Managing Indirect Spend. Joe Payne
task. In reality, it is not that difficult, as long as you have a clear idea of what you are looking to accomplish and an organized plan to get you there.
WHERE TO START?
So where to begin? For the purpose of this book, we'll assume you are starting from scratch—you are about to engage in a Strategic Sourcing initiative, and your primary goal is to maximize the amount of dollars your organization can save. You need to identify categories or projects and develop a plan to source those categories. You want to build momentum for your initiative with a few quick wins, and you do not want to squander limited resources on projects unless your return on investment is significant. To do this, you need to identify the quick wins—categories that you can source quickly and realize significant savings.
To get to that point, you must identify your supply base and categorize the suppliers into buckets based on the products or services they provide. From there, you can identify potential projects and begin collecting data.
The next few pages provide a high‐level overview on how to collect data and perform a rudimentary spend analysis. Later in the book, we'll outline a more detailed process. Before we go into detail on that process, it is important to note that there are tools that can make the spend analysis process easier. Spend analysis tools have many advantages, which we discuss later in this chapter and later in the book. Most also require an investment of time and money to implement properly. If you are or your organization is new to Strategic Sourcing, you should only consider investing in technology after you've confirmed that your process works. Regardless, the process we outline over the next few pages should only be considered if you do not have access to spend analysis tools.
Assuming you don't already have a robust system in place, the best place to start is in the general ledger or Accounts Payable (AP) ledger. The general ledger provides a list of all financial transactions, normally classified into groups used by the Accounting department. However, using these categories as a basis for an engagement is a mistake because purchasing requirements are typically not considered during the categorization process. For example, most general ledgers include a category for supplies, which can include anything from coffee filters to paint. Since you will probably want two different suppliers (and therefore will want to perform two distinct initiatives) for these items, classifying them the same way isn't helpful. While general ledger classification requires refinement, the ledger can point you in the direction of categories that (from an accounting standpoint) have the highest levels of spend and therefore the biggest impact on the organization.
Typically, each line item in the general ledger includes a description or comment field, and if that transaction represents the purchase of a good or service, that description will include the supplier's name. The challenge is that this description data, which is pulled from an AP or purchase order (PO) database, will not be consistent for each transaction and requires additional manipulation of data.
Table 2.1 provides an example of general ledger data that provides supplier name, but the name is not consistent enough to properly utilize the data as is.
In this case, our supplier, Widget Providers, is listed in the comments field; however, the comments also include other information, such as the PO number. In order to get a good understanding of how much is spent over the course of a year with Widget Providers, an analyst might create a spreadsheet that includes all the information above and an additional field called Cleansed Supplier Name, as demonstrated in Table 2.2.
Now that the data includes a standardized Supplier Name field, it becomes possible to analyze spend by supplier. Taking it a step further, we might also add a column called Category and identify Widget Providers as a provider of office supplies. Categorizing Widget Providers under this general category, along with other office supplies vendors, provides a good basis for identifying spend areas to consider. We will cover categorization in greater detail later in this book.
TABLE 2.1 General Ledger Information
| GL Account Code | Period | Date | Journal | Comments | Debit |
|---|---|---|---|---|---|
| 5162600‐02 | 03 | 3/26/2009 | AP‐002926 | 40WIDG000 WIDGET PROV 22809 PO 6361 | $12,472.20 |
| 5162600‐02 | 04 | 4/23/2009 | AP‐003106 | 40WIDG000 WIDGET PROV 33109 PO 7258 | $15,145.00 |
| 5162600‐02 | 05 | 5/31/2009 | AP‐003336 | 40WIDG000 WIDGET PROV 43009 PO 7412 | $17,595.00 |
TABLE 2.2 General Ledger Information with Cleansed Supplier Name
| GL Account Code | Period | Date | Journal | Comments | Debit | Cleansed Supplier Name |
|---|---|---|---|---|---|---|
| 5162600‐02 | 03 | 3/26/2009 | AP‐002926 | 40WIDG000 WIDGET PROV 22809 PO 6361 | $12,472.20 | Widget Providers |
| 5162600‐02 | 04 | 4/23/2009 | AP‐003106 | 40WIDG000 WIDGET PROV 33109 PO 7258 | $15,145.00 | Widget Providers |
| 5162600‐02 | 05 | 5/31/2009 | AP‐003336 | 40WIDG000 WIDGET PROV 43009 PO 7412 | $17,595.00 | Widget providers |
Depending on your enterprise resource planning (ERP) system, an AP report may also be a useful tool to help give focus to sourcing initiatives. The AP report has several advantages over a general ledger. First, while the general ledger includes every financial transaction (debit or credit) made by the organization, an AP report only shows money paid to vendors. Second, because the report is vendor specific, supplier names will likely be standardized to a higher degree than in the general ledger. This will make the data cleansing process much easier. A potential disadvantage to using an AP report instead of a rolled‐up general ledger report is that (depending on how your financial reporting is structured) each business unit or location within your company may be operating under its own Accounts Payable journal, which means you need to run a report for each location, then consolidate files (if you intend to source across multiple locations).
DEALING WITH DECENTRALIZED DATA SETS
This leads us into the next challenge, which is how to deal with decentralized spend. Decentralized spend typically means that a supplier relationship (and subsequent payment to that supplier) does not flow through a single point of contact or group, such as a centralized Accounts Payable team and payment process. Instead, employees out in the field (or at satellite locations) are able to place, pay for, and process orders for goods and services without oversight from a centralized entity.
This