Planning to undertake a strategic sourcing initiative? Thinking about reducing the size of an unwieldy supply base you're certain is too fragmented to be beneficial?
With cost reduction a primary tool in many U.S. manufacturers' efforts to improve profitability, it only makes sense for companies to look to procurement initiatives for help. And why not? For most manufacturers, material costs are the primary contributors to their product costs. (According to the most recent IndustryWeek/MPI Census of Manufacturers, material costs comprise a median 50% of U.S. plants' costs of goods sold.)
It also only makes sense for accurate expenditure data to drive such cost-savings measures. "It's hard to say what your opportunities are without gaining visibility [to your spend]," says Chris Sawchuk, procurement practice leader at Hackett Associates, an Atlanta-based business process advisory firm.
Hence the importance of spend analysis, a process of collecting and categorizing expenditure data in great detail to gain spend visibility, then leveraging that knowledge into cost-saving initiatives. The Sarbanes-Oxley Act, which requires timely and accurate notification of significant financial events, also has heightened awareness of spend analysis.
"Spend analysis gives you information to create a plan. It's foundational; it's an enabler," Sawchuk says. "Most organizations do some level, but the challenge is to what degree?"
Furniture maker HNI Corp.'s own spend-analysis efforts were intertwined with a strategic-sourcing initiative undertaken at its operating divisions specifically to reduce spend for direct materials. The manufacturer undertook the spend analysis following "the realization that we didn't have good visibility of our spend without a significant amount of legwork being done," explains Matt Sladek, procurement manager at the HON Co., Cedartown Plant, in Cedartown, Ga. HON is a division of HNI.
To improve visibility, six-digit HNI commodity codes were implemented for all direct materials across all divisions. The coding was completed at the plant level in August 2004. Not only did the coding identify major commodity buckets, such as steel, but it provided additional levels of detail, including steel categories (i.e. cold-rolled) and material presentation (coils vs. blanks).
Such detailed data readily at hand to share with suppliers aided in the company's steel sourcing efforts, Sladek says. The visibility also helps him set individual goals for cost-savings at the plant level.
Spend analysis can be challenging, notes Hackett Associates' Sawchuk. Simply gaining access to the information can be daunting, particularly across global operations that may have data stored in multiple IT systems.
He offers these additional steps of a spend analysis effort:
- Cleanse the data (for example, to remove multiple naming conventions for a single supplier) and further enrich it by applying a common commodity structure for added visibility.
- Make spend analysis a continuous exercise over time. Determine how to leverage the spend data going forward by making it more real-time, more enriched and easier to access.
- Ultimately, spend analysis should culminate in some plan of action.