With ongoing geopolitical concerns and trade wars, manufacturers should turn to procurement to improve bottom lines.
September 23, 2019
By Matt Clark, president and COO, Corcentric
Two-thirds of CFOs in the United States are expecting a recession by the second half of 2020. This is according to the latest Duke University / CFO Global Business Outlook. While headlines sway back-and-forth daily on who is expecting a recession, and when one may or may not occur, one thing is certain: manufacturing companies can do a better job right now to improve their bottom line by encouraging their finance teams to run a spend analysis.
Used properly, a spend analysis is a powerful tool. It helps organizations better understand where money is being spent, with whom, and on what. This is particularly important for indirect spend categories that rarely get the attention their direct counterparts do. Done right, these analyses serve as the foundation for strong opportunity assessments, and guide sourcing projects throughout the year.
It’s important to understand an analysis is only as good as the actions it inspires in leadership. Just about every procurement team can collect and analyze data, but far too few take the next step and provide a recommended course of action. The best analysis in the world won’t matter when management asks what changes need to be made and all there is to show for it is raw data.
You’re limited to the data you possess. Know where your data sources are – review general ledger reports, purchase orders, invoices, and contracts, and take time to speak with your supplier relationship managers.
Consolidate this information into a unified source, classify suppliers, and make sure product taxonomy is up to date. Taxonomies create the framework that makes the underlying data understandable. A good rule of thumb is to focus on the top 20 percent of suppliers. Typically, this group accounts for about 80 percent of company spend. With the right steps in place to analyze the data, leverage the following tactics:
Companies with multiple locations can typically benefit from supplier consolidation initiatives. In many instances, their facilities are using identical items at multiple locations while purchasing them from different sources. Left unaddressed, this lack of cohesion and standardization often creates a negative impact on the bottom line. Proper consolidation presents a savings opportunity by gaining control over ad-hoc spending, establishing consistent pricing, and providing centralized accounts that benefit everyone from accounting and safety officers to plant managers.
Internal optimization segues nicely from supplier consolidation. There are two steps to this approach. The first is to identify areas of opportunity for cost savings. If a company has 200 phone lines with a telecom partner, but are only using 150 of them, then the extra lines should be removed and contracts re-negotiated accordingly. A telecom spend profile provides the layer of visibility into all hardware and equipment at every facility so you can terminate non-essential service.
Some products and services require a deeper level of analysis to determine whether or not changes will disrupt daily operations. Scope rationalization requires input from additional team members and some critical thinking. For example: do you have a waste management partner that comes daily? Would there be a disruption to operations if they came every other day?
We continue to see the most savings by gaining control of dark purchases and indirect spending – the day-to-day items and services that keep things moving – which are often purchased with little concern for their impact on the company’s bottom line. We’ve seen these costs account for as much as 40 percent of total company spending. Since these purchases are often characterized by disparate suppliers and small-ticket items, contracting and oversight can be burdensome. By gaining control over dark purchasing, however, companies can save up to 25 percent annually. We recommend on-boarding a supplier capable of implementing a punch-out system that restricts purchasing to only pre-approved sources.
The Value-add of Spend Analysis
Manufacturers need to understand the value of data and where that value ends. Once you’re able to move beyond raw information, you need to put a plan in place. Your CEO isn’t interested in which supplier charges more, they want to know what is going to cut costs and maximize value – every analysis needs to end with a call to action and strategy for success. Don’t send reports by routine because it’s “just something we do every week.” Understand the challenges stakeholders are facing and make sure the report addresses them with direct recommendations.
With ongoing geopolitical turmoil impacting the cost of operations, it is now more critical than ever to take actionable steps for reducing spend and increasing cash reserves. It’s easy to evaluate, and re-evaluate, but at some point, finance teams need to do something with the data. That’s where management and leadership need to step in and take control. If you perform a spend analysis and it isn’t being used properly, does it even matter? To the 6,000+ global enterprises and mid-market companies we work with, the answer is no. After all, it’s one thing to say what you spend, but it’s another to show what you can save.
Corcentric is a leading provider of procurement and finance solutions that transform how companies purchase, pay and get paid. Matt Clark is responsible for setting and steering Corcentric’s strategic vision along with its mission of empowering businesses to do more. His leadership has led to a substantial increase in employees, revenue, and the company’s growing presence in the B2B FinTech space.