Spend visibility: The next frontier of e-sourcing 

by Jay Odell

Is it important to know exactly how much your organization spent last year on aluminum die castings? You bet.

The figures might show that your division in Illinois is paying 
75 cents more per part than your plant in California. Or maybe 10 different suppliers are selling you similar parts and items. If you aggregated your spend with one supplier you could probably negotiate a bulk discount. You also might be surprised to learn that 30 percent of your purchases for a certain part or item are being invoiced at above the agreed upon contract price.

Many companies have already figured out the benefits of integrating technology into their sourcing processes. Some of the world’s leading and largest organizations are increasingly leveraging sourcing technologies such as online markets to streamline the contract negotiation process and enable greater collaboration between their buyers and suppliers.

But many are now looking to the next frontier: spend visibility.

Armed with precise information about their global spend, companies are in a better position not only to reduce their costs, but to develop and execute effective strategies to manage them on an ongoing basis.

But getting a clear and accurate view of spend data isn’t easy.

Why? Because companies operate multiple divisions, in multiple locations. As a result, the data regarding their total spend is often stored in many different systems – such as accounts payable, enterprise resource planning (ERP) or other enterprise systems – across the organization.

To compound the problem, there are no uniform practices for inputting data into all the disparate systems. One plant might refer to a supplier as ABC industries, and another calls the same firm Alpha Beta Industries. What is known as ascorbic acid in a Pennsylvania facility might be referred to as vitamin premix in Kansas and vitamin C in Arizona.

Simple errors or typos also frequently lead to the misclassification of products and parts. And if an organization just uses high-level categorization, for example simply describing a part as a valve or an electronic component, it can be difficult to get a really deep look at spend strategies.

Combined, these three problems make it virtually impossible for a company to have a truly accurate picture of their spend.

So what steps can you take to address these data issues and gain better visibility into your spend management priorities?

First, you need to collect information from all the disparate systems within your organization in order to develop a consolidated view of your total spend. Second, you need to classify data using a multi-level classification scheme and build a supplier taxonomy that maps parent-child relationships so that you have a very detailed view of what parts and items you are buying and from whom on a global basis.

This information will provide deep visibility into your corporate spend and allow you to identify global sourcing priorities and execute a strategy based on those priorities. For example, it may become apparent that a Louisiana plant is spending 50 percent less for ball bearings than a Colorado site by buying from a division of the same supplier. You can act on this information.

Finally, remember that priorities change, new products are developed, and product cycles constantly evolve. At most organizations, sourcing data becomes obsolete within three to six months. And if your data is stale, you won’t be able to make effective purchasing decisions. It is therefore important to select and implement a spend visibility solution that is both cost-effective and easily repeatable.

Why is repeatability so key? Because without it, manual processes will need to be performed again and again as your data changes. How can you achieve it? By selecting a solution that builds in company-specific rules for the cleansing of data that are automatically executed as information needs to be updated.

Is there a single solution that can help you do all this?

Analytical software can help you collect and cleanse data. Management consultants also provide one-off data cleansing services designed to help collect data, perform basic cleansing and outline sourcing strategies.

The most effective solutions, however, combine both software and services in a single solution to help you determine how and where money is being spent and outline effective strategies for better leveraging resources.

In evaluating solutions, it is important to consider a number of factors. First, does the vendor provide both the technology and services necessary to effectively collect, cleanse and analyze your sourcing data? Working with a single provider will allow you to establish a single point of contact and accountability for the success of your spend management initiatives.

Second, does the vendor have the commodity expertise and sourcing domain knowledge to effectively collect, cleanse and analyze your sourcing data? If not, it may be difficult for them to accurately classify commodities or to map parent and child relationships between your suppliers. As a result, you may end up with information that does not truly represent your spend patterns or provide a deep enough view for you to identify actionable strategies.

Third, does the vendor use a process and underlying technology that allows for the automatic re-cleansing of your data? Such process and technology is essential to gaining a continuously updated view of your spend and ensuring that you won’t need to incur the time and expense of re-cleansing your data as it changes.

Fourth, can the vendor provide a broader set of sourcing solutions that can help you across the entire sourcing process? Spend visibility is a critical component of sourcing. But it is only a single component. To really benefit from the sharing of data and process enhancements that a spend visibility solution can provide, you must integrate it into a comprehensive enterprise sourcing program.

Gaining a clear and accurate view of global spend is among the most daunting tasks that sourcing professionals face. But with the right solution, it can be done.

If spend visibility isn’t on your radar screen yet, it should be. Because in today’s competitive global economy, what you can’t see can hurt you. 

Jay Odell is a Director of Product Management for FreeMarkets, Inc. He focuses on creating and delivering new sourcing solutions that enable FreeMarkets customers to drive efficiencies and savings opportunities within their organizations. He has extensive experience in the electronics, software, chemical and petroleum industries in product management and corporate strategy roles. Prior to joining FreeMarkets, he served as a product manager with Trilogy, a leading sales force automation and demand chain e-business provider. He also worked as a solutions manager with BSG, a software development consulting organization and Conoco Inc., a major petroleum company. 

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