Indirect Spend data deep dive...
“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.”–J.W.Frick
To make effective decisions about Indirect Spend, it is important to understand the scope and breadth of the category - visibility. This requires a deep dive into the data relating to the category in order to be able to fully understand the category and make effective decisions relating to the category.
However, indirect spend category data is not as easily accessible as we might like. Ask yourself the following questions:
1. How deep can I dive into my Indirect Spend data?
Typically when procurement category managers are asked how deep they can dive into their Spend data the answer is usually very deep for strategic spend categories, however for Indirect Spend data the answer is usually not very deep at all. In fact, on Tail Spend specifically, many Indirect Category managers do not even know their total spend.
In this case there is a need to capture the Indirect Spend data in real time in the first instance.
2. Can I base decisions on the Indirect Spend data when I get the detail?
With Indirect Spend data the issue is usually that a consultancy has come in and analysed historical data and provided a one off snapshot of what has already happened! Basing decisions on historical data, as opposed to current real time data, will produce very limited results.
For Indirect Spend data there is a need to have data analysis tools and views on what is happening in real time, in the current period, as well as this historical view.
So, there is a need to capture the data in real time in the first instance.
3. How much resource is expended in my category throughout the organisation
Effectively, how much time is wasted throughout the organisation on low value or one off purchases. Here, as examples, Indirect Spend data can show how many low value single item purchases are handled? How many mismatched invoices are there? How many returns are there? How many new suppliers have been used? What duplicate purchases are being made against the same or similar specification at different prices? As well as providing details on time taken to process orders and invoices.
On average, procurement professionals spend the majority of their time on the 80%–90% of the suppliers that represent less than 5%–10% of spend and business value, according to Spend Matters.
In this case we are looking at process improvements and the ease with which departments can make low value purchases, reducing errors and speeding up processes.
The remainder of this article focuses on the issues relating to Indirect Spend data and shows why it is important, in context of this spend, to have real time, complete, granular and global data to make decisions.
Understanding Indirect Tail Spend
To understand Indirect Spend it is best to start with the outcome that you are looking for in any sub category of Indirect Spend. So for example are you looking at supplier rationalization, spend reduction, diversification, more local suppliers or getting more competitive bids from suppliers against specified items.
Measuring, reporting and making decisions on a category in context of the outcome you are expecting will help identify pockets of opportunities.
Unlike strategic spend, the Indirect Spend data category requires a real time approach, since many purchases are not repeated over time and need to be captured at the point of process. Being able to access real time Indirect Spend data is essential for business decisions to both the Category Manager and the business in general.
For example: our expected outcome is to source 80% of our marketing materials from suppliers within our local region. We have three preferred suppliers in this region. A department raises a purchase order within this category against a supplier outside of this region. If the data is not real time this event would be missed and no control could be applied over this purchase criteria of specific local suppliers, which may in this example be an individual responding to a sales call from a supplier outside of region, or may be a legitimate purchase from a new supplier.
Additionally when we discuss Tail Spend, increasingly the issues of compliance is raised. Therefore it is important that all the contract data is accessible and that preferred suppliers are also identified. The use of corporate contracts for tail spend should maximise your buying power and drive down unit costs, however you need to know which suppliers are using these contracts.
Getting to the detail
In our experience most organisations can access category and sub category Indirect Spend data. However getting to the detailed data beyond this such as to product, sub product and specification(contract details) is not possible. This severely limits management decisions relating to Indirect Spend.
Then, in many cases, only historical Indirect Spend data is available – there is no real time data capture. This means that decisions cannot be made in real time and there is limited control over Indirect Tail Spend as a result: the outcome we are seeking cannot be achieved. As we stated earlier, typically with Tail Spend consultancies are used to analyse historical data and produce reports on where possible savings may be achieved. Typically this historical data will produce very limited results and decisions being made that do not reflect the current spend patterns of the business.
It is also worth noting that organisations typically have inefficient processes to capture Indirect Spend data, including use of manual data recording on multiple spreadsheets, which makes these consultancy projects time consuming and costly. Plus, lack of efficient processes just encourages maverick spend behaviours within the organisation.
Outside of Indirect Spend data relating to cost, there is the key requirement to capture specification and contract adherence. Yet many category managers have no access to online specifications for purchased items and the data relating to use of these specifications. Plus, if the specifications are not part of the process chain then these will be sent separately, with all the inherent risks of errors in specification and acceptance of goods. Which failings will of course not be available as Indirect Spend data either!
Indirect Spend data can be further classified / filtered into opportunity areas such as price variance, spend fragmentation, spot buying and off contract purchases. Data views aligned to these filters will provide invaluable information for decisions to be made to achieve specific outcomes within these opportunity areas.
Making effective decisions from data
Within Indirect Spend data the associated information is significant in volume terms, real time and the overall category complex by nature
There are however some key characteristics of the Indirect Spend data required for making effective decisions:
- Real Time or Near Real Time. The Indirect Spend data has to be available in real time or near real time, as purchase decisions are typically made on the spur of the moment for this category
- Granular. You need to hold the details down to specification level to be able to identify purchase types and engage with potential preferred suppliers for the sub product of a Indirect Spend category
- Complete. The process has to control the Indirect Spend data entry. Making the purchase process easy, in terms of entry and approvals, however at the same time ensuring that the Indirect Spend data is captured during the process.
- Global. The process and Indirect Spend data obtained through the process has to be across the organisation. Whether the organisation is global or not the point here is to ensure that the process operates throughout the whole organisation. Providing for local action and global control.
Once we have captured Indirect Spend data, with these characteristics, the category can be analysed from a number of perspectives that would include:
- Current overall spend of the category, sub category, product and sub product by supplier and location
- Spend by supplier breakdown, and organisation location
- Supplier location, performance, preference and status(live, under evaluation, on hold…)
- Geographic segmentation of the spend by supplier (this represents the location from which the supplier is supplying)
- Supplier risks in terms of single source
- Savings by Category, Sub Category, Product and Sub Product to show exactly where most savings are being made
- Price variance, spend fragmentation, spot buying and off contract purchase reports
- Local reports, showing spend and supplier use
- Anomalies on spend and invoicing. Incorrect or fraudulent activity
This article has focused on why it is important to dig deep into Indirect Tail Spend data in order to be able to make effective decisions on Tail Spend.
Indirect Tail spend by nature is a now event - current action needed. If the process and control cannot act on instant data, based on data generated by the process, then decision opportunities will be missed and anticipated outcomes never achieved.
The depth of data needed for making decisions on Tail Spend was also highlighted, with a view given that to make effective supply decisions you have to get down to sub product and specification levels of any purchase.