare prices & terms across time / vendors / locations
/ products)
– Product range reduction
– Improving compliance
– Increasing Spend under management
– Finding spend not matching index movement
– Finding maverick spends
– Assessing magnitude of vendor risk
– Inventory reduction
– Volume consolidation OR Volume splitting
– Demand management
 Savings Opportunities
• Spend category - level opportunities:
Identified by viewing the aggregate
amounts (by commodity, supplier, cost
center, etc.)
–Vendor fragmentation per commodity - Demand
aggregation
–Commodity/business unit fragmentation per
supplier - Contract consolidation across business
units
–Purchases from nonpreferred/unapproved
suppliers
–Non-PO purchases
–Diversity spend compliance
–Spend with poorly performing suppliers
–Spend with suppliers with bad credit ratings
• Transaction-level opportunities: Arising
out of transaction-level visibility
– PO limit approval violations
– Unrealized discounts and rebates
– Contract start and expiration date violations
– Delivery date violations
– Item unit price variance—Are we paying more
than our peers?
– Payment terms opportunities—Are we paying
too early or too late?
– Consolidated payment processing
opportunities
– Frequent charges and credits
– Processing of recurring invoices
– Quality of GL assignments
 Spend under management
• Purchased through specified process
–Actively sourced: Supplier search, evaluation
and contracting as per the approved process
Criteria for identifying
–Actively managed: commodities analyzed (for
cost reduction and compliance), segmented,
Spend Under Management:
benchmarked and savings opportunities being • Properly Sourced and
targeted. Managed Supplier
• Proper Authorization
• Proper Coding
• SUM is a key performance parameter for
• Correct Pricing & Terms
sourcing teams.
• Processed Efficiently
• Clearly Visible
 Scope of e – procurement
Strategic sourcing • Spend Analysis
• E- procurement refers to
use of software solution, • Vendor discovery services, Supplier platforms
and internet connectivity Vendor search
• Catalogue management
to improve sourcing
processes. Vendor evaluation • E-RFX documents

Negotiation • Reverse Auctions

• Instant and
communication with
multiple entities and Contracting • E-contracts

process automation drive

the benefits. Payments
• Online transfers
• Portal for accounts status

Supplier Relationship • Product development projects, Savings projects

Management • Supplier Quality Management
Expression of Interest /
Registration of Interest RFX Documents
• Different modes of
inviting information
from suppliers

• RFI / ROI serve the

same purpose

• RFP used for

solutioning of
unstructured
requirements

• RFQ/RFT are used for

commodities or
requirements with
known specifications

RFI RFP RFQ

Increasing clarity of requirements and level of

formality,
Decreasing # of suppliers involved

RFI
Purpose:
Collect information to enable
supplier moving into RFP stage.
Involves:
Understanding stakeholder
requirements.
Assess Supplier interest, Collect
information / declarations.
Screen based on pre-defined
criteria.
Skip or limit scope for known
suppliers / commoditized items.
RFX - Process
RFP
Purpose:
Seek solutioning for needs that are
not completely specified.
Involves:
Defining the requirement in detail,
scope of solution and underlying
purpose.
Clarifying supplier’s doubts
through open conversations,
creating a level playing field.
Clarifying the criteria and process
for awarding the contract.
Skip for commoditized items &
items with precise specifications.
RFQ
Purpose:
Seek lowest cost vendor for a
clearly specified need (product /
reliability)
Involves:
Developing comprehensive
specifications with users.
Standardizing and sharing the
same with vendors.
Providing clarity on commercial
terms.
Clarifying the quotation process
and decision making criteria
 E-sourcing – usage across S2P process

Extent of
automation
possible
across
various
stages in
sourcing

Source: McKinsey & Co.

 Benefits of e-procurement
• Visibility: in to stocks, transit inventory, • Standardization: of products,
order status, production/consumption specifications, test methods, helps
plans, Supplier’s QMS, accounts in purchasing of non critical items
statement (Kraljic matrix)

• Seamless Communication • Availability: of information at all

times, across time zones
• Efficiency: Reduce transaction time,
waiting time, transaction costs • Process improvement: Stronger
control, secure, transaction trail for
• Automation: Automatic ordering audit, exception highlighting
(Purchase requisitions) from planning
systems, Reorder level driven ordering, 3
way matching of invoices for payments
(invoice, PO, Goods receipt) – buyer can
generate invoices
 Pitfalls in opting for e-procurement solutions
• System capabilities
– New processes may seem more elaborate,
bureaucratic
– Managing transition from legacy habits
(processes, dashboards, analysis, reports)
– Over promise by software vendors
• Implementation costs
– Research, evaluation, selection
– Cost of acquisition, process consulting,
implementation, licenses, AMC
• Loss of human touch
– Personnel may miss interaction as compared
to earlier processes
– Transmission of softer information is lost
• Internal resistance
–Perceived loss of power
–Insecurities related to change in job scope
• Supplier limitations
–Low exposure to IT systems, untrained manpower
–Supplier dealing with various customers with
different IT sytem requirements
• Security
–Leakage of sensitive information
–Malware and ransomware attacks
–Process shutdown on IT failure
 E-procurement solutions
• Procurement solutions that integrate with the ERP
• Common modules:
–Spend analysis
–E-sourcing and reverse auctions Strategic sourcing
–Supplier performance management modules
–Contract management

–Catalogue management
–Purchase order management Procure to pay
–Requisition management modules
–Invoice management

–Supplier lifecycle management, product development project management, supplier quality

management
 Reverse Auctions
• Choose appropriate product category for reverse auctions
– Commoditized products, multiple suppliers, significant value of purchasing
• Reverse auctions can be carried out using RA software or III party services

• Mechanics of reverse auction

– Prepare/educate suppliers
– Shortlisting of suppliers eligible to participate in the auction
– Auction details, terms and date announced to eligible suppliers

– On the day of auction, suppliers login to the reverse auction platform and bid
– During the bidding the platform may be configured to display certain information to suppliers e.g.
currently lowest bid, all bids, supplier with lowest bid etc.
– Usually an extension is granted if bids are received in the last minute (almost in all cases)

– After closure of bidding, the bids are evaluated and contract awarded to the most appropriate bid (may
not be lowest price)
 Reverse Auction vs. Sealed bid: Kraljic Matrix perspective

• RA: Best suited for commoditized

USE RA USE SEALED BIDS items, standard specifications,
multiple suppliers and low risk
HIGH related to supply default / quality
LEVERAGE STRATEGIC
Impact on Profitability

PRODUCTS PRODUCTS • Sealed bids: Better suited for

complex requirements, complete
High solutions, fewer vendors, low to
Risk moderate risks related to supply
default/quality
Zone

• Both are not recommended for

NON highly strategic OR high risk
CRITICAL
products, with very high
LOW BOTTLENECK dependence on suppliers
PRODUCTS Low benefit Zone PRODUCTS

LOW Supply Risk HIGH

 e-Auction best practices
• Get buy in from internal stakeholders
–Business users to provide time to purchase teams to arrange for e-Auctions

• Standardize practices and communication, document them. All communication

to suppliers should also be written.
–e-sourcing tool does not replace communication

• Training for vendors

–Retraining, using dummy tests, resource for training
 e-Auction best practices
• Establish buyer credibility
–Run events as per rules,
–Declare clear criteria for awarding contract and follow the same
Commit to honor valid bids
–Award contracts immediately Equal access and information to all suppliers
Confidentiality
No offline quote / conversation / negotiations
Promise of running auction to award business,

• Document and publish ethics note, binding both buyer no bias against suppliers who are new
entrants

and seller Supplier to honor the contract

• Have optimum number of suppliers

• Collect preliminary bids to eliminate unsustainable
bidders
 e-Auction best practices
• Actively monitor auctions
– Ensure transparency of rules, decision making to all participants
– Provide support during auctions
– Use III party support, category sourcing team needs to be support actively
– Contact suppliers pre-emptively if you see non-participation
– Have well documented processes to deal with problems during e-auctions

• Use Multi-attribute bidding in complex purchases

• Allow for price tiering by quantity, dates and location

• Using bundling strategy to reduce # of suppliers, assure minimum volume to bidders and get bids for
less attractive products
• Assess the effectiveness of bundled product / bid package from the number of bids received,
incorporate learnings.
– Strict specifications, illogical and complex bundles may dissuade bidders

• Not overcomplicating auctions

 Types of reverse auctions
• Sealed bid auction – submit one offer within the specified time duration
• Reserve price reverse auction - establish reserve price, award business once price is
reached
• English Auction – most common. Supplier bid lowest price they are willing to accept.
Bidding ends after the stated duration of RA.
• Japanese auction – After every bid, the sellers must state willingness to stay in the
option (everyone who stays accepts the currently bid price)
• Vickerey auction – Suppliers submit bids without knowing lowest bid. Contract
awarded to lowest bidder at the second lowest price
• Dutch RA – Prices slowly increased from a low value to the reserve price. Suppliers
can opt to supply specific qty at each price change, till entire lot is completed.
• Yankee auctions / Brazilian auctions
 Explore the e-procurement suites
• Future technologies – Blockchain, Bigdata analytics and visualization, AI
and Cognitive purchasing

• GEP
• Zycus
• ARIBA