Tags: Supply Chain
Developing or Improving a Spend Management Strategy
Spend management is the process of collecting, categorizing, and evaluating spend data in the procurement process to reduce costs and improve efficiencies. Spend management is an important tool that ensures your business is not wasting money on unnecessary or redundant expenses in the procurement and sourcing process. In order to capitalize on spend management, you will need to develop a strategy (or improve your existing strategy!) Use these tips to set you on the right path.
Identify Spend Categories
The first step in outlining a spend management strategy is to identify your organization’s spend categories. There are four spend categories which include:
Direct Spend: Direct spend is the amount of money your company spends in order to acquire raw materials or goods used in the production process. Direct spend typically makes up the largest portion of your total spend.
Indirect Spend: Indirect spend refers to the cost of keeping your business running. These things are typically costly and include operating expenses, maintenance, technology, etc.
Tail Spend: Tail spend follows the 80-20 rule in which 80% of indirect suppliers account for 20% of your business spend. Since these suppliers are often infrequently used and only represent 20% of overall spend, they are typically left uncontrolled due to resource constraints. Procurement teams that ignore tail spend management risk missing out on additional savings.
Maverick Spend: Maverick spend is also referred to as rogue spend and it involves any purchases that are made outside of the procurement process. An example of maverick spending would be when a department or individual purchases materials or services independently and not part of a contract. This can result in higher costs.
By understanding your spend categories and organizing your various expenses accordingly, you can get a complete picture of your expenses, have more control over spending, and ultimately lower your total spend.
The next stage in your spend management strategy is to gather data. Compile your spending information into one standardized report to shed light on wasteful spending. This includes things like duplicate or redundant supplier contracts or software that is unused or infrequently used. Having your data all in one place – with standard formatting – makes the data more manageable and easier to access insights.
At Group O, we perform inventory management, supplier rationalization, and supplier management after cleansing your data to improve your company’s efficiencies. Our goal is to consolidate spend with fewer suppliers, enabling greater buying power and paving the way for stronger relationships with your preferred suppliers.
To truly understand the spend data that has been compiled, you will need to perform spend analysis. Spend analysis will enable you to identify how much you are spending with which suppliers. Then you can use that information to rework your spending as needed. Insights gained during spend analysis are useful for future cost savings opportunities as well.
Group O’s spend analysis includes:
- Discovery and data collection
- Data cleansing
The information we gather helps us determine what you are spending, who your company is spending it with, and if you are receiving the agreed upon product or service.
Control Your Tail Spend and Lower Your Total Spend
Spend management is important to any business, big or small. Developing a strong spend management strategy is also essential. Group O offers comprehensive spend management services to help you control your tail spend and lower your total spend. We compile spend data and categorize it to identify cost-savings opportunities for your organization.
If you’d like to learn more about Group O’s spend management strategy and how spend management can benefit your organization, give us a call at 866-476-8761.