Spend Under Management Part 3 of 4
In our last post. we discussed adopting spend under management (SUM) and the first of five principles. Here are the other four:
2) Purchase through a formalized requisition to purchase order approval process. The purchasing processes of an organization should be governed by policies and procedures that are complete and enforced universally. Simply having them in place is a starting point but the key issue is enforcement. Are all the spend areas incorporated? Does my procurement system reinforce these through workflows and business rules? Is that system intelligent enough to accommodate the differences in requirements by category or region? In reality, an organization should be targeting to flow 100% of spend through a controlled process.
3) Source in a competitive environment. Sourcing in a competitive environment is easy to understand but for a myriad of reasons is not always applied. Using quick quotes in a procurement tool, web-enabled RFPs, and auctions are a start, but how you maximize the business value of sourcing varies significantly based on category, region, and end customer needs. Are there well-articulated category strategies customized to the business needs and is there an accurate assessment of the competitive environment? Are savings strategies developed and assigned to each functional leader through spend portfolios? Are there category playbooks and are they linked to core financial metrics and improvement objectives? Is there real-time visibility into performance across regions? Moreover, are functional managers committed to running all of their spend through the process?
4) Ensure contracts are in place and used across the full spend. Well-structured and managed contracts are essential to gaining efficiencies, reducing risk, and managing effective partnerships with suppliers. In almost any category, 70-90% of spend should flow through contracts or pre-negotiated catalogs. This is where specialized talent in indirect procurement can really add value to functional areas and the goods or services they request. But does the indirect procurement team have the skills base and market knowledge to rapidly bring key market insights to the functional organization? Has the organization captured best practices in the contracts and are those contracts being proactively managed? Does the organization execute against the contracts and do our systems and processes enable efficient transactions against those contracts? Is there leakage or maverick spend that is bypassing defined processes? Are the suppliers being managed to their commitments and are they providing value-add?
5) Provide for closed loop metrics and management. A closed loop performance measurement and management system is a key success factor in achieving maximum sourcing strategy acceptance and savings capture. Alignment of indirect spend objectives with core financial metrics by business unit (BUs) or function is critical to driving organization buy-in. Enterprise objectives are parsed by BU and P&L by utilizing robust spend analytics so that information can be viewed at any level of the hierarchy. Cost savings targets are explicitly linked to financial objectives of the business. Without this direct linkage to the operations, indirect procurement is a competitor for savings rather than partner and an enabler of business results.
The elegance of the SUM model for an executive is that it’s an outcome-based model – the organization is either performing or it’s not – and every aspect is measurable.
In our last post, we’ll discuss some of the types of benefits companies can expect to experience as part of getting more spend under management.