A seemingly simple question for a business leader to ask and one that most would think it would be easy to answer. Unfortunately in many organisations it is not that easy to get a handle on where the money is going. If we take an average business in the manufacturing sector then perhaps 25% of the money goes out the door on the cost of people, 15% might be taken up on overheads and 10% gets kept as profit. So what about the remaining 50% of money that goes out the door? This is money being paid to third parties for raw materials, goods and services. Should be easy to get a handle on, right? In most cases the answer is it’s not so easy at all!
But we have an ERP or Purchasing system you might say! Again in most organisations Procurement only controls about 30% of the third-party spend. The purchasing files will only get you part of the answer. The next straw that is usually grabbed is to say that the ‘accounts payable records’ will give the whole picture. These will certainly get you more than the 30% procurement controlled spend but again still not the full 50%. What about expense claims, petty cash or corporate credit cards? All these are avenues by which money leaves the business to third parties.
Is this lack of clarity something to be concerned about you ask, our people are all ethical and operating in the best interests of the company! The key question is whether all the spend is being optimised, are you getting the best deal for all the dollars you are spending? Often the buying of the same goods and services is spread over several suppliers or products that are very similar are purchased separately again diluting the companies purchasing power.
So what to do about it! A process called “Spend Mapping” can help bring some clarity to where the company’s money is going and whether there are opportunities to aggregate spend to get a better deal. A Spend Mapping project will go through the following stages:
|Spend Analysis Step||Step Detail|
Once you have developed this information you are ready for the next stage – Developing sourcing strategies for each category you have identified. And of course tightening internal controls if not all the dollars are going where you would want them to!
By Andrew Downard – AD Supply Chain Group