Resources > APICS Magazine > July/August 2006 > Spend Right

Spend Right
Going beyond procurement tools to improve your bottom line

By JENNIFER PROCTOR

Long gone are the days of more staff than you know how to use, supply closets filled to the brim, and extravagant lunches on the department’s expense account. Now, businesspeople have to justify each penny, noting exactly how it influences the bottom line. Leaders at already-lean companies must find ways to trim budgets, and they are looking to procurement for help in achieving monumental savings.

“Companies are trying to get their arms around everything that is spent and everything that is in the supply base that’s external,” says Mickey North Rizza, a research director for AMR Research.

As procurement takes on more importance within organizations, it is also taking on different names with deeper meanings—spend management is popular, and so is supplier relationship management. Both terms describe products and the associated activities involved in improving companies’ purchasing.

Andrew Bartels is a vice president with Forrester Research. He says companies can break down spend management into the following six steps. (There can be between five and eight steps, depending on definitions.)

• Spend management starts with spend analysis: figuring out from whom the company is buying and what is being bought.
• Next is supplier assessment and identification. During this step, company officials examine the suppliers they use and determine the suppliers they should be using.
• Companies then go through the sourcing phase, when experts solicit and compare competitive bids from vendors in order to determine the best price.
• Next, company officials must draw up and manage contracts with company suppliers. Here, procurement helps secure employee compliance with negotiated contracts.
• Then, professionals must follow through with order fulfillment.
• Lastly, invoices must be verified and paid.

Within the spend management cycle, Bartels says procurement clearly plays an important role. Automating procurement takes something that was paper based and puts it online, enabling employees to go directly to supplier sites, find exactly what they need, and verify the items presented are offered at the prices negotiated. This certainly is an improvement from sending a memo out to all employees and hoping three, four, or six months later they remember when they order to ask for the discount from the supplier. Or, worse yet, the employee can’t remember where the catalog is, and he or she rushes to the nearest office supply store to purchase the item at an undiscounted rate.

“Most issues of so-called ‘maverick spending’ or noncompliance are not willful, [they happen] because the traditional process is awkward and cumbersome,” Bartels says. “Without procurement tools, it’s hard for employees.”

The tools
Business leaders are starting to consider spend management a core business process that needs to be optimized across the company. In that way, it’s a trail blazer because there aren’t a lot of processes that can be applied across disparate departments and locations.

Companies that make “quantum leaps” in procurement, as opposed to making continuous improvements, do display some common characteristics, Rizza says. Instead of viewing procurement as purely transactional, procurement professionals work with suppliers and engineers on new product introductions. Company leaders redesign the organization to support the new model, taking it from a tactical transactional organization and making it more strategic. Changes like this require tools and training.

Companies fall on many different levels of procurement automation. Bartels says larger companies,
such as Fortune 500 and Global 2,000 types, usually have a procurement system with several modules that complement the six steps previously described. As companies get smaller and smaller, there is less use of the tools.

“I think the biggest mistake … is to view e-procurement by itself as the total ‘here’s everything you need,’” Bartels says.

Ariba is a provider of spend management solutions, and it has evolved from its e-procurement roots to become a single solution to manage all spending. One of the most common misconceptions with customers is that spend management is all about procurement, says Kevin Costello, Ariba’s chief commercial officer. That top misconception is closely followed by two more: that it’s all about sourcing and that it’s all about technology.

“We chose in 2002 to really master the spend management process,” Costello says. “We [aim to help users] understand the entire spend profile of a global organization, understanding how to source it, how to comply against it, how to invoice and pay against it, and how to receive data on the back end that will allow you to revisit what we call the ‘closed loop spend management cycle.’”

Diebold, with headquarters in North Canton, Ohio, provides integrated self-service delivery and security systems and services. It employs more than 14,000 people, with representation in nearly 90 countries worldwide. For some time, the company has been using Ariba sourcing solutions. In January 2006, Diebold’s chief executive officer laid out a cost initiative challenge for the entire company—reduce spending by $100 million in three years.

“We understood the first thing we had to do before we could save any money was … figure out on what exactly we were [spending money],” says Michael Rager, director of enterprise spend management at Diebold. “That was really the driving force behind why we started considering spend management as a solution.”

In the past, responsibility for tracking spending sat squarely with Diebold’s procurement professionals. Like it is at many other organizations, Diebold’s procurement team members had to sift through data from accounts payable; records; and, in some cases, the suppliers themselves.

Rager uses fasteners as an example. Previously, if someone were to approach an engineer and ask him or her how much a particular fastener cost, the engineer would refer the questioner to the procurement office. Ariba’s spend management solutions now enable Diebold’s engineers to go online and look up the cost of the fastener. In addition, the engineer has tools that empower him or her to provide input as to whether the fastener can be purchased more effectively or more efficiently.

Spend management goes beyond procurement and, because of this, involves the entire organization, including engineering, finance, accounting, sales, and marketing. One solution can help all the disparate departments quickly relay reliable information on their spending.

“You can’t do that from the systems we previously had,” Rager says. “They were data rich, but information poor … Everyone has tons of data. The problem is taking that data and turning it into useful information.”

A different approach
While Ariba has made its name as a licensed software seller, Ketera is well-known for its hosted, or on-demand, spend-management solutions. Like any on-demand solution, on-demand spend management in most cases costs much less than its licensed counterparts and doesn’t require an information technology investment of time or resources.

Ketera customers pay only for what they use. For example, a customer can start with 100 users and manage 10 suppliers. The customer can increase its usage (and its payments) to up to 10,000 users and 1,000 suppliers. Ketera’s customer base is diverse, and it includes trucking, retail, oil and gas, and mining companies. Still, these customers have one thing in common, says Pravin Kumar, vice president of products at Ketera: They are highly distributed, with offices all over the world.

“Look and see where your value is going to be, and make sure you understand how much visibility you have,” Kumar says. “Companies want to immediately start doing something [because] everyone is biased toward action. They want to install e-procurement and start executing. Many times, I think the key thing is to start doing the strategic first, which is to increase visibility and do spend analysis.”

Kennametal Inc., with headquarters in Latrobe, Pennsylvania, is a global supplier of tooling, engineered components, and advanced materials that are consumed in production processes. It has 14,000 employees worldwide. Charged with reducing costs by $35 million, the company increased its number of strategic contracts from 25 to 50. Kennametal leaders searched for a way to let professional and nonprofessional buyers quickly and electronically purchase items at negotiated prices.

They picked Ketera because it offered the lowest cost and the fastest implementation, says Jim Cebula, CPIM, global director of purchasing and travel for Kennametal. Kennametal has more than 400 Ketera users—about half of whom participated in two 40-minute instructional Webcasts. Cebula reports the other half of users easily were able to teach themselves the Ketera solution.

Ketera’s spending analysis tool enabled Kennametal employees to free themselves from spending too much time sifting through data. “They are positioned now to utilize the tool for [gathering] strategic information, monitoring contract spend, and looking for opportunities to consolidate spending,” Cebula says. The tool enables company leaders to monitor spend on a global scale. They can compare spending to strategic contracts and determine if off-contract spending is financially beneficial in certain situations.

Kennametal leaders have seen quantifiable results. In three years, the company has realized a 150 percent return on investment, and employee compliance with contract spending is up to almost 77 percent.

There are pros and cons to both on-demand and licensed spend management software. Company leaders must search for a fit for their individual organizational needs. Licensed software requires a capital requisition. On-demand solution providers run the technology for the company, but data must be accessed remotely. Daily batch transfers of data can be inconvenient and even impossible. Forrester’s Bartels says companies tend to pick on-demand solutions to cover areas such as sourcing and spend analysis, but are less likely to choose them for procurement and contract management.

Also, some company leaders choose to start by outsourcing parts of their spend management solution and plan to bring it in-house within a few years. That was the case at Kennametal. Cebula says the company began with quarterly updates of data, but needed monthly updates once the obvious money-saving opportunities were gone. The company went through three versions of spend analysis, with the third version on its own server.

“It’s not an either-or [decision],” Bartels says. “It’s definitely a case [in which] companies see the value of on-demand as a solution, but they also see the negatives. They weigh those out to see which makes the most sense.”

People and procurement
Technology is an important aspect of spend management, but, as with anything, people are what make it successful.

“The most important thing is people,” Diebold’s Rager says. “At the end of the day, you are going to be changing what people do every day when they come to work. People want to do a good job.” Rager goes on to say that technology can frustrate people and make it difficult for them to optimize the value they bring to the company.

AMR’s Rizza agrees. She gives the example of a U.S. aluminum producer that experienced significant spend-management success. Company leaders presented the necessary tools and training to start thinking from a strategic basis. But, company leaders had to work to change mindsets.

“What they tried to do is optimize within the organization and move people around based on the skill sets that were required,” Rizza says.

Back at Diebold, Rager and his team consider the implementation of spend management to be a significant rallying opportunity for the entire staff. “The intent and driving force behind it was to lay out a challenge ... and have everyone rally around it so that everyone has a specific purpose,” Rager says. “It’s about focusing on a way to reduce the cost of our business to create better shareholder value.”

Jennifer Proctor is managing editor of APICS magazine. She may be contacted at editorial@apicshq.org.