Supply Chain Management: Procurement Strategies

, Building the Nation
SUPPLY CHAIN MANAGEMENT

PROCUREMENT STRATEGIES
PREPARED BY: ENGR. EJ CARPIO

ANALYZING SUPPLY CHAIN MARKET
5 STEPS TO A SUPPLY CHAIN MARKET ANALYSIS
● Define your objectives, scope, and commodity profile
○ The primary goal of performing a
market analysis can vary, but a common
goal is to develop key
insights to drive better business decisions and improve
your competitive position via
your supply chain. Since
every organization is unique, ensure you and
your stakeholders are in alignment prior to executing
this analysis.
○ Before you begin any research, it is also critical to
understand the scope of your project. Define the breadth
and depth of your efforts and develop a clear understanding
of the profile of the commodity that you will research.
● Research the market and pricing structure for your commodity
○Make sure you understand how pricing works for the goods or services you are
interested in; factors including material costs, labor costs, transportation costs, energy and
utility needs, and overhead can influence the final price you pay.
○Is the commodity’s availability influenced by the time of year? By geopolitical
events? By new laws coming into effect? This is the time to find out.
● Conduct in-depth supplier analysis
○Identify the main players in your market and research them thoroughly. From
geographic locations to target customers and competitive advantage, it’s important to
understand the context in which they operate.
○It’s also not a bad idea to do some digging into their financial background and
research any lawsuits or other risky situations they may be up against. One
framework that can be helpful in this step is a SWOT (Strengths, Weaknesses,
Opportunities, Threats) diagram, which can make it easier to compare suppliers against
one another.
● Identify key market indicators
○Finding the right indicators for your commodity can be difficult, but it can play a
significant role in your research conclusion and ultimately, your recommended
business strategy.
○How? When viewed in context, the right indicators can help you understand the
current state of the market, and when tracked over a period of time, these
indicators can become predictors of what’s to come in the market. Four categories
of indicators you may consider measuring include:
■ Economic Indicators – pricing trends, inflation rates, and production rates
■ Pricing Indices – Consumer Pricing Index (CPI), Producers Pricing Index
(PPI), and Import/Export Price Indexes
■ Employment Indicators – unemployment claims, percentage of workforce
fully employed
■ Production Measurements – gross domestic product
(GDP), industrial production rates, and capacity utilization rates.
● Compile your findings and outline final recommendations
○ In this step, keep in mind the context and culture of your
organization. Risk tolerance, for example, can vary greatly from
industry to industry and company to company. Developed and
implemented the right way for your unique organization, your
findings can enhance your business’ competitive advantage, reduce
risk in your supply chain, and strengthen your financial position.
○ Conducting your own supply chain market analysis is not an easy
feat, but with careful, comprehensive research and judiciously
applied recommendations, this analysis can prove very effective.
From increasing your supply chain’s strategic impact to enabling
business agility to outsmart unexpected circumstances, the outcomes
of such an analysis can be far-reaching and surprisingly valuable.
SPEND MANAGEMENT
SPEND MANAGEMENT
● Spend management is a continuous process of controlling and improving
the way a company spends money and typically
includes strategic
procurement activities such as supplier management, category management,
inventory management, and product development.
● Ideally, an effective expense management strategy includes a comprehensive
spend analysis and helps companies maintain control of
their purchases,
optimizes supplier relationships, and maximizes the ROI of every dollar they
spend.
● While spend management is often executed by
procurement, it impacts
many internal and external stakeholders of a business who are also concerned
with budgeting and planning future profitability.
● They need spend management to stay in business and
improve an
organization’s bottom line. Effective spend management will leverage real-
time analytics and insights to drive better decisions,
create value, and cut costs.
SPEND MANAGEMENT
SPEND MANAGEMENT SYSTEMS
HOW SPEND MANAGEMENT IMPROVES PROCUREMENT?
● Better sourcing opportunities
○ By mapping out all the costs involved in the supply chain
process, you can identify which suppliers are yielding the
most value and which ones are not. Supply chain
management becomes more efficient because you have
a clearer picture of the vendors who are the most cost-
effective.
● Increased process efficiency
○ Spend management software eliminates manual processes
that take up valuable time and money and optimizes
procure-to-pay processes like strategic sourcing and
contract management
HOW SPEND MANAGEMENT IMPROVES PROCUREMENT?
● More spend visibility
○ Spend management systems provide accurate and timely
data that lead to more insightful decisions around
procurement. Spend analytics support forecasting efforts
that reduce maverick spend and capitalize on
savings opportunities.
● Better risk management
○ An end-to-end spend management solution provides the
means to assess the market, identify risk factors, and
develop plans for navigating around them before they
occur and well into the future.
HOW SPEND MANAGEMENT SAVES MONEY?
DEVELOPING SUPPLY STRATEGIES
TACTICS TO IMPROVE YOUR SPEND MANAGEMENT PROCESS
● Identify expenses and company spending
○The first step is to identify the sources of
expenditure, which encompasses both direct and
indirect spend. It involves collecting purchase
orders, goods receipts, supplier invoices, and
supplier payment data. There is no room for error
here and it can be an extremely tedious task. That’s
why investing in spend management software that
records expenses digitally is a good idea.
● Centralize expense data
○ Once you have all your expense sources, you must gather this
information in a central database. Automation can help maintain
records of spend or you can put all your expense data in a digital
spreadsheet. Either way, make sure you assign this task to a
responsible individual.
● Verify data
○ The data that’s collected and stored must be cleansed. This
entails steps such as removing duplicates, correcting any spelling
mistakes, and ensuring that all spend data is recorded in a single
currency. Cleansing and verifying your database validates that
the data you’re using to make key company decisions is as
accurate as possible.
● Create spend categories
○ Expenses come in all shapes and forms. It’s necessary to create top-
level spend categories that align with your company’s objectives.
Examples could be advertising expenses, supplier contracts,
salaries,
employeeand so on. Compartmentalizing helps with better
understanding all the spend information you’ve gathered.
● Analyze spend data
○Now it’s time to conduct a detailed spend analysis that will give you
real-time visibility into your company’s purchasing history, spending
patterns, and will provide insight into supplier benchmarking and cost
opportunities. This is also how you can quantify cost savings and
differences in terms of percentages and aggregates/averages.
● Define a strategy
○ Based on the data you’ve collected, streamlined, and analyzed, you
can form a spend management strategy. This will most likely involve
implementing changes that affect all stakeholders, so make sure
they’re involved in the decision-making and implementation process.
● Forecast and planning
○ When you obtain accurate and reliable data through a spend
management platform, you can identify savings and cost
reduction initiatives and estimate the impact it will have on your
bottom line. Data forecasting helps you prepare for the future,
improve supplier relationships, and provides the insights needed to
adapt to changes in supply and demand.
SPEND ANALYSIS
●Spend Analysis is the starting point of strategic sourcing and creates
the foundation for spend visibility, compliance, and control.
●Spend analysis organizes procurement information via supplier
hierarchies, commodity alignment, and spend amount, in order to:
○ Ascertain true category spend
○ Identify strategic sourcing opportunities through demand
aggregation and supplier rationalization.
○ Identify expense reduction through increased compliance – in
the form of vendor rebates, maverick spend, contract
compliance, and budget variance.
●The savings can range from 2 to 25% of total spend.
SPEND ANALYSIS
●Spend analysis is the practice of analyzing
procurement spend to decrease costs, increase
efficiency, or improve supplier relationships.
SPEND ANALYSIS
KEY TERMS AND DEFINITIONS
●Spend data (also known as procurement spend data) is
information dealing with a company’s expenditures on
goods and services purchased from external suppliers.
●Spend data management is the process of collecting,
sorting, and managing that spend data.
●Spend analytics is the process of collecting, cleansing,
classifying, and analyzing spend data through either
dedicated software or one-off spend cubes.
●Spend analysis is the practice of analyzing spend data to
decrease costs, increase efficiency, or improve supplier
relationships.
SPEND ANALYSIS
●Put simply, spend analysis is a process of systematically
analyzing the historical spend (purchasing) data of an
organization in order to answer the following types of
questions:
○What was the corporate-wide spend associated with each cost center last year?
Does the aggregate amount enable me to increase leverage with suppliers?
○What are the top commodities? What has the spend trend been over the last few
years? Which of these commodities represent opportunities for spend reduction?
○Which suppliers are the most valuable and strategic?
○How much am I spending with preferred suppliers? How much am I spending
with poorly performing suppliers?
○What percentage of spend is associated with contracts?
SPEND ANALYSIS
●The idea is to be able to examine these reports and identify
opportunities for savings.
●For example, if the spend associated with non preferred
suppliers is high, this category is clearly where spend “leakage” is
occurring because the prices and terms negotiated with preferred
suppliers are usually better than the prices and terms that are in
effect with non preferred suppliers.
●Similarly, if a particular commodity is fragmented (i.e., is being
sourced from many suppliers), this commodity could be
consolidated into fewer suppliers and better prices could be
negotiated by channeling a higher volume of spend through
them.
SPEND ANALYSIS
●To understand this situation, take a look at figure 1.1,
which shows a few transactions pulled from the A/P
(accounts payable) systems of two divisions of a corporation.
Examine these transactions and try to quickly answer the
following questions:
○How much did the company spend on
personal computers?
○How much did the company spend
with IBM on software?
○What was the spend associated with IT
and professional services in Q3 and Q4 of 2006?
SPEND ANALYSIS
●To understand this situation, take a look at figure 1.1,
which shows a few transactions pulled from the A/P
(accounts payable) systems of two divisions of a corporation.
Examine these transactions and try to quickly answer the
following questions:
○How much did the company spend on
personal computers?
○How much did the company spend
with IBM on software?
○What was the spend associated with IT
and professional services in Q3 and Q4 of 2006?
SPEND ANALYSIS
SPEND ANALYSIS
SPEND ANALYSIS
CHARACTERISTICS OF AN IDEAL SPEND ANALYSIS APPLICATION
● Data definition and loading (DDL)
● Data cleansing, structure, and enrichment (DE)
● Spend data analytics (SA)
● Knowledge Base management (KB)
SPEND ANALYTICS VS SPEND ANALYSIS
●Spend analytics is the art behind spend data management. It
begins with the collecting and cleansing of data. Then, there
are the important steps of classifying and consolidating the
data, so it’s grouped and named in understandable ways.
After that, the data can be merged with external data, and be
ready for the analysis stage.
●With spend analysis, you examine a specific part of the
spend data to identify and extract valuable information that
gives you strategic insights. It’s one of the key methods
procurement organizations use to proactively identify
savings opportunities, manage risks, and optimize their
organization’s buying power.
SPEND ANALYTICS VS SPEND ANALYSIS
●Spend analysis is often regarded as the fundamental foundation of
sourcing. It is a tool that sourcing executives can utilize to engineer
superior performance. The insights from spend analysis can improve
visibility into corporate spend, as well as drive performance
improvement, contract compliance, and most importantly, cost savings.
●Analyzing procurement spend provides a baseline to measure
improvements and provides a reliable reference for deciding strategies
to realize short- and long-term savings.
●As procurement moves to a more strategic function in the company,
spend analysis is its fundamental strategic technique which establishes
a parallel process that guides senior leaders and budget holders in
maximizing value for the organization’s dollar.
SPEND ANALYSIS
●To extract valuable information out of a spend analysis, it involves pulling together purchase history data to look
at all angles of an organization’s expenditures. This includes considering products, prices, quantities, suppliers,
business units, and payment terms.
●By following these guiding questions, spend analysis can help you look back at past performance and help you
perform an assessment of future performance as well as trends.
These are the basic questions we are asking when performing spend analysis:
○ What are we buying?
○ How much have we paid?
○ How much have we bought?
○ Who are we buying from?
○ Who is buying?
○ On what terms did we buy?
○ How often do we buy?
○ When did we buy it?
○ Are we getting what had been promised?
○ Where were the items delivered to (geographical location)?
○ How does the data compare from previous years?
SPEND ANALYSIS
Here are some of the most common sources of procurement spend
data.
○enterprise resource planning (ERP) tools
○general ledgerinformation (i.e., an organization’s
financial data)
○purchase orders
○data shared by suppliers
○risk reviews
○credit ratings
○transaction data
○other internal systems and external sources
DIRECT AND INDIRECT PROCUREMENT SPEND
●Direct spend in procurement refers to goods and services
that are directly related to making products. Examples may
include raw materials, components, hardware, and services
related to manufacturing processes.
●Indirect spend in procurement is the sourcing of goods and
services not directly related to manufacturing of products.
Indirect procurement enables businesses to maintain and
develop its operations.
● Examples of indirect spend categories include:
○ marketing services (media buying, agency fees)
○ professional services (consultancies, advisors)
○ travel and lodging
○ MRO (maintenance, repair, and operations)
○ information technology (hardware, software)
○ HR related services (recruitment, training)
○ transportation and fleet management
○ utilities (gas, electricity, water)
● In manufacturing industries, direct material spend covers most of the total spend –
sometimes it may account up to 80% of the total spend. But what is the difference
between direct spend and direct material spend?
SPEND ANALYSIS IN 6 STEPS
● Identify Data Sources
○To start a spend analysis, the first step is to get an
overview of what spend will be covered. Doing this
allows you to restrict those purchases to just a few key
sources.
○You can segment your spend into different groups and
from there determine all the spend data sources available
from your departments, plants, and business units. Start
by identifying the areas of your business that make
significant purchases, such as procurement, finance, and
marketing.
● Data Extraction
○Once you have narrowed the scope down, you
can now capture your spend data and consolidate
all of it into one central database. Data is usually in
different formats, different languages, and
different currencies, so collecting it into one single
source might be challenging. There are, however,
software programs available to make this step
easier.
● Data Cleansing
○Cleansing is about detecting inaccuracies and
removing corrupt records and redundancies from
a set of data. This includes finding and eliminating
errors and discrepancies in descriptions and
transactions to ensure accuracy. Through data
cleansing, you can identify which contacts in your
database are incomplete or irrelevant. Typos are
removed and missing codes are validated and
corrected for up-to-date information.
● Data Enrichment
○Data enrichment refers to the process of enhancing,
refining, and improving raw spend data. It also includes
standardizing the spend data for easy viewing. Enriching
the spend data makes sure that all the header and line-
level names and details are accurate and to a specific
naming standard. Data is often missing specific fields, and
misspellings and abbreviations are common — as are
incorrectly coded fields.
● Classification
○Classification typically involves grouping several suppliers of the
same parent company or organization. For example, Microsoft
purchases like Microsoft 365, Azure, and Surface should all be
grouped together. At the same time, you can also categorize the
data into meaningful groups (like marketing, office supplies,
software) to identify how and where the business is spending its
money.
○Unifying heterogeneous spend data into clearly defined categories
makes spend easier to address and manage across the whole
organization. Classification is about harmonizing all purchasing
transactions to a single taxonomy, enabling procurement to gain
visibility to the global spending to make better sourcing decisions.
● Analysis of Data
○The last step is to identify opportunities for savings and
other procurement improvements. Analysis can be geared
towards investigating all sorts of business problems, such
as ensuring that you have negotiated the best contract
deals per supplier, or confirming buyers are purchasing
from preferred suppliers.
○With this, you can identify opportunities of reducing the
number of suppliers per category and negotiating better
rates. The best probable method for cost savings can only
be realized after the confirmed estimates have been
calculated properly.
TYPES OF SPEND ANALYSIS
● Tail Spend Analysis
○Tail spend is defined as the amount of money that an organization
spends on purchases that make up approximately 80% of
transactions but only 20% of total spend volume. Tail spend is easy
to ignore, but at a big cost. It is the place where procurement
organizations may be leaving money on the table and utilizing their
resources inefficiently
● Supplier Spend Analysis
○Supplier spend analysis is the task of identifying
the amount of spend coming from critical vendors.
It involves creating a detailed spend profile for
each vendor using historical consumption data.
Knowing this can help focus efforts on getting the
best value from these preferred vendors and
consolidating the relationships.
● Supplier Spend Analysis
○Supplier spend analysis is the task of identifying
the amount of spend coming from critical vendors.
It involves creating a detailed spend profile for
each vendor using historical consumption data.
Knowing this can help focus efforts on getting the
best value from these preferred vendors and
consolidating the relationships.
● Category Spend Analysis
○Category spend analysis allows you to explore spend in a defined
spend category hierarchy. This is useful in identifying spend
leakage issues.
● Item Spend Analysis
○Item spend analysis refers to analyzing expenditure at an item/
SKU level. It takes into account every individual purchase,
classifying each one of them to identify what department it was for
and what supplier was used.
○This analysis gives the ability to know whether a specific item is
being purchased from various suppliers, or in several locations and
at different item prices. Doing this analysis can highlight the
different opportunities for purchasing in the business and
potentially identify spend leakage issues, such as purchasing from
non-preferred vendors and maverick spend.
● Item Spend Analysis
○Item spend analysis refers to analyzing expenditure at an item/
SKU level. It takes into account every individual purchase,
classifying each one of them to identify what department it was for
and what supplier was used.
○This analysis gives the ability to know whether a specific item is
being purchased from various suppliers, or in several locations and
at different item prices. Doing this analysis can highlight the
different opportunities for purchasing in the business and
potentially identify spend leakage issues, such as purchasing from
non-preferred vendors and maverick spend.
● Payment Term Spend Analysis
○Payment term spend analysis provides excellent insights for
companies to analyze payment practices and terms within their
purchase to pay (P2P) processes. It explores the opportunities of
leveraging all possible discounts or interest from the invoice
payment process, while increasing working capital.
○Suppliers may reward early payment of invoices with discounts,
but early payment of invoices may also mean lost interest on
working capital. Payment term spend analysis utilizes data and
gives a comprehensive view that enables you to identify unrealized
discounts through late payments of invoices or opportunities to
negotiate better payment terms to capture unrealized interest. It also
covers the review of payment patterns to identify practices and
activities that are not done properly.
● Payment Term Spend Analysis
○Payment term spend analysis provides excellent insights for
companies to analyze payment practices and terms within their
purchase to pay (P2P) processes. It explores the opportunities of
leveraging all possible discounts or interest from the invoice
payment process, while increasing working capital.
○Suppliers may reward early payment of invoices with discounts,
but early payment of invoices may also mean lost interest on
working capital. Payment term spend analysis utilizes data and
gives a comprehensive view that enables you to identify unrealized
discounts through late payments of invoices or opportunities to
negotiate better payment terms to capture unrealized interest. It also
covers the review of payment patterns to identify practices and
activities that are not done properly.
● Contract Spend Analysis
○Finally, contract spend analysis tells companies if
they are complying with their existing
negotiated contract terms. It analyzes spend with
vendors by contract to identify spend leakage
through non-compliant contracts. It ensures that
the best contract deals per supplier have been
negotiated and that all the buyers are purchasing
● Contract Spend Analysis
○Finally, contract spend analysis tells companies if
they are complying with their existing
negotiated contract terms. It analyzes spend with
vendors by contract to identify spend leakage
through non-compliant contracts. It ensures that
the best contract deals per supplier have been
negotiated and that all the buyers are purchasing
SUPPLY POSITIONING MODEL
A. LEVEL OF ANNUAL EXPENDITURE ON THE ITEM
B. IMPACT ON THE ENTERPRISE
C. SUPPLY OPPORTUNITY AND RISK
● The supply positioning model refers to segmenting the spend portfolio by
risk and opportunity. With the help of this model, organizations rank their
supplies based on the money spent with the supplier
and the level of susceptibility a business has if that supplier
fails.
● Supplier positioning is the process of classifying spend with a supplier in
terms of the profit potential and supply risk and
assists in prioritizing
categories of spend and developing the right strategy.
● Supply positioning is an analysis tool that seeks to map the importance to
an organization of the item being purchased against the complexity of the
market that supplies it. It identifies the two variables of risk and spend as
determining the type of commercial relationships that should be formed for
supply agreements. Based on this, all procurement can be assigned to one of
the four categories namely - strategic, routine or non-critical, and bottleneck
items. With this knowledge, the supplier has a
platform for prioritizing
supplying activity based on the importance of the goods and developing the
appropriate purchasing and supply relationships with the
suppliers who supply them.
fails.
fails.
KRALJIC MATRIX
BENEFITS OF SUPPLY POSITIONING MODEL
● Simplicity:
○It is easy to understand and is a strong communication tool that could be
used to convince other departments of what they should have to do.
○This is because applying supply positioning to a particular context is a
fairly straightforward process and facilitates easy mapping of the current
situation.
● Focuses on those areas where potential benefits and risks are greatest:
○The model highlights the fact that each category of items will have an
impact on the financials of an organization according to its use and that
risk is associated with supply, depending on the number or range of
suppliers in the marketplace.
○Based on this, the buyer can discover ways for improving company’s
bottom line profits through cost reductions and efficiency gains.
DISADVANTAGES OF SUPPLY POSITIONING MODEL
●It ignores the fact that not all the risk of supply comes from
within the relationship between customer and supplier.
External environmental factors, especially competition, and
the PESTEL factors can have a great impact.
●The supplier side of the buyer-seller relationship is
considered a disregarded element in the model.
●It does not take into account the possible strategies and
reactions of the supplier.
●Fixation on the model can restrict the development of
appropriate relationships to suit the changing nature of
market conditions and the power dynamics between the
parties involved.
E-PROCUREMENT
●E-procurement is the process of buying and selling
supplies and services over the Internet. It differs from
e-commerce in that it makes use of a supplier’s closed
system typically available only to registered users.
●When implemented properly, e-procurement opens
the lines of communication between a company and a
supplier by creating a direct link and facilitating
interactions such as bids, purchase orders and emails.
BENEFITS OF E-PROCUREMENT
● Cost Savings
○Built-in monitoring tools help control costs and maximize
performance, reducing overhead and paperwork. Fully
automated systems streamline processes and can result in a
faster cycle from creating an order to fulfillment. There also is
an opportunity for a larger selection of products and services.
● Shorter Purchasing Cycles
○Centralized transaction tracking simplifies reporting on
orders, payments, and requisitions, as well as ensuring
contract compliance, all of which can reduce delivery time.
Buyers have electronic access to available products, services,
and prices.
BENEFITS OF E-PROCUREMENT
● Improved Inventory Control
○Procurement professionals can quickly locate products
from preferred suppliers and are limited to the purchases
they can make, so inventory is better controlled.
● Transparency
○All information is centralized and can be made available
to management, stakeholders, shareholders or the public,
as appropriate.
REFERENCES
● Spend Analysis: The Window Into Strategic Sourcing
● https://www.scribd.com/document/104725921/Module-2
● https://www.corcentric.com/blog/spend-management-what-it-is-how-to-improve-your-
strategy/
● https://sievo.com/resources/spend-analysis-101
● https://aavenir.com/glossary/supply-positioning-
model/#:~:text=What%20Is%20Supply%20Positioning%20Model,has%20if%20that%20supplier
%2 0fails.
● https://www.supplychainopz.com/2013/05/kraljic-matrix.html
● https://www.michiganstateuniversityonline.com/resources/supply-chain/e-procurement-
helps-online-information-exchange-between-buyers-suppliers/
● https://www.thomasnet.com/insights/5-steps-of-a-supply-chain-market-
analysis/?fbclid=IwAR2hRkjRXMMfViMomKhGjYsroOH32jHpNP8PHqgaQEskBQHp1NSTZy
QR
mak#:~:text=5%20Steps%20to%20a%20Supply%20Chain%20Market%20Analysis,improve%20yo
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, Building the Nation
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, Building the Nation

SUPPLY CHAIN MANAGEMENT

PREPARED BY: ENGR. EJ CARPIO

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