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Procurement Spend Management is a critical aspect of an organization’s procurement and financial strategy. It involves the process of controlling and optimizing the money a company spends usually on their needs as well as operations. The prudent management of the spend of every organization has proven to be a game changer in the finances of the organization. When the spend of an organization is properly structured and effectively managed, organizations can improve their financial health, streamline operations, and ultimately enhance their bottom line.
In the spend management ideology, there are two aspects that are very essential and they remain the backbone and driving force of every company’s supply chain management system. These are, categorization of spend and resultant procurement strategy.
In the managing of the spend of an organization, one tool has been very instrumentals in helping organizations chalk successes. Supply Chain Professionals use the Kraljic Matrix” to categorize their spend and apply the appropriate strategies to each commodity.
According to the Chartered Institute of Purchasing & Supply (CIPS) the “Kraljic Matrix” enables procurement professionals to rank their organizational spend against the “Supply Risk” and ‘Cost Impact” to the organization.
CIPS defines the “Kraljic Matrix” as “a strategic tool used by procurement and supply chain professionals to identify and minimise supply risks. Using the tool to classify the importance of suppliers’ products and services can highlight supply chain weaknesses, support strategy development, and minimise supply disruption”.
They further define “Risk Impact” and “Cost Impact” as follows:
• “Risk Impact”: The degree of difficulty associated with sourcing a product or service and the vulnerability this will have on the organisation.
• “Cost Impact”: This is used to determine the extent of the supply to contribute to profitability. The profit potential might be realised by achieving lower costs, either by paying a lower price for goods or services or by introducing more efficient buying methods.
This clearly goes to confirm the point that, effectively managing your spend goes beyond just categorization but also very heavy on the use and adoption of the right procurement strategies. Determining the type of relationships by positioning suppliers by risk and profit impact supports procurement and supply chain professionals to build the right type of supplier relationships and utilize their time more efficiently, whilst mitigating supply risk for their organisations. With the right application of these two, it drives more value in the management of the category with resultant benefits in profitability and ROI.
TYPES OF SPEND CATEGORIES:
For the purposes of this discussion, we will outline four major categories and procurement strategies, based on ranking one’s spend risk against the cost impact as defined above. Every organization on their own or with the help of a consultant, can make the right decisions on how to categorize their spend.
The four strategies that will be discussed includes, Strategic Items, Bottleneck Items, Leverage items, Routine Items.
1. Strategic Items – (High-Cost Impact/
High Supplier Risk Impact)
Top amongst the list of Supply chain management strategies are the important roles the Strategic items play in the day-to-day operations of the organization. Normally these items or services have very few suppliers who have the capacity to deliver, or natural scarcity. As such it is very prudent for every organization to develop very cordial and fruitful business relationship with these suppliers.
This is where contract management and analysis come it, it is very easy for organizations to drift from their core mandate in their quest to manage these relationships, supply chain management consultancies who are well vested in contract advisory play a very important role in maintaining such relations.
For instance, an Oil & Gas company’s strategic commodities will include, but not limited to, marine vessels, rotary wing & drilling rigs. Evidently, these are very essential to their business operations, and their absence will be an absence of the very existence of the business.
Procurement Strategies:
A very sustainable way of managing the relationship with the suppliers of strategic items and services includes but not limited to developing close supplier relationships, closer collaboration, practicing open book sourcing, redesigning as well as rationalizing specifications by locking into continuous improvement targets and seeking competition by developing new suppliers.
2. Bottleneck Items (Low-Cost Impact/High Supplier Risk Impact)
The basic way to make you appreciate what bottleneck items are is that, these products usually have specifications that are complex which makes the alternatives very few. Buyers have low control of suppliers and their impact on the operations of the organization cannot be underestimated.
Their absence leaves a void, hence organizations must prioritize their spend here. For instance, for an off shore company in the oil and gas industry, the services of professionals like engineers and mechanics can be placed under bottleneck services, as well as some electrical instrumentation & rental leases.
Procurement Strategies:
To be curb the unavailability of such bottleneck items in your supply chain management, some organizations use consultants to leverage volume with a few suppliers, dual source, innovate and product substitute, use leverage to secure lowest price and also drive price. These tactics has proven to be successful procurement strategies for Bottle neck items.
3. Leverage Items (High-Cost Impact/Low Supplier Risk Impact)
In the various session of spending areas, the leverage items and services are the costliest to deal with as a supply chain and procurement manager. Even though suppliers abound be it capacity, delivery time and quality, the cost involved are usually voluminous, although there tends to be abundant supply. Let’s take an oil and gas firm for instance, the freight forwarding may fall under this category. There are several freight forwarders and Lead Logistics Providers (LLP’s) in the industry, but mistakes in procurement of their services could have a dramatic impact on the costs of the items being procured and could hurt the company financially.
Procurement Strategies:
To strategically manage this, spend as a supply chain management professional, it is necessary exploit the full purchasing power, make use of knowledge based pricing strategies, and sign long term contracts with suppliers/contractors. To successfully manage such suppliers, you also need to seek areas of mutual dependency where both organizations become interdependent on each other. By consolidating with other areas to ensure and improve leverage, companies will be at an advantageous position.
4. Routine Items (Low Cost Impact/Low Supplier Risk Impact)
Routine items fall withing the category of things that are of less significance, do not really have any direct impact on the operations of the organization but are also needed to help perform certain duties within the organization. There are usually an abundant number os suppliers for such commodities and their financial impact to the organization is usually minimal. Examples of routine items are stationery and office suppliers, vehicles, tools, Cargo Carrying Units (CCU’s) etc.
Procurement strategies:
Organizations should aim to standardize products, and use efficient and automated ways of procurement to procure these items. Tools such as e-auction, e-catalogs etc are best utilized for the purchasing of these items, freeing procurement professionals to concentrate on more strategic categories. Long term contracts with clear deliverables, bundling and spend consolidation all aid in the management of these category items.
Procurement professionals have increasingly become aware that the “one size fits all” approach to procurement doesn’t drive the necessary financial returns and minimize supplier risk as once thought. Different categories require different strategies to maximise the returns to the organization, allowing professionals to concentrate more on building and maintaining relationships that drive real value for the organization.
In the categories that our suppliers and items are grouped in there are also some key areas of focus every organization needs to pay attention to, in order to maximise their spend and category management efforts.
Key Areas of Focus
1. Budgeting and Forecasting
Accurate budgeting and forecasting are essential components of effective spend management. Organizations must carefully analyze their historical spending patterns and future business objectives to create realistic budgets. By forecasting future expenses, companies can proactively identify potential cost-saving opportunities and allocate resources more efficiently.
2. Supplier Management and Contract Advisory
Maintaining strong relationships with suppliers is crucial for successful spend management. Organizations should regularly evaluate their supplier base, negotiate favorable terms, and explore opportunities to consolidate spending with key suppliers. By doing so, companies can leverage their purchasing power and secure cost savings.
3. Process Automation
Implementing automation tools and systems can significantly enhance spend management efforts. Automation streamlines processes such as invoice processing, expense management, and procurement, reducing the risk of errors and inefficiencies. By embracing technology, organizations can gain greater visibility and control over their spending activities.
4. Policy Compliance
Establishing clear spending policies and ensuring compliance across the organization is fundamental for effective spend management. By setting guidelines for expense approval, travel expenses, and procurement, companies can mitigate the risk of unauthorized spending and ensure adherence to regulatory requirements.
5. Data Analysis and Reporting
Data-driven decision-making is essential for optimizing spend management. Organizations should leverage analytics tools to gain insights into their spending patterns, identify areas of overspending, and uncover opportunities for cost reduction. Regular reporting and performance analysis enable organizations to track their progress and make informed decisions.
6. Risk Management
Mitigating financial risk is a critical aspect of spend management. Organizations must identify potential risks associated with their spending activities and implement strategies to minimize exposure. By conducting thorough risk assessments and establishing contingency plans, companies can protect their financial interests.
Conclusion
In conclusion, effective spend and category management is essential for organizations looking to enhance their financial performance, operational efficiency and supply chain optimization. By focusing grouping their spend utilizing tools such as the Krawljic Matrix and focusing on key areas such as budgeting, supplier management, process automation, policy compliance, data analysis, and risk management, companies can optimize their spending practices and achieve sustainable growth.
Embracing a holistic approach to spend and category management empowers organizations to make informed decisions, drive cost savings, and strengthen their overall financial position.
Alvin A. Mingle (Senior Managing Partner Fitzgerald- Bassey Consultancy Ltd) & Kwabena Peprah (Managing Partner of Fitzgerald-Bassey Consultancy Ltd).
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