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Decisions Special Feature – Track the cash: Corporate spend analysis crucial to e-sourcing

Procurement matters

It’s a procurement industry adage: for every pound brought in by sales,
between 10 and 40 pence goes straight to the bottom line; for every pound saved,
the entire pound goes to the bottom line.

This is the much-used argument of the long-suffering procurement director ­
– an executive who often struggles to gain a strategic voice within their
organisation. But that’s certainly changing ­ – supplier relations are now seen
as core to many corporate strategies and never is this more evident than during
times of economic hardship, such as those we are going through now.

But it must be a two-pronged attack. It is no good squeezing suppliers until
they go out of business, because doing so will almost certainly be detrimental
to your own business. But at the same time, good supplier visibility and spend
analysis allows your organisation to get the best deals while keeping track of
where the cash is going.

For an example of how seriously some corporates are taking the contribution
of procurement and supply chain executives and systems, look no further than
Vodafone. Its global supply chain management director, Detlef Schultz, presented
at an investor day hosted by (then) chief executive Arun Sarin earlier this year
and was quick to extol the benefits of systems to understand this very issue.

“We implemented spend analysis to get transparency of our spend by supplier,
category and geography,” Schultz explains. “We developed supplier performance
management to have best-in-class systems to evaluate our suppliers.”

Buying power
Vodafone has gone one step further than most organisations. Following in the
footsteps of IBM, Schultz has been busily establishing the rather grand-sounding
Vodafone Procurement Company, a profit-focused group with headquarters in
Luxembourg which is responsible for (euro) 5bn worth of procurement activity,
buying items that range from its physical mobile phone networks and in-house
technology, to corporate services. Just over two years ago, IBM opened a similar
operation in Shenzhen, China, where John Paterson, its global head of
procurement, is permanently based. Both Vodafone and IBM see the benefits that
can be had from focusing on procurement and supply chain initiatives.

Rob Hemsley, director of European procurement at Heinz, has long been a fan
of technology and has won awards for the implementation of sourcing and
procurement systems, ­ especially around the discipline of e-optimisation, a
technology that allows corporates to engage with suppliers on a huge scale
without losing the advantages of working closely with a single supplier.

“The job of the procurement team is to meet the needs of the business while
at the same time leveraging the suppliers and their strengths to best fit that
in a competitive environment,” he says. “What e-optimisation does is it allows
the suppliers to bid, or put their offerings into a system that meets the
current perceived needs of a business, and then put other offerings in to almost
challenge those needs to give the business itself the opportunity to change its
specification.”

Companies can gain a great deal by listening to their suppliers. Supplier
relationship management isn’t just about implementing systems used to produce
statistics to bash your providers over the head and force price reductions. Used
successfully, the systems can also help to introduce innovation and product
development. “We did an e-optimisation event where there were something like 700
items and 200 suppliers,” says Heinz’s Hemsley.

Powerful relationship
Perhaps one of the best examples of supplier management technology is provided
by Portuguese energy company EDP. The Iberian energy leader has grown from a
relatively small regional utility to a global powerhouse in just a few years,
acquiring several international businesses along the way ­ and with each
acquisition comes a new list of suppliers, all of which are crucial to
corporate success. But successfully integrating those businesses and their
suppliers is critical ­ an issue also faced by many finance directors who have
steered organisations through periods of rampant consolidation.

Luis Ferreira, procurement director of EDP, approached the problem in an
innovative way ­ by establishing a joint venture, Sinergie, which focused on
spend management. The project made use of data provided by both Dunn &
Bradstreet and Achilles, a company that identifies, evaluates and monitors
suppliers on behalf of various companies.

The utility’s rapid growth by acquisition had resulted in the accumulation of
almost 20,000 suppliers spread across four databases. The inaccuracy of that
data was made evident by the fact that more than 6,000 of the supplier accounts
weren’t even active. “We are integrating businesses in Spain, in the north of
Brazil and in the United States,” says Ferreira. “But the first point that we
should put together is the way that we are spending money. What we need is the
beginning of an alignment in procurement to get these potential savings, these
synergies in the group.”

Sinergie allows EDP to categorise both existing and potential suppliers into
low, medium and high risk.

Would-be suppliers must also complete a rigorous questionnaire and
registration process before being able to do business with the energy company.
This information is then interfaced with the company’s more traditional ERP
systems to provide Ferreira with detailed, up-to-date information on suppliers
and potential suppliers for the purpose of spend analysis and risk management.

Sinergie is doubtless one of the world’s more advanced supplier relationship
management solutions ­ EDP has even gone to the length of securing the
intellectual property of the technology developed by the joint venture for at
least the next five years.

But while EDP’s approach is to be applauded, there are many off-the-shelf
software packages that can be implemented and adapted to large enterprise needs.
Heinz, for example, uses software provided by technology companies Ariba and
Emptoris (both systems are used to extract value from a disparate collection of
legacy systems and databases while the manufacturer implements a company-wide
SAP installation); Vodafone also uses Emptoris; the Welsh Assembly has just
signed a deal with Italian software provider Bravo Solution which also helped
the Office of Government Commerce save £270m over a three-year period.

Clearly, access to this technology is not difficult. But it has still to get
to the level of more familiar technologies such as business intelligence,
customer relationship management or corporate performance management.

Duncan Jones, a senior analyst with
Forrester
Research
who focuses on sourcing and procurement technology, says
that good spend analysis is crucial if an organisation is to source
strategically. It differs from business intelligence, he says, because it
enriches the data that lies within legacy ERP systems that would otherwise be
extremely difficult to extract and use. “With spend analysis you are able to
look at data which has many different descriptions and normalise it,” he says.
“We call it enrichment ­ taking base data and turning it into something you can
use, such as single category goods being bought from several suppliers.”

Making sense of it all
He also talks of the problems that are caused with consolidation. When companies
come together, it’s incredibly difficult to integrate systems which may refer to
a product that both companies buy in very different ways. “For the first time
you can say, ‘do you realise we spend X amount of money with such-and-such a
supplier?’” Jones says. “It’s about taking a mass of unstructured data and
making sense of it ­ not like business intelligence, which is generally adding
up numbers.”

Of course, with that knowledge comes power. Companies are able to negotiate
far better rates with suppliers if they have the right visibility of spend; but
also, internal compliance can be vastly improved and spending patterns tracked
and predicted in order to produce far more accurate forecasts. Jones goes on to
say that it makes sense for companies to implement spend analysis systems from
software companies already in the enterprise. Both Oracle and SAP, for example,
have their own spend analysis systems.

But this raises another interesting point. Many companies will already have
purchased the software licence to use these applications, yet fail to do so for
the simple reason that it continues to drop below the radar.

“Anecdotally, that’s often the case,” agrees Jones. “We call it shelfware.
I’ve certainly spoken to a lot of clients who have encountered that problem.”

Of course, having access to good quality software and systems is only useful
if the people that are using it know what to do with the information. At a
recent round table debate hosted by
Procurement
Leaders
, Guy Allen, procurement director of Fujitsu Services,
warned of the problems companies can encounter when they get too deeply involved
in spend analysis.

“I think you’ve got to be careful with spend analysis, because analysis is
looking at numbers and not doing anything,” he warned. “If you talk about spend
management, that’s far more interesting. One of the things we learned when we
put a spend database in at
SmithKline
Beecham
was that people got very excited about the numbers but
didn’t do anything. So the really important thing for me is, having done the
analysis, what actions does it drive?”

It is an extremely valid point; getting bogged down by the minutiae of
corporate spend could well be quite interesting. But the real value comes
through abiding by the 80:20 rule ­ that is, 20% of deals are responsible for
80% of the value. Successfully tackling that 20% is critical if companies are to
successfully drive down costs, while at the same time maintaining good relations
with suppliers.

“Spend analysis has been seen as a very specialist area, but now companies
are seeing it as a very relevant area of e-sourcing,” says Forrester’s Duncan
Jones. “Spend analysis helps you find where the opportunities are. It comes with
a lot of business logic and the ability to extract information from corporate
data.”

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