How to Make an Ineffective Spend Strategy an Effective One

March 15, 2022

The implementation of a Spend Management Vision – a dedicated function within an organization is very common in most large organizations. While most organizations that have a Spend Management Vision and Department realize the benefits and efficiencies, organizations that do not have those functions resident in their organizations probably do not realize the costs of being highly decentralized.

Effective vs. Non-Effective Spend Management Function Should Look Like

What are the key characteristics and attributes of a well performing Spend Management Function? How would we recognize a successful function versus a poorly performing Spend Management function? The chart below will depict the differences. Where is your organization?

Characteristic

Effective Spend Strategy

Ineffective Spend Strategy

     

Mission and Scope

Control up to 130 expense categories

Narrow category scope

 

Cost - Profit Impact

Total spend reduced by 20%+

Overpay suppliers by 20%+

 

Spend Visibility - Plan

Sourcing plan, spend by supplier, category

No plan, no spend visibility

 

Financial Strategy

Long term pricing- terms, least total cost

Spot buy - focus on price

 

Category Strategies

Focus on high usage items, processes

Focus on price

 

Supplier Selection

Corporate - Narrow - Directed

Local - Broad - Uncontrolled

 

Supplier Base

Narrow- optimized - high performing

Broad – large - no controls

 

Process - Controls

Policies, Improved control, reduced risk

Lack controls, increased risk

 

Compliance Audits

Planned compliance audits

No audits

 

Resources

Highly trained, category expertise

Lack training & expertise

 

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Benefits of an Effective Spend Management Strategy

Research on the benefits of centralization of Purchasing or Spend Management function is clear from a number of research organizations. Cost savings, or new profits equal to 25% of spend can be realized with the centralization process. That does not include the benefits associated with the reduction of suppliers and the new efficiencies that will be generated with an optimized, leveraged supplier base. Expected benefits are as follow:

Area

Benefits of Effective Strategy

Costs of Ineffective Strategy

     

Total Profit Impact

Opportunity = 15% to 25% of spend

Minimal, short term savings

Supplier Costs

Fewer suppliers, reduced costs

Many suppliers, additional costs

Invoices

Fewer invoices, reduced back office costs

Many invoices, additional costs

Supplier Compliance

Price and term compliance measured

Unknown compliance

Price Protection

Sustainable long-term savings

Short term savings

Business Terms

Quoted, negotiated terms to reduce costs

No business terms quoted

Processes

Internal & payment processes reduce costs

No process focus

 

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How to Implement an Effective Strategy

If you think ahead and envision the Spend Management function as it can, as it should look for your organization, a draft Spend Management Vision is outlined below that is certainly achievable in most if not all organizations.

1. Create a Sourcing Strategy

Up to 130 expense categories are planned, sourced, quoted and negotiated based on a methodical, prioritized plan.

2. Sourcing Approach

Suppliers are quoted based on pricing, terms, service levels, quality, (least total cost) reputation and client relationships where applicable. Preferred Suppliers will be selected, communicated and utilized at the category level and to leverage spend, improve supplier performance and create internal efficiencies


3. Financial Strategy

Pricing, terms, quality and service levels or a least total cost strategy with terms locked for 12, 24- or 36-month terms across all categories will be achieved routinely.


4. Solutions, Implementation and Training

Management will seek input from category experts and influencers for each category, source and quote the categories according to those requirements, then make informed decisions about supplier selections, implementation and training as required.


5. Leadership and Alignment

CEO’s that begin this process, and then promptly delegate the implementation of the Spend Management function to an Executive who isn’t a “believer” or doesn’t share the same vision will be extremely frustrated with the result. A strong leader that is aligned completely with the vision must be charged with leading this effort and utilize change management techniques to develop buy-in to a changing process.

Common Issues when Switching from an Ineffective Spend Strategy to an Effective One

Like any change, the process might not be smooth. These are the most common points of friction I see when an organization undertakes this process – and how to resolve them.

Anticipate Management Challenges

Change is difficult for some folks. When you attempt to centralize functions and, in the process, take authority away from staff that “enjoys” that authority, the change can be difficult. There will be challenges to this process…..I guarantee it. The only question is how long does it take for those challenges to occur and where does it come from? Be prepared for these objections and be prepared to listen, adjust as necessary, but move fully toward implementing your vision.



Prepare for Internal Pushback

Change can be difficult for some. Employees will try to “outshop” Category Owners for better prices on selected items and services in order to re-introduce old suppliers. One can never guarantee the cheapest price on over 10,000 items, but when these issues occur - and they will - then work with the “Preferred Supplier” to reduce the price as much as possible. This strategy will prevent the growth of the supplier base and prevent new inefficiencies from occurring from the addition of new suppliers.


Navigation of Supplier Changes

Suppliers build relationships with your employees, sometime appropriate and sometimes not. When management makes a supplier decision, discussions will come up asking for exceptions in order to utilize “old” suppliers based on price, service, quality, relationships. Management should be prepared for this because if too many exceptions are allowed to occur, supplier optimization and leverage will never occur. Management has to be willing to enforce the Preferred Supplier strategy to realize the spend management vision.


Resolving Supplier Issues

Supplier issues will occur with service, quality problems, incorrect pricing. When those issues occur, it is best to allow the supplier to resolve those issues with an expectation that the issues will be resolved quickly and permanently. Employees unwilling to make changes will look for opportunities for suppliers to fail. When suppliers drop the ball, it is fair to give them an opportunity to resolve the issue to your satisfaction.

Final Thoughts

The implementation of a spend management strategy and vision can have a significant impact on an organizations’ expense structure, profitability and internal efficiencies as evidenced by the many organizations that have that function in place today. Savings or new profits up to 25% of total spend is possible.

Spend Management functions should start with a clear vision of how the organization will perform in terms of scope, process, methods and expected benefits to the organization. The implementation of the Spend Management function is an exercise in change management for those groups that do not have that function today.

While this implementation is a sound strategic move, and will drive new profits and new efficiencies, realize there will be pushback from those uncomfortable with change. The question is this: will your organization allow that pushback to derail positive and necessary change for your organization? Strong management teams will not allow that to happen.

If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone. StrategicSource’s Profit Improvement program help you identify areas for improvement long-term.

Douglas AustinThe above blog comes from Doug Austin of StrategicSource, Inc. which is a leading provider of purchasing services to automotive dealerships, as well as manufacturing and retail. Austin has acquired over 28 years of Purchasing & Supply Chain management experience in multiple business sectors as a corporate executive, trainer, speaker and consultant.

StrategicSource offers procurement solutions, business spend management, and tactical sourcing to help businesses reduce costs. We understand the difficulties of choosing suppliers and managing vendors. Whether your business needs self-service digital solutions or complete spend management, StrategicSource can help. We deploy a wealth of experience and support for less than the cost of maintaining a purchasing organization.

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