Spend Analysis - Part I (Lecture) PDF

MGMT46501 STRATEGIC SOURCING AND PROCUREMENT SPEND ANALYSIS Spend analysis as a strategic supply function Learning objectives Through this module, you will be able to understand  What is spend analysis?  What are the roles of spend analysis?  How to perform spend analysis?  How to levera...

MGMT46501 STRATEGIC SOURCING AND PROCUREMENT SPEND ANALYSIS Spend analysis as a strategic supply function Learning objectives Through this module, you will be able to understand  What is spend analysis?  What are the roles of spend analysis?  How to perform spend analysis?  How to leverage insight from spend analysis to improve supply chain performance? What is spend analysis? Spend analysis refers to the process of aggregating, classifying, and leveraging spend data to assess sourcing performance, ensure compliance, identify cost-saving opportunities, manage supply risks and optimize sourcing, budgeting and planning strategies. Spend analysis aims to answer, but not limited to, the following questions: What did we buy? Products From whom? Suppliers Quantities How many? SPEND ANALYSIS For whom? Users Prices At what prices? Where are the saving opportunities? Delivery Combine volumes of spending from different businesses? Performance Standardize product requirements? Reduce the number of suppliers? Exploit market conditions for better pricing? What was delivered? And how was the delivery? What are the roles of spend analysis? Uncover the hidden part of the iceberg through …  Enhancing sourcing visibility – Facilitate financial planning (e.g., COGS, taxation) – Ensure contract compliance  Measuring and benchmarking performance – Product cost – Supplier benchmark – User spend rationality  Improving sourcing operations – Streamline sourcing process – Identify saving opportunities – Rationalize suppliers and product portfolio – Optimize supply base – Manage supply risks  Enabling data-driven sourcing How to analyze spend data? Spend cube: a 3-d view on spend data  What specific types of goods and services are you buying?  Who or which business units are buying?  Which suppliers you’re buying from? Spend analysis examples  Classification Pareto and ABC classifications  Pareto 80/20 rule: 80% of outputs (e.g., cost or revenue) are due to 20% of inputs (e.g., products, cost drivers).  ABC classification: Classify objectives based on specific criteria such as the total spend on SKUs, spend with suppliers, spend for customers, price per unit, criticality of the item, and contribution to profits, to name a few. – Category A represents the most valuable items that contribute highly to the overall profits of a company (SKUs that account for the top 80% of total spend ) – Category B represents the next set of items that are not as profitable as items in Category A, but may be just as valuable (15% of the total spend ) – Category C usually comprises the largest category; they pertain to small transactions that do not contribute highly to profits, but could still be valuable to the company in terms of complementarity and overall coverage (5% of the total spend) How to operationalize spend analysis? Spend analysis process Step 1: Identify Data Sources Step 2: Data Extraction Step 3: Data Cleansing Step 4: Data Enrichment Step 5: Classification Step 6: Analyze Data CASE STUDY: SPEND ANALYSIS FOR AN E-BUSINESS PLATFORM Background  Founding: Company A was an online startup platform founded in 2010 with initial fund of $3M, serving all-occasion gift stores across the US and establishing a reputation for gifts with British themes. Its online shopping portal went live on 12/1/2010.  Pull-based business model: with each order that came online, a procurement plan was drawn up  Distribution network: Items were sourced from a network of suppliers and shipped to a designated distribution center (DC), before Distribution centers by region making their way to the customer. There were 20 DCs with a fixed sum leasing cost of $100,000 to operate each DC.  Sales: Serving 4,500 orders in the first year (2010/12-2011/12) with a median margin of about 50%.  Supply base: Sourcing from over 570 suppliers for the 3,140 items that were displayed on the website. The challenge  After a year of operations, the total spending had amounted to $3M; however, the overall picture was disheartening. Despite a 50% net margin on sales, it was yet to be profitable (see financial statements).  The CEO and founder urged the CPO and CFO to identify the opportunity to improve the sourcing strategies: “ After paying out a million dollars to suppliers, instead of making our money on gifts, we were gifting away our money!”  Question: How can the company reduce its operational costs and improve it profitability? Supply Chain Mapping Building a spend cube ABC classification by SKU Pareto classification by SKU  Pareto split (80-20 rule): – 80% of the total spending was accounted by 22% of the SKUs; – 50% of the SKUs had contributed to 95% of the spend.  The top selling item accounted for $235,000 (8%）while 1/3 of the SKUs amounted to less than $60,000 or 2% of annual spend (the spend of each item of this group was about $140) Top 10 items with price variations  Ten out of the top 11 SKUs had price variations -> potential cost saving from sourcing at lower prices.  How? Evergreen contract (automatically renewed contract)? Batch ordering? Row Average of Sum of Sum of Min of Average of Max of Accumulative Distinct Count of Labels Quantity Quantity TotalPrice UnitPrice UnitPrice UnitPrice Spend %Spend %Rank Category SupplierID 23843 80995 80995 235857.44 2.91 2.91 2.91 235857 7.87% 0.03% A 1 22423 8 3533 56431.41 15.33 17.39 17.85 292289 9.75% 0.06% A 5 85099B 25 12060 31224.59 2.31 2.81 2.91 323513 10.80% 0.10% A 5 84879 37 12067 26263.03 2.03 2.35 2.37 349776 11.67% 0.13% A 4 47566 11 3652 23257.64 5.25 6.84 6.93 373034 12.45% 0.16% A 4 85123A 12 6005 22936.97 3.57 4.04 4.13 395971 13.21% 0.19% A 5 22386 23 6621 17143.29 2.31 2.82 2.91 413114 13.79% 0.22% A 5 23203 19 6051 16319.63 2.45 2.88 2.91 429434 14.33% 0.26% A 5 79321 13 2394 15706.12 5.35 7.54 8.05 445140 14.85% 0.29% A 5 85099F 24 5343 13664.04 2.31 2.80 2.91 458804 15.31% 0.32% A 5 23084 23 4878 12589.26 2.51 2.80 2.91 471393 15.73% 0.35% A 5 Potential savings from sourcing at minimum prices SKU ID Actual Spend Sourcing at MinPrice 22423 $ 56,431.41 $ 54,160.89 85099B $ 31,224.59 $ 27,858.60 84879 $ 26,263.03 $ 24,496.01 47566 $ 23,257.64 $ 19,173.00 85123A $ 22,936.97 $ 21,437.85 22386 $ 17,143.29 $ 15,294.51 23203 $ 16,319.63 $ 14,824.95 79321 $ 15,706.12 $ 12,803.11 85099F $ 13,664.04 $ 12,342.33 23084 $ 12,589.26 $ 12,224.27 Top 11 Total $ 235,536.00 $ 214,615.52 Cost saving 0% 9% ABC classification by supplier ABC classification by item type Spend by item type 105% 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% Category A Category B Category C 10% ~ 26 item types ~ 45 item types ~ 110 item types 5% 0% 1% 3% 5% 7% 9% 12% 14% 16% 18% 20% 23% 25% 27% 29% 31% 34% 36% 38% 40% 43% 45% 47% 49% 51% 54% 56% 58% 60% 62% 65% 67% 69% 71% 73% 76% 78% 80% 82% 85% 87% 89% 91% 93% 96% 98% 100% Principles of Spend Analysis  Principle 0: Carryforward as many items that are current advertised on the own website as possible. Must however consolidate or discontinue those items, suppliers and item types that fail to meet some liberal criteria on the total spend. Principles of Spend Analysis  Principle 1: If the total spend on an SKU falls below a threshold value (e.g., $140), then mark the SKU for consolidation. Principles of Spend Analysis  Principle 2: For those SKUs that have been marked for consolidation under Principle 1, discontinue the associated supplier relationship if no other SKUs have been procured from them. Should the need arise, we can arrange to source these SKUs by alternative means, perhaps by using another supplier that caters to items with the same type classification. SupplierID Sum of TotalPrice SKU Count SKUCode 10011002 46.41 1 22123 Rationalization strategy 10012301 10012601 15.75 45.22 1 1 90022 85176 Discontinue these single-SKU suppliers for 10012602 10013601 65.45 36.96 1 1 85176 84539 SKUs with spend $140 10016801 10016802 42.336 28.812 1 1 16012 16012 10016803 56.448 1 16012 10018101 13.93 1 90014B 10020501 21.168 1 16011 10020502 35.28 1 16011 10020503 56.154 1 16011 10022001 5.25 1 84842 10022101 10.78 1 16015 10022102 84 1 16015 10022301 26.25 1 84569B 10022601 0.588 1 84227 Principles of Spend Analysis  Principle 3: If the total spend on a supplier falls below a threshold value (e.g., $500), then redistribute the spend among the remaining suppliers, preferably to those classified as Category A or B; avoid vendor lock-in wherever possible. Principles of Spend Analysis  Principle 4: If the total spend on an item category falls below a threshold value (e.g., $500), then rationalize the category. If it is eliminated, then the associated suppliers, as well as the set of items that they provide, will have to be pulled from the website. Summary  What is spend analysis? – The process of analyzing spend data to assess sourcing performance and identify cost- saving opportunity to optimize supply chain performance and manage supply chain risk.  What are the roles of spend analysis? – Enhancing sourcing visibility, measuring performance, improving sourcing process, and enabling data-driven decision making (sourcing analytics)  How to perform spend analysis? – Spend cube (What to source? Where to source? For whom? – Pareto and ABC classifications  How to leverage insight from spend analysis to improve supply chain performance? – Category management, inventory management, supplier management, contract management, …