Tail management | Best practice for visibility of expenditure aocrss indirect supply chains

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Tail Management Best practice for visibility of expenditure across indirect supply chains

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Author Steven Paul 020 8774 3415 steven.paul@tailmanagement.co.uk OfficeTeam Ltd Unit 4, 500 Purley Way, Croydon, Surrey CR0 4NZ Internet: www.tailmanagement.co.uk Email: marketing@officeteam.co.uk Phone: 020 8774 3415

Executive summary Delivering real benefits from indirect procurement is a core challenge for many organisations, in particular for companies in the retail, restaurant and entertainment sectors. Whilst many of these companies have taken steps to optimise their supply chain and reduce indirect procurement costs, we still see fundamental issues for procurement, finance and accounting teams in achieving visibility and control of financial expenditure.

In order to optimise indirect supply chains and procurement, these companies should place a greater emphasis on the process of collecting, cleansing, classifying and analysing spend data with the purpose of reducing procurement costs, improving efficiency and monitoring compliance. This spend visibility can then be leveraged in other areas of business such as inventory management, budgeting, planning, and product development.

With this in mind, we believe that companies should be actively seeking suppliers than can enhance their visibility of spend across the indirect supply chain - those that will work with them proactively to help reduce costs, reduce consumption and remove hidden costs, whilst also providing or enhancing organisational controls. It is only by utilising effective supply chain management and leveraging supplier capability, that a company can be fully aware of, and in control of its expenditure on indirect products and services.

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“In the typical company, indirect procurement accounts for 60% to 80% of all purchasing transactions.”

What is indirect procurement?

Indirect procurement (GNFR) covers the sourcing and procurement of all goods and services a business requires in order to undertake its core activity.

Indirect procurement therefore covers all the goods and services bought for consumption by internal stakeholders, rather than external customers or clients. In the typical company, indirect procurement accounts for 60% to 80% of all purchasing transactions (e-procurement - From strategy to implementation; Dale Neef).

Indirect procurement categories include: • • • • • • • • • • • •

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Office supplies (stationery, print etc) IT hardware & software Computer consumables/EOS Business services (managed print services, records management) Professional Services (consultants, advisors) Marketing related services (media buying, agencies) Travel Management HR related services (recruitment agencies, training) Facilities Management Telecoms Utilities Logistics

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“Companies that acknowledge the supply chain as a strategic asset achieve 70% higher performance than those that do not�

Why is visibility of indirect supply chains important?

Sourcing, procurement, spend management and supply chain management are critical to any modern company. A recent PwC survey found that companies that acknowledge the supply chain as a strategic asset achieve 70% higher performance than those that do not (PwC - Global Supply Chain Survey 2013). A 5-10% reduction in indirect procurement spend can translate into a 1-3% increase in profit (https://research.everestgrp.com). Companies are therefore regularly assessing and reviewing their supply chains and sourcing strategies, looking for areas of cost reduction and improvement.

The successful optimisation of purchasing across a supply chain is dependent on the ability of these companies to access and successfully analyse their spend data. Quick access to accurate and detailed spend data offers invaluable intelligence on spending patterns, compliance and performance ratings, providing valuable insight into identifying potential areas for supply chain optimisation and cost saving opportunities.

Without visibility of supply chain spend data it is very difficult for companies, particularly large multi sited organisations, to address spend in aggregate and leverage spend for economies of scale.

Lack of visibility and control of spend often leads to increased costs for individual purchases and increased levels of maverick spend. This is more pronounced in indirect supply chains where internal stakeholders are often spread across an organisation, with many categories being purchased outside of a centralized system and often with minimal input from purchasing.

Correct spend data and supply chain visibility is also vitally important to other areas of business planning such as financial planning, budgeting and inventory management.

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“51% of Procurement Managers believe greater indirect category expertise is required in order to correctly optimise their indirect supply chain”

What are the issues with indirect supply chain visibility?

According to a recent survey by Procurian, 51% of Procurement Managers believe greater Indirect category expertise and market intelligence is required in order to correctly optimise their indirect supply chain.

So why is visibility across indirect supply chains presenting such an issue?

Indirect supply chains are usually characterized by: • • • • •

A large number of product and service categories High numbers of suppliers Regular ad-hoc purchases High volumes of low value transactions Many decentralised stakeholders

In large companies indirect supply chains are usually complex, covering a diverse range of products and services across multiple (and often unrelated) product categories, all requiring specialist product expertise. This results in convoluted and highly fragmented supply chains, consisting of high numbers of suppliers providing large numbers of products and services, to a wide array of internal stakeholders.

This is particularly evident in areas of tail spend where procurement often does not have the infrastructure or resources to handle the number of high volumes of low value transactions and associated regular ad-hoc purchases.

Indirect supply chains usually decentralised, opaque and convoluted by nature. There is therefore a general trend towards low visibility and control of expenditure, alongside the high possibility of maverick spend. This causes specific issues with data visibility across the supply chain. These are: Inaccurate or incomplete data: Indirect supply chains often incorporate a wide variety of suppliers, from large national wholesalers to small enterprises. These suppliers are dealing with a number of stakeholders, often without the involvement of a central procurement team. This can mean that data which is erroneous or missing critical data fields, such as supplier name, product name, product details, amounts ordered or even account codes. Data errors must be corrected in order to avoid problems with data classification and/or analysis.

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“Identifying patterns and savings opportunities amongst aggregate spending data require considerable analysis. Many companies’ still use spreadsheet applications as primary analysis tools and fail to engage suppliers in the data analysis process limiting their internal analysis capabilities”

Incompatible product and service naming conventions: A single product or service may appear multiple times in multiple systems, including the inventory systems, purchasing systems and procurement systems, due to supplier and/or internal classifications resulting in disparities across data and a lack of visibility of spend across product and service categories.

Insufficient commodity expertise: Correcting spend-data classification errors can require specific domain expertise in products, services and data attributes. A recent survey by Supply Management magazine found that 24% of businesses list a lack of category knowledge as the main challenge of indirect sourcing. Category expertise can vary internally and across suppliers, resulting in spend data that is inaccurate, incorrectly categorised or unclear, which complicates any efforts to effectively analyse and leverage spending.

Limited analytics capabilities: Identifying patterns and savings opportunities amongst aggregate spending data require considerable analysis. Many companies’ still use spreadsheet applications as primary analysis tools and fail to engage suppliers in the data analysis process limiting their internal analysis capabilities.

Incompatible product and service naming conventions: A single product or service may appear multiple times in multiple systems, including the inventory systems, purchasing systems and procurement systems, due to supplier and/or internal classifications resulting in disparities across data and a lack of visibility of spend across product and service categories.

Insufficient commodity expertise: Correcting spend-data classification errors can require specific domain expertise in products, services and data attributes. Expertise can vary internally and across suppliers, resulting in spend data that is inaccurate, incorrectly categorised or unclear, which complicates any efforts to effectively analyse and leverage spending.

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“Vendor reduction and supply chain consolidation allow you to leverage your spend and benefit from economies of scale across your indirect supply chain�

The benefits of increased visibility of spend data across the supply chain The key benefits of increasing spend data visibility across your supply chain and indirect procurement can be summarized as follows: Accurate supplier benchmarking Supply chain spend visibility has become critical for procurement organisations to make the right sourcing decisions, particularly with a view on driving bottom-line results. With added pressures on indirect procurement teams, often the primary way to improve the bottom-line is to reduce spending through strategic sourcing methodologies. Visibility of accurate and detailed spend data will provide clear view of what you are buying, when, with whom and who is purchasing. With effective analysis you will be able to benchmark supplier performance across products and sector categories and across the indirect supply chain as a whole. When benchmarking it is important that consideration is also taken with regards to soft costs (such as administration).

Reduced costs It is an accepted principle of economics that bulk buying a product or service will result in reduced unit costs (and often improved contractual terms) due to economies of scale and allow you to leverage spend in supplier negotiations.

Full data will allow you to select the suppliers with the best pricing and consolidate spend under fewer suppliers to reduce soft costs, leverage spend in supplier negotiations and generate increased savings through economies of scale.

Supply chain consolidation Assessing product and category spend can highlight areas of supplier duplication. This opens up areas for supplier consolidation and vendor reduction, increasing your capability to leverage your spend effectively with suppliers whilst reducing internal workloads.

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“Visibility of data allows for more accurate forecasting and modelling providing greater insight into business performance �

Centralisation Generating accurate data and acquiring full visibility of expenditure across your organisation provides the opportunity to increase centralised control of expenditure. Finance and procurement teams can leverage their data and analysis to become the category experts acting on behalf of internal stakeholders, ensuring they are the decision makers behind all indirect Improved inventory management Visibility of data (particularly alongside procurement centralisation and supplier consolidation) allows for reduced stock levels and warehousing costs due to improved forecasting and inventory information flow. By working actively with flexible suppliers, companies can further reduce stock level requirements and warehousing costs.

Accurate financial forecasting More accurate data leads to more accurate forecasting and modelling, providing greater insight into how the business may perform financially if certain strategies, events and plans are carried out. As well as providing a strategic insight, this information proves invaluable when dealing with investors and shareholders of the business. Accurate data will also provide a true benchmark against which to measure future performance.

Increased control and reduced maverick spend Ad-hoc purchases and orders made outside of a negotiated preferred suppliers list usually come at a premium (15-20%) over those made through a preferred supplier with which the company has already negotiated a contract with discount pricing. By effectively managing data, organisations can identify and eliminate these maverick purchases resulting in reduced costs.

Increased process efficiencies Improved data and supply chain optimisation can enable the improvement of automated sourcing, procurement and payment processes in place of manual processes. This can reduce internal workloads, costs and payment processing times.

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Applying best practice for visibility of spend across your supply chain It is clear that the benefits of achieving true visibility and control of spend across a supply chain can deliver clear and measurable benefits to businesses.

In order to achieve these benefits companies should focus on best practice spend analysis and spend management:

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Identify your business needs: By identifying your business needs and determining your corresponding visibility needs, you can begin planning and identifying a solution that will address the requirements of your specific business.

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Implement a common data language: Implement a common data language across all suppliers in a format that is visible and usable by your sourcing, accounting and finance units.

Consolidating your sourcing performance data across suppliers with spend, sourcing, contracts and supplier profiles into a single location, will provide easy access to all the critical information your organisation requires. Full visibility will allow detailed internal analysis and provide the ability to effectively assess and benchmark suppliers.

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Reconcile and classify your data: Reconcile data disparities and correctly classify data. Products and services should be classified internally according to a consistent taxonomy and to a level of detail that is compatible with insightful analysis. A number of classification “standards� exist, such as standard industrial classification (SIC) or NAICS codes, Universal Standard Products and Services Classification (UNSPSC), eCl@ss.

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Utilise specialist spend analysis software applications: Utilise specialist software applications to extract and cleanse spend data from multiple sources and systems. These applications can classify data by product/ service category, supplier, and internal stakeholder to deliver meaningful data analysis.

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Secure access to flexible internal reporting and supplier reporting: Gaining access to flexible reporting and analysis on an on-demand basis is vital for maintaining visibility and control of expenditure, as well as identifying patterns and savings opportunities amongst aggregate spending data.

Flexible, ad hoc reporting and analysis capability enables companies to optimise existing procurement and discover new unanticipated opportunities.

Analytics capabilities should be able to support the needs of internal stakeholders across sourcing, finance and accounting and provide a quick insight into activity across the supply chain.

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Streamline the supply chain: Reductions in supplier numbers greatly reduces supply chain complexity and therefore the amount and complexity of spend data that the supply chain generates. Remove duplication of suppliers and look for areas of consolidation across product and service categories. This will reduce the number of orders, deliveries and invoices across your supply chain, making it easier to monitor and control spend and inventory. Management information and reporting becomes more standardized across the supply chain and supplier data becomes quicker to access and generate meaningful insight from. Select suppliers that can provide data in formats that match your business needs and software requirements. Select suppliers that are willing to collaborate and capable of providing meaningful insight into the data they produce to deliver added value.

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Ensure compliance: Examine levels of non compliance where stakeholders have made purchases outside of the negotiated supply chain. Track and measure percentage and actual losses due to non compliance, then ensure that individual stakeholders and/or business units become responsible for their expenditure outside of negotiated supplier frame agreements. Non compliance should not exceed 2-3%.

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Conduct regular supplier reviews: Conduct monthly, quarterly or bi-annual or reviews to analyse the supply chain procurement and reporting data. Good quality suppliers will be eager to demonstrate that they are managing their supply chain well on your behalf and be able to propose opportunities for cost reductions and reduced consumption. Product alternatives can help reduce prices and new product innovations can provide opportunities for added value. Suppliers should be able to use spend data to clearly and accurately demonstrate where and how savings can be made. Use the opportunity to talk with suppliers about trends they see in the market, back through their supply chain, as areas for future development and areas for further supply chain consolidation to benefit from economies of scale.

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Make use of supplier spend management tools: Engage with suppliers than provide meaningful management reporting and controls. Controls can include online ordering systems, employee authorization systems, spend limit systems and bespoke product catalogues. Tools such as these can enable you to maintain central control of expenditure whilst providing individual sites with the freedom to order the products and services they require.

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Look at outsourced solutions: Outsourced solutions can provide a simple method for consolidating a number of fragmented product and service categories in a single location. This method can be particularly useful in areas where it may be uneconomical to hire in house expertise, or where costs would outweigh the potential savings such as tail spend. By managing the indirect spend of multiple clients these outsourcing partners can provide the market intelligence to manage and optimise this portion of your expenditure.

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About OfficeTeam Tail Management FINALIST

Our Tail Management Service has been short-listed for Retail Weeks “Supply Chain Awards 2013” as “3rd Party Logistics Provider of the Year”

Our Tail Management service is part of the OfficeTeam group. Our specialist solution is designed to allow your business to consolidate the procurement of all your indirect products and services under one single source supplier.

By working as an extension of your finance, procurement, supply chain and logistics teams we enable you to increase efficiency, reduce workloads and reduce your total cost of procurement, whilst providing you with full visibility and control of expenditure.

We offer a full suite of management information and business controls to help you maintain full visibility and control of expenditure. These include: Online ordering and management reporting: • • • • • •

Access to detailed management information & control Accessible over the internet, anytime and anywhere Exportable reports enable further manipulation and analysis Dashboards providing quick snapshots of key information Sourcing tool supports analysis of your entire spend Provides central visibility of spend

Ordering Controls: • • • • • •

Bespoke product catalogues Allocate user/site budget levels Restricted ordering Employee authorisation systems with authoriser alerts Spend limits by site, department or even individual user Provides central control of expenditure

Account Reviews • • • •

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Scheduled account reviews with key stakeholders Detailed analysis of spend Product alternatives for reduced consumption and spend Supply chain consolidation and gap fill suggestions to help reduce soft costs and workloads

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At OfficeTeam our solutions are always bespoke, tailored to your business and your specific needs.

Contact us: At OfficeTeam our solutions are always bespoke, tailored to your business and your specific needs. To find out how we can help your retail business contact us on: 0844 822 1700 www.tailmanagement.co.uk Copyright: Steven Paul, OfficeTeam Ltd.

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To find out how we can help your business call us on:

0844 822 1700 Or visit us on the web at:

www.tailmanagement.co.uk

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