Cost Reduction – Where do I begin?

Getting Started

Imagine your organization is looking to cut costs and find savings opportunities. For many companies, this means going to market with suppliers in the form of a strategic sourcing event. However, conducting effective sourcing events requires prioritizing spend opportunities, organizing the projects, assigning resources, and forming go-to-market strategies. How do you kick this off? - through a Spend Analysis. By conducting a spend analysis, your procurement department can get full view of purchasing patterns and history, making it possible to uncover strategic sourcing opportunities. 

First, you must start by sorting your suppliers into categories based on the products and services they provide. Once that is all set, you and your team will need to identify the cost savings projects you want to launch and begin data collection. Before you jump into collecting data and performing a manual spend analysis, it is worth noting that there are tools that can simplify this process. However, to implement them correctly, your team may need to sacrifice some time…and money. Your organization you may consider a spend analysis tool as an investment to drive further efficiency, but ideally only after you have proven that it works. Not yet ready to commit to a spend analysis software or tool, your procurement and strategic sourcing department can continue the process manually, or utilize the services of a Spend Consultant.  In any case, the work begins with data collection.

What am I looking at?

The best place to begin collecting your data as the basis for your strategic sourcing initiative is in the general ledger or accounts payable ledger. The general ledger involves a registry of all financial transactions, which are usually sorted into groups used by the accounting department. While this is a great place to start, solely using the information provided in the GL is a mistake, as the suppliers categorized by accounting are not typically aligned with purchasing requirements. For example a GL might have both paint and coffee filters classified under one category: “office supplies”. While the classification serves its purpose for accounting, you’ll want to further define these items when seeking suppliers in a strategic sourcing event. Although a general ledger needs to be modified, it guides you in the direction of which categories, from an accounting point of view, use the most spend and influence the organization the most, which is the purpose of this phase of data collection.

Usually each item in the general ledger includes a description or comment. If the purchase of a good or service is represented in the transaction, it will probably be mentioned in the description. The challenge with this is that the description information, which is taken from an accounts payable (AP) or purchase order (PO) database, will not be the same for each transaction. So, it will require some additional tweaks to the data. Depending on your enterprise resource planning (ERP) system, an accounts payable report can be a guiding tool to focus on sourcing opportunities. This report has several advantages compared to a general ledger. For example, while the general ledger lists every debit or credit transaction an organization has made, an accounts payable report only shows money paid to vendors. Also, since the report is specific to vendors, supplier names will probably be more consistent, making the filtering process easier. A disadvantage of using an accounts payable report instead of a general ledger is that it is possible that each business location within an organization may be working under its own accounts payable journal. If you are sourcing for multiple locations, this means you would need to do a report for each particular location and then combine the files.

Over the next few weeks, we’ll continue the process of conducting a spend analysis including the type of data to assess, how to deal with decentralized data, standardizing and centralizing data, ranking spend categories, and understanding your supplier mix.

Could your organization use a spend analysis but you need expert support to get the job done? Source One & SpendConsultant.com have you covered. Our cost reduction experts have over 20 years of experience cleansing and consolidating spend to form a clear view of our client’s spend data. We’ll help you understand your purchasing history and formulate a strategic plan for achieving cost savings.