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GUIDE TO Driving beneďŹ t from your low value spend – a sting in the tail
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Welcome foreword A significant amount of spend falls under the procurement radar as it is made up of low frequency small payments that companies usually make to many different suppliers. Best practice in corporate procurement is typically reserved for companies’ strategic purchasing. Greater savings are expected from tackling larger areas of spend, which comprise the majority of a company’s buying. Transactional procurement and low value purchasing, known as tail spend, is estimated to make up half of a company’s indirect and direct spend. But this non-core spend is often difficult to track and manage, and projected figures suggest that 20 per cent of these transactions are unmanaged. Figures also suggest that a minimum of 15 per cent waste occurs in the tail spend. Small, infrequent purchases with lots of suppliers add up. A long tail spend can also affect levels of compliance and risk in the supply chain. By managing tail spend in an organisation, procurement professionals can enable financial savings to be made, and also improve compliance, allow current contracts to be renegotiated, and consolidate and reduce the number of vendors. This guide sets out the key principles of how to manage low value spend and make sustainable savings. Anna Scott Special projects editor, Supply Management
Contents 01 02 03 04
Successfully delivering sustainable savings What is low value spend? The challenges The benefits
05 06 07 12 14
Key factors to enable success How to manage low value spend The levers to delivering value Conclusion Credits
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Successfully delivering sustainable savings Many organisations face increasing pressure to deliver sustainable savings and drive additional value in the supply chain, while minimising the cost of delivery. These pressures are not unique but recognised across industries and market sectors. The challenges listed below may sound familiar to your organisation:
• Requirement exists to free up procurement resource to focus on higher value strategic procurement activities.
• A strategic focus for the organisation results in it missing opportunities for supplier and spend management for low value transactions (<£10k).
• Requirement exists to
reduce the total cost of procurement’s service operation and deliver ever increasing levels of cost savings for the business.
• Need remains to deliver
increased levels of service and value to the business.
• Requirement remains to
provide flexible operations that can expand through a single solution, while maintaining strong local stakeholder engagement.
• Focus remains on delivering
additional value and savings opportunities aligned to the procurement strategy.
• Improving levels
of procurement and spend compliance across the organisation remains a challenge.
• Need exists to consolidate total number of suppliers and reduce invoice processing volumes.
• Obligation is to provide clear accountability and reduced risk in the supply chain.
• Internal stakeholders must
be influenced to demonstrate the benefits of using central contracts.
Businesses respond to these challenges by focussing on high value spend where larger benefits can be driven. So why should we be concerned with effective low value spend management at all? The answer is simple: to drive out costs and provide value (in whatever form that takes) to the business. That being the case, organisations should look at where all of their costs fall, not just with the strategic or high spend suppliers, but across the whole supply base. By taking this approach organisations are beginning to notice that, in a great deal of cases, there are a large number of suppliers being used where the spend with each supplier is relatively low. If you consolidate that spend, the figure ends up being surprisingly high.
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What is low value spend? Low value spend or tail spend will mean different things to different organisations. It is typically defined as a small proportion of spend being fulfilled by a large number of suppliers, which can include one-off expenditures as well as non-contracted and non-compliant spend. In a large number of instances this spend remains unclassified due to its nature, which can prove challenging to identify and therefore manage. This lack of visibility is one of the key barriers to unlocking the value in the low value spend. Effective management of low value spend will result from managing your total supply chain to optimise procurement, minimise suppliers, deliver cost savings and maximise process efficiencies. That said, it is important to fully understand your spend and profile. Assessing this against organisational drivers and challenges (such as the political and social) will enable you to identify what low value spend means to you.
£
Spend by supplier
Spend
Low value spend
Characteristics • • • • •
Low value High volume Non-contracted Fragmented One-off
Number of transactions
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The challenges Managing multiple low value suppliers and transactions is typically seen as a costly activity and without the proper foundations is perceived to deliver little value to an organisation. Traditionally, organisations focus a great deal of effort on their strategic suppliers (quite rightly of course – they are essential to any business) and their approach to managing supplier relationships tends to be according to a Kraljic categorisation of their supply base. This is a thoroughly sensible approach to managing the supply chain and focussing effort according to the relative importance of an individual supplier. But we do need to take another look at this area and step back to consider some basic principles. In our experience of low value spend, organisations apply limited amounts of management effort towards managing supplier relationships following the onboarding process. Even where budgets are devolved within the onboarding process, there is a limited challenge to the engagement or incumbent supplier cross-matching to ascertain a different delivery solution. Costs are high due to the administrative burden placed through this profile, although these costs are often hidden and are therefore not truly recognised by the organisation.
Typically, low value spend management sits embedded within the organisation. To maximise the full benefits low value spend should operate across all procurement activities, sectors and regions whether local, regional or global. Global organisations will undoubtedly have differing requirements in terms of supply chain, legal requirements, currencies and so on. All of these factors and more will impose challenges and need to be identified early to ensure successful low value spend management and therefore value delivery.
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The benefits Working with our clients, we have found the following benefits can be achieved through successfully managing low value spend: • Reduced internal cost of management after identifying and implementing process and administrative efficiencies
• Increased visibility of spend and insights • Lower costs through leveraging spend • The ability to challenge demand on goods and services
•
Adherence to compliancy rules
• Risk management and mitigation • Improved and effective contract and supplier management of all suppliers
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Key factors to enable success Effective planning Managing and transforming low value orders will not happen overnight. It will take time and resources to implement a value add solution and for this reason there will be associated manageable costs and risks. Identifying these prior to commencement and ensuring they are effectively managed will be the key to success. Proper risk management and mitigation must form part of the planning process and flow through the embedded solution. Understanding, managing and mitigating risks will enable a successful low value spend management solution to be deployed. Through undertaking a full and detailed review of your low value spend you can identify the potential benefits that can be delivered (resource/process and supply-side), while fully understanding the associated risks.
Accurate data One of the key challenges when looking to implement a solution for managing low value spend is obtaining accurate and timely data. It is vital that the data you use is accurate and up to date as this will form the foundation for revising processes and procedures. Duplicate invoices, held payments, mis-categorised invoices or purchase orders all require identification and management. Many organisations run several systems to access spend data, creating unnecessary complexity, poor quality data and inefficiency. Consideration should therefore be given to using a single platform that addresses these issues and sits above existing systems, gathering detailed data, cleansing it and presenting a fully customisable report.
Appropriate resources Low value spend management is often left to operational resources which are not always aligned to corporate procurement strategies. These resources are often focused on project delivery and completion; therefore they use off-contract suppliers even if the cost is higher to meet the requirement. Understanding the challenge within the organisation at a buy/budget holder level and then feeding this into the overarching low value development strategy will ensure that the customer will buy in to the new process more positively through this ‘done-with-them’ approach rather than if it is simply a ‘done-to’ strategy. The organisation will then need to invest in appropriate resources to develop the value case for transition and the resources required to manage the additional value downstream. Failure to do so will result in the ‘as is’ solution being deployed at a buy/budget holder level and the value not being realised.
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How to manage low value spend Organisations looking to achieve optimum low value spend solutions will firstly need to develop an overview of the current situation and understand their ‘as is’ processes and procedures. An assessment of need will enable the organisation to understand the expenditure and define the parameters of what low value spend means to them. It will vary between organisations depending on industry sector and the types of goods and services that are being procured. Getting started: Start with an assessment to understand the current expenditure. During this initial phase it is essential to undertake the following key steps:
01
Spend diagnostic
02
Stakeholder engagement
03 ‘As is’ process review
Conduct a spend diagnostic to make sure that all expenditure has been captured and provides an accurate baseline Gain early engagement of stakeholders to ascertain the buy need and embed thinking around a revised solution Undertake an ‘as is’ process review to understand how low value spend is currently managed and the end-to-end costs associated with this spend (internal)
04
Contract/ category review
Map spend to contracts/categories allowing identification of maverick spend
05
Demand challenge
Understand the urgency, frequency and criticality with appropriate challenge from procurement
06
Strategic opportunities
Identify strategic opportunities through the use of subject matter experts and market intelligence
Having understood the current position a tailored vision and strategy can be prepared and a roadmap to transformation identified. There are a number of key activities (as detailed above) which may be leveraged across the organisation to deliver the value.
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The levers to delivering value Low value spend management Through a focused approach on low value spend management, and using the levers identified below, organisations can quickly drive additional value over and above the cost-to-deliver model.
Leverage into current category strategies: Low value spend often contains spend with multiple suppliers in the same category. Identifying your total spend will highlight opportunities to identify the full scope of category requirements and also spot any opportunities to repair ‘contract leakage’.
Renegotiate current contracts with new volumes: With a view of total spend you will have opportunity to renegotiate current contracts and leverage opportunity, as you have a better indication of the volume or extent of service required.
Identify gaps and improve compliance:
Standardisation of requirements:
Profiling and linking low value spend to the overarching category strategies in the organisation will ensure that such spend is accounted for within the strategies.
A further opportunity exists to identify areas where similar requirements across the organisation are being satisfied through different solutions, perhaps with different specifications of products. Identifying this allows you to harmonise the solution.
Put in place contract coverage and remove risk and exposure from low value spend. A view of total expenditure will develop an organisation’s understanding of contract compliance and create opportunity to drive compliance initiatives to bring spend under contract, removing the exposure to risk.
Drive savings from non-recurring spend: Embedding appropriate processes and procedures for one-off spend will enable the organisation to grip/influence the expenditure and ensure maximum value is delivered. This may be through taking a more commercial approach to the expenditure or simply looking to dovetail within existing contracts.
Vendor consolidation and reduction: Your view of low value spend will identify areas which are fulfilled with multiple suppliers. Understanding this, mapping the existing supply base and/or taking a more holistic approach to requirement fulfilment will enable consolidation of suppliers. The fundamental challenge needs to be met at the first engagement so that supplier onboarding does not occur without proper commercial and compliance input.
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Stakeholder engagement: It is vitally important to ensure that key stakeholders and budget holders are engaged early so that they understand why low value spend management is important to the organisation. Given that in the majority of cases low value spend is controlled by these stakeholders it is also key to ensure that they are equipped with the appropriate tools and techniques so that this spend is continually managed and compliance improved. This can take many forms, the points below will simply provide the platform for supportive stakeholder engagement:
• Awareness and training to
• Compliance management
• Local stakeholder
• Demand management
requisitioners
engagement and support
and reporting
Technology and process enhancements: Today many organisations consecutively run several systems or platforms which mean that it can be difficult to identify, and therefore control, low value spend. While the implementation of a single system may sound a step too far, depending on the profile of the low value spend within an organisation there may be a strong business case for control and value against this spend. The size and scale may also provide a useful benchmark to what is going on with the more strategic suppliers and how they are being managed.
Procure-to-Pay (P2P) process review and efficiency gains: An end-to-end P2P process review should cover all elements from sourcing through to contract management. Within this, utilisation of catalogue management for example can drive the buy behaviour down a naturally consolidated route. Understanding the burden and/or the leverage that can be achieved through full implementation of a P2P solution will enable the identification of value for a low spend value solution.
E-sourcing: Low spend areas where it is not possible to develop category strategies can benefit from the use of RFQs, e-auctions, and ‘quick quotes’ to accelerate the process and therefore reduce the burden on resource.
Invoice consolidation and payment solutions: The number of invoices that are submitted by low spend suppliers can lead to a high level of finance and processing administration within an organisation. Leveraging simple techniques like the use of ‘P-Cards’ (a company
payment card that enables purchases to be made without using a traditional purchase order process) and reviewing transactions (so that a solution can be developed to minimise the number of transactions), can provide significant early wins. The value of these can only be determined following the completion of the opportunity assessment and detailed cost build.
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Stakeholder Engagement Ongoing Management
Technology & Process Low Value Spend Management
Sourcing Support
Supporting the buy-decision While embedding processes and procedures will deliver beneďŹ ts, the buy-decision needs to be guided so that stakeholder expectations and actions are aligned to delivery. In order to do this, the establishment of a help desk and online tools (web chat/how to buy guides and so on) will further enhance the migration of low value spend to the new processes and will improve buyer awareness, and therefore behaviours.
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Ongoing management of low value orders: Once the basic principles are embedded within the organisation there are a number of activities that need to be put in place to ensure the value from low value spend is not lost over time, but is in fact increased as the solution matures. This will require regular close working with all key stakeholders within your organisation including the finance department to ensure buyer behaviours are being influenced and changed. This will also ensure the value is realised and properly accounted for.
Some tactics that can be used to do this are: • • • • •
Undertake regular spend diagnostic and opportunity assessments Review savings targets and keep a focus on low value spends Ensure that low value spend plans are aligned to category strategies Regularly review processes and identify efficiency improvements and savings opportunities Consider the impact of cash flow and working capital benefits on low value spend improvements
Ongoing Management Management information
Strategy for continuous improvement
Continuous spend profiling
Regular spend diagnostic & OAR (Opportunity Assessment Review)
Demand management Benefits and savings tracking
Savings target & focus Category planning
Compliance monitoring Managing operational performance
\ Supplier management
Process & efficiency drive Identification of working capital benefits
Ad hoc sourcing support:
To drive additional value you may find gathering support to deliver either niche projects or provide ad hoc expertise will prove effective in supporting the management of your low value spend.
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Expertise: Managing low value spend is not always easy due to the commodities and goods required within this spend profile and the fact that it is often in niche areas. In this instance the deployment of subject matter experts and category specialists to review the requirements and to understand where value can be driven is key. We recognise that while most of the low value spend can be managed, in only a very few instances can it be removed completely so a light touch deployment of expertise at the appropriate point will increase the operational knowledge and expertise of the specific spend area and migrate this spend into a professionally managed solution.
’As is’ activity: Third party providers would enable flexible support through access to a pool of category specialists, targeted at reducing low value spend costs. Substantial savings are achievable through the utilisation of multi-vendor experts that can consolidate low value spend across multiple organisations.
‘As Is’ - Non-Managed Low Value Spend Request
Request
Request
Request
Contract
Supplier A
Supplier B
Supplier C
Utilising a Flexible/Consolidated solution Company 1
Company 2
Company 3
Company 4
£500k
£1m
£3m
£5m
Low value spend, high transaction volume Large no. of suppliers
Consolidated low value spend solution = £9.5M
Buying power & leveraged opportunity = savings plus reduced transactions & consolidated invoicing back to organisation 13 11 Capita A5 guide final checked.indd 13
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Conclusion There are a number of levers you can use within the organisation to release the significant value that is held within low value spend. Applying all these levers in a consolidated approach and leveraging planning, data and resources as identified above will enable a shift in commercial activity on the low value spend from limited value processes to maximum value strategic transactions. If an organisation embeds a low value spend solution then they can expect to see efficiencies of 10 per cent (low) to over 25 per cent (high). This saving will be split between internal administration/process and supply side efficiencies. If you are thinking of having a look at this area, we advise taking the following approach. Firstly, understand the true cost of your low value spend by: • Uncovering the hidden costs of the end-to-end transactional processes and resources • Understanding the size and scope of your low value spend
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Secondly, if you do not have the requisite skills and resource to do this in-house, consider taking advantage of a healthcheck facilitated by a third party specialist. This will enable you to understand your spend at a granular level and help to identify what opportunities may be open to you for dealing effectively with this area. Thirdly, having fully understood the complete range of opportunities open to you, you can then understand the potential beneďŹ ts available to your organisation. This can then be communicated to senior management teams and you can subsequently plan your route to low value spend management transformation.
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About us As the procurement business of Capita, we offer expertise in transforming procurement services, driving innovation and efficiency, releasing working capital and realising cashable procurement savings in public sector and private organisations. We are actively engaged across all market sectors. Our goal is to provide best in class procurement services and consultancy to every client we work with. Our commitment, approach, methodologies and expertise have resulted in a solid record of delivering for our clients, plus recognition from our industry peers:
• • • • • • •
We have access to 200+ procurement professionals and 100+ commercial experts We have access to unprecedented real-time benchmarking via our market-leading delivery position We provide internal procurement services to 500+ operational sites and 92 separate business units Access to a global shared service infrastructure Spend cube with over £8 billion of client expenditure Responsible for over £2 billion of live client sourcing projects Typical ROI Range 4:1 – 10:1.
To discuss more about how managing your low value spend could change your organisation, contact Capita’s procurement business, at 17 Rochester Row, London SW1P 1JB, procure@capita.co.uk, 020 7901 0068, www.capita.co.uk/procurement.
Redactive Publishing Limited 17 Britton Street, London, EC1M 5TP, 020 7880 6200 Editorial Special projects editor Anna Scott Advertising Sales manager Chris Dooley, business development manager Jennifer Fisher Sponsorship sales manager James Brunt © 2014 Redactive Publishing Ltd. All rights reserved. This publication (and any part thereof) may not be reproduced, transmitted or stored in any print or electronic format (including but not limited to any online service, any database or any part of the internet) or in any other format in any media whatsoever, without the prior written permission of the publisher. Redactive Publishing Ltd accepts no liability for the accuracy of the contents or any opinions expressed herein. Printed by Polestar Stones, Banbury, Oxfordshire.
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