Continuation of Managing Indirect Spend Book Excerpt Series, Part V: Data Collection
The following article is excerpted from the book Managing Indirect Spend, by Joe Payne and William R. Dorn, Jr. Published by John Wiley & Sons, Inc. Release date: 19 October 2011. Click here to order from Amazon.com.
On the most basic level, engaging in data collection and spend analysis enables you to identify your starting point. Having a detailed understanding of where you are right now in terms of price, as well as what you are getting for that price (service, quality, etc.), provides the context for analyzing offers from alternate suppliers in a much more meaningful way. In addition, establishing an accurate starting point helps justify your position when decisions come under scrutiny from your peers.
Understanding the data is not just helpful for making and justifying decisions internally. Providing alternate suppliers with a complete and accurate picture of current requirements allows them to take the guesswork out of their proposals and eliminates additional costs that can get factored in when the scope of work is unclear. Before digging in to the most effective ways to collect data, let us first identify the types of data you need to get started on any sourcing engagement.
On the surface, quantity and price seem to be the two pieces of raw information you need to get started. However, once you begin to dig, you will discover there can be some tricky complexity hidden within these data points. For example, a logical first question is, how much does the company buy (total units) and how much does it cost (price per unit)? As you explore the answer, the notion of price quickly grows in complexity when you realize that unit cost is not the only component you need to consider; other factors come into play. Are there quantity price breaks? Is freight included or are there additional charges? What are the payment terms, and is there a discount for early payment?
Usage, or volume-how much you buy of a particular product or service-is the other basic component in the data collection process. In most cases, companies consider the last 12 months of usage to be reflective of future purchases; however, this may not always be the case. If business has shrunk or increased dramatically, volume may have shifted, and those changes should be documented before engaging in the RFx process. In some cases, consolidating volumes across locations (if you have multiple sites buying the same products) might make sense; in other cases the data should stay separated. Order size may also make a big difference, so line item detail of purchases across locations becomes critical. As we discuss later in this chapter, getting this level of detail out of your own internal systems can be a challenge, if not impossible.
Price and usage are the foundation of a spend analysis, but there are many other factors that should be considered during the data collection and assessment process. Understanding existing contractual commitments, contract terms and conditions, quality levels, and scope of work are also important. Business concerns such as the order-to-payment process, the shipping and receiving process, and a detailed understanding of the historical relationships with current suppliers should all be reviewed and evaluated during this stage. With all this data to collect, getting started can prove to be a daunting task. In reality it is not that difficult, as long as you have a clear idea of what you are looking to accomplish.