“If you can measure it then you can manage it” This statement is so true in the procurement field. Whether you are focused on controlled growth or cost efficiencies, the ability to measure what is occurring in real time is essential to making decisions.
Procurement is fundamentally in the intelligence business, and since information is at the core of intelligent decision making, you need to be really good at efficiently gathering and transforming data into information. Providing insight and valuable intelligence that helps to answer key questions and drive decisions within the organisation.
This article looks at the challenges associated with information in context of Tail Spend, explores an approach that can be taken towards analytics and the benefits that can be realised through effective information gathering and presentation.
The challenge of Tail Spend
The supply chain may contain components of raw materials, manufacturers, wholesalers, distributors, resellers, agents, logistics, retailers and many other entities. Knowledge of part of this chain is not sufficient. Procurement needs to have real time data on the entire supply chain.
When we look at Tail Spend specifically, this knowledge takes on a whole new level of complexity in terms of entities involved, plus the level of transactions involved. The following table gives a perspective on some of the differences from strategic spend:
Add on top of this the array of categories associated with Tail Spend:
• Print and Packaging
• Signage and Display
• Business Services
• Marketing Services
• Professional Services
• Office Products
• Uniforms and Apparel
• Gifts and Premiums
• Temporary Labour
and the complexity of the information escalates to a level that software tools are essential.
Given this complexity it is not surprising that when asked about tail spend the typical procurement responses are along the following lines:
1. I don’t know who spends what
2. I don’t know how to control spending in the tail
3. I don’t know what we buy
4. I don’t know who we buy from
5. I don’t know if we’re getting value for money
6. I’ve negotiated some preferred supplier contracts, but they struggle to gain adoption
7. I know there’s a problem, but don’t have time to sort it out
8. We hold stocks of obsolete product
9. Different business units buy the same product from different suppliers at different prices
An approach to Tail Spend Analytics
True supply chain visibility means delivering real time information to upstream customers and downstream suppliers. Providing at any point in time, a top level view of KPIs, yet at the same time to be able to drill down to a specific item within any one of the many supply chain domains.
Specifically for Tail Spend there is a need to be able to dive deep into data and slice and dice transactional data to uncover real value and identify opportunities for improvement.
A huge challenge in this space is that most transactions are manual (online search, email, phone and spreadsheets). There is no central repository of information. The time / cost required to gather information for large numbers of small transactions is significant.
And even when you get to the data, the quality is generally poor, unstructured (ie lots of free text), inconsistent and out of date.
Often organisations resort to one off consultancy projects to try to assimilate the data and make sense of what is happening. This is just that, a one off, and will not provide a long term management solution.
Given the magnitude of the challenge automating tail spend procurement to accurately capture employee spending is essential. Once deployed, employees will find it quicker and easier to use than traditional sourcing methods, so adoption will not be a barrier.
Procurement can centrally control local spending and management have access to granular, specification level data, locally, nationally and globally in real time.
However given the magnitude of the challenge, we would propose an initial focus on a specific spend category and working with a specific organisational business unit.
Then, even with this focus it is important to break this down further in terms of how you are going to analyse the data: to analyse volume Transaction Level information we use ‘Data Cubes’ to work within.
Data Cubes contain Facts – that is the measurable data information
Example Facts would include:
• and service levels
For any one fact you then add Dimensions, that form the overall Data Cube. The Dimensions are the different ways you may want to look at the Fact. An example for Cost would be the dimensions of Supplier, Buyer and Product.
Using this Data Cube approach allows a user to present data in any dimension that they want, providing critical management information to make informed decisions.
Having focused and broken data into cubes you can now fully analyse the information available to you and request reports and populate dashboards in any dimension to help you to visualise the spend activity.
Why are Dashboards important?
The high impact of visual tools cannot be underestimated. You seldom have the time to assimilate tables of information, so being able to present these, as you want them to be presented, in real time dashboards helps improve your performance and focus on KPIs.
Now moving beyond the initial sector and business unit focus you can start to extend the analysis to further business units and sectors to get granular line item visibility of every transaction globally and in real time. Sharing management reports, performance dashboards and analytics with customers, suppliers and co-workers.
It should be noted that although most ERP systems will allow broad categorisation, they will be of little help identifying the opportunities for savings and efficiencies in Tail Spend. It is better to focus outside of these systems for Tail Spend control, however ensure you choose a supplier who can integrate to your chosen ERP platform for seamless operations.
Through this methodology you can gain unique granular visibility of every penny of every transaction, globally and in real time. Enabling you to make better decisions, faster. For actionable business intelligence
Users can, from this organised data, create, manage and publish powerful management reports for all key management functions. Monitor demand, gain insights into spend under management, track operational efficiencies and keep a close eye on suppliers and spending.
It can also help mitigate risk. Scanning masses of data from multiple sources means systems can start to identify potential problems like fraud or impending bankruptcy. Is a supplier always asking to be paid early and paying subcontractors late?
The next step is to automate the predictive analytics: the human element of looking at date to predict outcomes. For now we will leave this to another article., as this is a significant topic in itself and for most organisations the focus is firstly to assimilate their data and get Tail Spend under control.
The results of the Deloitte Global Chief Procurement Officer Survey 2018 show for the second year running that leaders think analytics technology will have the most impact on procurement in the next two years.
In our experience the financial benefit realised from effective analytics, using software tools focused on Tail Spend, is at minimum 4x any investment cost. That is the savings far outweigh the investment being made. These savings and returns are also achieved within 1 year when adopting a SaaS solution.
However direct savings are not the only benefit. Management and control of Tail Spend can realise significant benefits beyond cost in terms of sustainable business growth.
The following list is probably not exhaustive, in terms of benefits realised. Also, dependent on your industry, you may not see all these benefits. However, a list is included to show the potential depth and breadth of impact of effective analytics on Tail Spend.
We started this paper with the “If you can measure it then you can manage it” statement.
In the case of Tail Spend, we have shown that to manage this element of an organisations spend, and to control all aspects of supply, it is essential to be able to measure what is occurring at the time it occurs.
Getting this real time insight into purchase categories, that typically are of low value and high volume, ensures that management decisions are based on factual real time information.
We also identified that there are areas, in terms of benefit, that directly impact on an organisations interests and reputation. Making analytics a wider issue within an organisation than pure control and cost management.
A method and approach was proposed to bringing in Tail Spend Analytics and control. This relied on organising around Data Cubes, to effectively organise and manage how data can be used.
We hope you have found this article interesting. If you would like to learn more from Claritum then please Contact Us.
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Deloitte Global Chief Procurement Officer Survey 2018
What is Tail Spend?