Part II of the Cost Reduction Series

The first step in the strategic sourcing process, or really any cost reduction or procurement project, is to analyze your spend data to deter­mine where you should focus your efforts via a spend analysis. You will often find that gained visibility into your spend patterns and history may reveal a number of opportunities for budget optimization.Your resources are more than likely limited, making it all the more difficult to immediately reduce costs across all spend categories. So, you’ll need to prioritize your cost reduction initiatives and create a time line for your efforts. 

If your procurement department is unfamiliar with the process of spend analysis, and your organization is challenged by decentralized spend, seeking support from a spend consultant may be ideal. Firms specializing in spend management can offer fast spend analysis services, along with opportunity assessments that can quicken the cost saving process and alleviate the burden on your internal procurement teams.

Getting started with your spend analysis, you’ll begin with data collection. Before digging in to the most effective ways to collect data, let us first identify the types of data you need to get started on any sourc­ing engagement.

Data Types

On the surface, quantity and price seem to be the two pieces of raw informa­tion you need to get started. However, once you begin to dig, you will discover that there can be some complexity hidden within these data points. For example, a logical first question is, how much does the company buy (total units) and how much does it cost (price per unit)? As you explore the answer, the notion of price quickly grows in complexity when you realize that unit cost is not the only component you need to consider; other factors come into play. Are there quantity price breaks? Is freight included or are there additional charges? What are the payment terms, and is there a discount for early payment?

Sometimes net cost per unit is not the only way to evaluate price. Consider a project that includes a basket of items, some purchased regularly and others rather infrequently, such as office supplies. In this scenario, high-volume items might be identified as having a fixed unit price, but what about items for which a fixed price wasn’t negotiated? It is not likely that you will have negotiated a fixed unit price for everything in a supplier’s catalog. Still, controlling the costs of the less-frequent purchases is also important. For these items, you likely have a discount structure based on a list price. For instance, pens and pencils that are not listed as contract items might receive a 20 percent discount off of list price. In this example, price is a combination of net costs, list prices, and dis­counts. Collecting pricing information may appear to be a simple concept but, as you can see, there are many factors that must be considered to understand the total cost.

Volume & Usage
Usage, or volume—how much you buy of a particular product or ser­vice—is the other basic component in the data collection process. In most cases, companies consider the last 12 months of usage to be reflective of future purchases; however, this may not always be the case. If business has shrunk or increased dramatically, volume may have shifted, and those changes should be documented before engaging in the RFx process. In some cases, consolidating volumes across locations (if you have multiple sites buying the same products) might make sense; in other cases the data should stay separated. Order size may also make a big difference, so line item detail of purchases across locations becomes critical. Getting this level of detail out of your own internal systems can be a challenge, if not impossible.

Price and usage are the foundation of a spend analysis, but there are many other factors that should be considered as part of a larger strategy development. Understanding existing contractual commitments, contract terms and conditions, quality levels, and scope of work are also important. Business concerns such as the order-to-payment process, the shipping and receiving process, and a detailed understanding of the historical relationships with current suppliers should all be reviewed and evaluated. In part three of the Spend Analysis Series, we’ll explore how to approach data collection, including how to manage the process when dealing with decentralized data sets.

Looking for end-to-end cost saving help? Source One has you covered – offering comprehensive spend analysis services through including data collection, cleansing, and classification. With a complete view of your organization’s spend, leveraging marketing insights and deep category knowledge our experts will provide cost savings opportunity assessments, outlining where your company can reduce costs and optimize your budget.
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