The great irony of today’s ERP systems is that, once they are implemented, it becomes harder to extract information so that it can be used within the business to drive decision-making and take action, Alan Low of Purchasing Index (PI) says in this month’s SmartProcurement.
Spend analysis can have a huge influence on the behaviour and processes around how organizations spend money. Identifying who spends how much with which suppliers on what and how can show savings opportunities throughout the organization.
Here are some of PI’s findings from the deployment of its Decision Support Service to analyse spend.
The majority of savings opportunities highlighted by spend analysis relate to poor processes and inappropriate behaviour. Procurement may do a good job negotiating with suppliers, but if processes are not streamlined then the internal costs and the suppliers’ service and delivery costs can add to the total cost to company.
A simple example of this would be a decision to go with a to-desk delivery service from a stationery supplier coupled with no minimum order value. The service may be very good, but the process may encourage lots of low value orders resulting in a very high internal administration cost relative to each order value. If the internal cost per order is high for the customer, the same is also certainly true for the supplier. A good spend analysis tool should be able to identify these process anomalies and highlight the costs involved.
Behaviour in spending the organization’s money can vary from the sloppy to the fraudulent. Frequent ordering increases suppliers’ costs; and delays in signing GRNs or approving invoices can stretch suppliers’ cash-flows and ultimately jeopardise their businesses (particularly SMEs!). Identifying these anomalies allows organizations to remedy specific errant behaviour.
PI’s experience is that most people change their behaviour if they know it is being monitored.
Many instances of potential fraud can also be uncovered through building simple checks and algorithms into the spend analysis software (i.e. comparing staff and supplier bank account numbers, etc.). Spend analysis must also be able to identify trends and patterns to mitigate against corruption.
Analysing spend must also allow for a holistic view. For instance: it is important to identify black-owned suppliers if a business is trying to maximise its BBBEE procurement score. But, if the analysis system can’t incorporate external credit rating information, the company may run the risk of doing more business with suppliers who are not sustainable. On the other hand, identifying these risks may not only allow the business to develop a long-term supplier, but also earn it a higher Enterprise Development score.
As organizations learn to use information to make changes to their environment and decision making, the requirements for incorporating extra internal and external information grow. The process tends to be iterative. However, spend analysis users are constantly amazed at what they can do with little or poor information, even if it is just to identify what needs to be fixed.
Please contact alan@pibenchmark.co.za if you would like some practical assistance on spend analysis or would like to discuss PI’s Decision Support Service.
