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Spend management

Spend management is the way in which companies control and optimize the money they spend to cut operating and other costs associated with doing business.

Whether it is the money spent on goods or services for direct (raw goods and materials used in the manufacture of products), indirect material (Office supplies and other expenses that do not go into a finished product) or services (temporary and contract labor, print services etc), a company needs a mechanism by which they are not only able to save money but control costs associated with doing business.

Money to a company falls into two major buckets - revenue and cost. Often in hard economic times when revenue is harder to come by, companies turn to cost cutting initiatives.

Because cost cutting affects a companies bottom line directly, certain types of cost cutting can be the quickest way companies can increase their market value. The typical consensus is that the revenue to cost ratio is 3 to 1 such that in a company needs to bring in 3 times more revenue in order to acheive the same effect as cutting costs.

For example, a company cuts its operating costs which increases its operating income. This in turn increases net income. An increase in net income leads to a greater earnings per share and ultimately a higher market value (higher market capitalization).

This is why often companies in hard times turn to layoffs as one of the quickest ways to cut these costs as it creates the most immediate effect on a companies market value. However, most analysts agree that this short term tactic does not create any long term value, nor any long term sustainable savings. This is why "Spend Management" has become a key long term strategy for companies seeking to maintain long term and sustainable value.

Born out of the need to find ways to garner more value of activities such as sourcing and procurement, the term was most recently coined by companies in light of new technologies that help to facilitate the control of these costs.

These costs typically show up as "operating costs" or SG&A (Selling, General and Administrative) costs, but can also affect other parts of the supply chain such as manufacturing and sales.

"Spend Management" is also meant to represent a holistic view of the activities involved in the source to pay process and includes spend analysis, sourcing, procurement, receiving and finally payment settlement and management of a companies accounts payable and general ledger accounts.

Most recently companies have been utilizing new tools such as e-sourcing (for bidding and reverse auctions), e-procurement (to control and monitor purchasing acivities and contracts) and e-spend analytics (to gain insight into how much money is being spent on what types of services or products).

The promise of these tools was not only to automate paper intensive and manual processes, but also to help monitor and control spending activity and to create an integrated process in which each activity feeds into another.

Savings is realized by improving these processes by:

Decreasing "maverick" spend

"Maverick" spend is the process whereby requestors (those who are creating a request for an item or service that will be turned into an order to a supplier) by items or services that are outside the preferred process or system. This often means that a "maverick" purchase typically results in an individual or department buying an item in an ad-hoc fashion that results in paying a 20% premium for that item. Instead of buying from a preferred supplier with which the company negotiated a contract with discount pricing, an individual goes outside the normal process and purchases that same item at retail.

This is often hard to enforce unless some control mechanism (often technology), in put in place that 1) prohibits this type of purchasing, 2) sets up penalties for these types of purchases and 3) puts into place some type of approval or check and balance system.

Increase of spend economies of scale

By directing more spend toward a particular supplier, a company can negotiate more favorable pricing based on how much money it spends with that supplier in a given year. Many companies may purchase like items from many suppliers at different prices. By consolidating this "spend", and directing it toward 1 or a few suppliers, companies are able to get bigger discounts.

The activity that a company goes through (also called supplier rationalization) is called "strategic sourcing". This takes a commodity by commodity look taking into account business unit, location and other requirements to find opportunities for "economies of scale" savings.

Automating sourcing, procurement and payment processes

Process efficiencies can be gained by using technology automating paper based and manually intensive processes. However, different companies have had varying degrees of success in this area. The general idea is not to just automate but also use the technology to improve upon these processes.

Process savings can be measured in various ways such as: how long it takes to process a purchase order, how many individuals need to touch the purchase order before it can be sent ("touch points"), how long it takes to reconcile and pay the supplier as well as many other methods to measure these process improvements.

Using e-sourcing tools for bidding auctions

Tools are used to not just automate the bidding and contract award process (similar to e-bay in which you may have 1 buyer and many supplier or 1 supplier and many buyers). Tools also help to develop product requirements that will go out to suppliers (typically called an "RFP" or Request For Proposal).

A buyer (ie: an individual at a company that has determined a need for a particular product), will develop a document that lists the need (ie: the type of product they need and why), specifications, the bidding process (how the process will work and how suppliers will be scored), rules for the bidding process and other factors.

Buyers will then invite suppliers to register online and open the event for a set period of time so that suppliers can bid. At the end the buyer awards the contract to one of several suppliers. The award can be based on price, delivery time (the time it takes the supplier to fulfill an order) or other factors such as quality or how close the product meets the needs.

The e-sourcing of direct items (raw materials) is often much more complex than indirect (office supplies etc) as the deciding factor is not just price but also the way the product fits into the overall manufacturing of a product.

And many others.

In addition, the way a company collaborates and transacts with their suppliers is a critical part of spend management as well. This is often called "Supplier Relationship Management". This term is often incorrectly used in place of "Spend Management".

Spend Management, however, is really a subset of Total Cost Management, which takes into consideration financial management aspects such as tax/vat, exchange rates, the impact of demand (ie: sales) and manufacturing and other factors.

In fact, Spend Management when considered from a holistic viewpoint can start to feed into supply management as it also affects how assets (capitol and otherwise) and inventory are procured and managed. Spend Management (and in a bigger view Total Cost Management) starts to inform a company of Total Cost of Ownership and is often used to understand the total cost of items such as assets (from their aquisition to their use and depreciation and finally to the assets retirement).

In the end, however, Spend Managment is about creating longterm and sustainable savings. True Spend Management (and by extent Total Cost Management) is considered by many to be an ongoing cyclical process.



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