Spend Analysis - Process, Methodology

Strategic Sourcing Webinar Series
Spend Analysis – There’s always money to save!
Mar 14, 2015
Copyright © 2015 BCube Global Solutions All Rights Reserved

Agenda for Today
introduction
The presenter, Spend Analysis
1 Types of spend, data &
categoriesData sources, categories & sub-categories
2Spend analysis – the process
Steps involved in performing a comprehensive analysis
3 Common types of analysis
Possible templates – limitless opportunities
4Tools and technology
Introduction, tools, challenges
5 Summary, Question & Answ
sessionType in your questions or raise your hand.

Introduction
Ram Raghuraman is a skilled Supply Chain professional with an MBA degree
from the reputed Purdue University, USA. He has worked at Terex Corporation
(Forbes 500), a $ 10 Billion global manufacturer of earth moving equipment, Frost
& Sullivan, USA and has extensive global experience executing projects
successfully.
Achievem
ents
Managed over $ 100M of Global Spend across multiple categories spread
across Europe and North America
Deployed Global 3PL network involving 50 + plants/suppliers in Asia, NA &
Europe
Implemented lean manufacturing system at a plant that saved $48 million
Trained peers on ERP implementation, lean manufacturing
Conducted seminars on Negotiation and Leadership within Terex
Corp
CPSM Certified (held by less than 1% Supply Chain professionals)Learni
ng
Leaders
hip
Director, ISM India – Chennai Chapter. The Institute of Supply
Management is the premier institution in the world for Sourcing
and Procurement Professionals.

Spend Analysis – The Basics

DIRECT SPEND (MATERIAL)
Spend on Goods and Materials that directly
influence the product/service that the
company is selling. Easier to find and classify!
 Commodities
 Parts and Sub-assemblies ……
Types of spend
INDIRECT SPEND (ENABLING SPEND)
Spend on Goods and Services that enable its
primary activity
 Travel
 IT
 MRO & Utilities
 Capital Goods and Consumables…..
TAIL-SPEND
The bottom 10% of your Indirect spend is
known as Tail-Spend
 One-off purchases that fall below a certain
threshold (say $10,000)
 Purchasing done at the plant level by other
departments

ACCOUNTS PAYABLE DATA
Quite possibly the most widely used source of
data. Integrity of data cannot be questioned.
Easily covers more than 95% of company
spending.
Data sources
OTHER SOURCES
If an organization wants to get close to 100%
understanding, they should look at other
sources. Very challenging and resource-
intensive
 INTERNAL (Invoices, HR data)
 EXTERNAL (Supplier spend, Data in public
domain)

Input Data
Must Have’s Nice To Have’s
Field Description
Invoice No The unique identifier of the invoice
Invoice Date Issue date of invoice
PO Number The unique Purchase Order identifier
PO Date Date on which Purchase Order was
issued
Product Code Unique item code set by buying
company
Product
Description
Description of item/service
Category Name Name of Commodity (eg. Travel)
Business Unit The BU/division responsible for the
spend
Supplier Name Name of the Supplier
Supplier Code Unique code to identify the Supplier
Supplier Parent Ultimate parent supplier
Supplier Location City/Country (or) address of the
Supplier
Purchased
Quantity
Number of items supplied
Unit of Measure Unit by which supplied items are
measured
Field Description
Contract No The unique contract identifier
Expiry Date Date on which the contract expires
Payment Terms Number of days within which the payment is made
INCO Terms Terms under which Title of goods will be transferred
from Supplier to Buyer
Category/UNSPC
Code
UNSPC Code for the Commodity/service
Sub-category Name of the Sub-commodity (Legal services is a sub-
category to Professional Services)
Delivery Location Location/Plant the supplier delivers to
Cost Center Code Cost center to which the payment applies
Cost Center Desc Cost Center code description
G/L Account
Number
The General Ledger account number to which the
payment is made
G/L Account
Description
General Ledger account description
Payment Date Date on which the invoice payment was made

UNSPSC ® (www.unspsc.org)
The United Nations Standard Products and Services Code is an open, global, multi-sector standard
for efficient, accurate classification of products and services.
KEY FEATURES:
 Most commonly used categorization across the world – helps if everyone speaks the same
language
 Managed by the UNDP (United Nations Development Program)
 Open Standard, free for everyone
 Over 20,000 categories available. Five level hierarchical code set
 Responsive – constantly updated
categorization
OTHER SOURCES
 FSC (Federal Supply Codes published by US Government)
 NAICS (North American Industry Classification System)
 NIC (National Industrial Classification published by Ministry of Statistics and Program
Implementation)

Spend Analysis – The Process

Spend Analysis – Benefits
Lower Overall Costs
Identify Areas of Opportunity
Increase Productivity and
Efficiency
Better Decision-making
Greater Visibility Improve Relationships
Track every Rupee you
spend across multiple
categories including
Indirect Spending
Obtain insights from your
historical spending and
create savings
opportunities
Focus more on your key
deliverables rather than
mundane data analysis
Make fact-based decisions
with data made available at
your fingertips.
Improve 360 degree
relationship – suppliers,
customers and
stakeholders

Spend Analysis – The
Process
AP Data
AP
Data
Extract Cleans
e
Enrich
Classificatio
n
Analysis
Insight
Automate the input from your ERP system into our flexible solution.
Custom Web
Interface
CSV Format Data

Process
AP Data
AP
Data
Extract Cleans
e
Enrich
Classificatio
n
Analysis
Insight
We use a variety of automated tools and manual checks to ensure the
quality of the data. A system is only as good as the data it uses!
Data Extraction
• Mapping and extracting required
data fields to data source
Manual Validation
• Data availability under correct
headers and GL Account
Supplier Normalization
• HCL Bombay, HCL Mumbai, HCL
BOM, Hindustan Computers Ltd.

Process
AP Data
AP
Data
Extract Cleans
e
Enrich
Classificatio
n
Analysis
Insight
Classify your spend into Industry accepted categories or create your own
based on the need.
Custom Web
Interface

Process
AP Data
AP
Data
Extract Cleans
e
Enrich
Classificatio
n
Analysis
Insight
Insights that drive decisions.
Dashboards, Charts, Reports and
more!

Spend Analysis – Templates

Spend analysis should help you answer
The Spend Cube
What are we buying? From who are we buying? For who are we buying?
What? Category
THE SPEND CUBE

Common Types of Analysis
Cost per unit weight
Analysis
Cost per unit weight is performed to compare the similar parts. The inherent
assumption is that these parts are similar, and their cost/unit weight should be
similar. This helps to identify the outliers which contributes to different costs.
Part Price History
Analysis
Plot the trend of a part’s price over 2 years and identify opportunities to re-
negotiate lower price in cases of unjustified price increases in the past.
Pricing Brackets/
EOQ Analysis
Analysis identifies the optimum bracket quantity for cost reduction within the
available brackets. Can only be done on parts that have contracts that include
pricing brackets.
Indexed Pricing
Analysis
This type of analysis helps identify the relationship between material prices
and part cost and helps us identify opportunities for index-based pricing and
re-negotiation.
Currency
Opportunity Analysis
The analysis identifies the cost reduction opportunity by switching prices
between currencies. The assumption is that the manufacturer should be paid
in the currency of manufacturing country.

Common Types of Analysis
Freight
Analysis
Analysis identifies a way to obtain visibility into freight costs associated with
procuring parts from suppliers. It helps in selecting a best approach to
optimize freight costs.
VAT
Analysis
VAT is a tax that is assessed at each phase of the process where value is
added to components or services by different suppliers. It is usually
recovered when a supplier sells his product to the next supplier in the chain.
Leakage can sometimes occur when trying to recover the VAT from foreign
governments.
Warranty Cost
Recovery
Warranty cost incurred due to defective supplier parts. This could include
both labor and part cost.
Payment Terms
Analysis
Analysis identifies deviation to standard payment terms. The intent is to
negotiate with the suppliers to pay them on Standard Terms so that we realize
savings from holding the cash (Cost of Money)
Part Family
Analysis
Analysis identifies the optimum way of categorizing parts into a family and
then identifying potential parts for cost reduction which do not belong to the
part family due to different processes or alternate processes that could be
used. It also helps in identifying cost outliers within the same family of parts

A logical extension of Spend Analysis is helping track benefits and drive PO compliance. This will
help recover costs and minimize leakage as well as help the Finance/Budgeting organization in
projecting future cash flows
An extension of spend
analysis
Savings & Compliance Tracking
Cash Flow
0%
20%
40%
60%
80%
100%
0
1
2
3
4
5
6
Compliance % Across Categories
Contract Compliance

Spend Analysis – Tools

Currently, there are many tools available in the market that offer spend analysis solutions.
A few popular tools include:
1. Ariba
2. SAP
3. I2 Technologies
4. Procurian Software (Acquired by Accenture)
5. Bravo Solutions
6. Zycus
7. SMART by Global eProcure……. And many more!
Spend analysis tools

While the differentiation between them will be limited, the following should be kept in mind:
1. DATA SOURCES: The ability to handle multiple data sources, providing data in multiple
formats
2. COMPATABILITY: Compatibility with multiple ERP systems
3. CUSTOMIZATION: Almost all tools are customizable, but require a lengthy implementation.
The required capability must be very well defined upfront else it will be hard to work in
modifications
4. VISUALIZATION: Ability to provide information in a clean, crisp manner. Different profiles
need different information – the charts and tables should be different for different
hierarchies
5. CLOUD: This is a must – especially for large corporations who would want data to be
stored on their existing cloud (or) in a cloud located in the same region as their HQ for legal
restrictions Key considerations
COST
Enterprise Tools very expensive1 implementation
Complex & Time Consuming2integration
Individual Tools need to
integrate
3 automation
Still lots of manual intervention4
SERVICE-BASED
APPROACH TO SPEND
ANALYSIS
ALTERNATIVE

Thank You!
Ram Raghuraman
Founder, BCube Global Solutions
Director, ISM India
Mobile: (91) 95000 17385
ram@bcubeglobal.com
www.bcubeglobal.com

Spend Analysis - Process, Methodology

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