World Class Spend Control: Taking Action (Part 1)
If you have in place a world-class Spend Control process, you want as much spend as possible to go through that process because it means it is spend where you have CREATED the opportunity for value and savings (Source-to-Contract & SRM processes) and have then CAPTURED that actual value (Purchase-to-Pay processes).
That spend is what you can call SPEND UNDER MANAGEMENT. In practical terms spend that is ‘under management’ must meet this criteria – spend that is…
Properly sourced & managed suppliers
There are many different ways suppliers can be sourced. Strategic, project, long term contract, or one-off spot buys. It usually involves multi-candidate competitive sourcing activities. And it often involves conscious decisions or regulatory compliance. The important thing is that the organization uses consistent, repeatable processes for each type of sourcing activity.
Means that purchases are made within the bounds of the organisation’s approval policies based on the value and nature of purchases, and the role of the staff making the purchase. That doesn't always need to mean a formal request-to-approval process…
Spend with ongoing contracts that pre-authorise the supplier to invoice on a periodic basis (utilities) or on some form of payment schedule (maintenance services) and certain employee expenses allowed to reimburse after the fact (expenses or PCards) spend won’t require that – the contract is, in effect, the approval.
And if you are providing employees with catalogs for low value categories like office supplies, that ‘approval’ process may be automated at certain thresholds to eliminate un-necessary ‘friction’.
Departmental expense accounts are made up of thousands of detail items. The same is true for purchase history for spend analysis. Each item is an individual transaction that only gets into the department’s actual vs. budget report, or the category purchase if it is properly coded when the purchase is made. Improper coding causes budget management problems and surprises. Proper coding is definitely a ‘devil in the detail’ issue that is important to address systematically.
The good news is if other aspects of the process are in place, much of the coding becomes automatic.
Correct pricing & terms
The correct pricing & terms are, of course, those negotiated at sourcing time and documented in the supplier agreement, catalog or contract. If the purchase does use this price then you will be paying more than necessary and losing some of the potential savings created by procurement.
Cost can be added to the apparent cost of the purchase based on the way internal purchase and payment processes are performed. Internal effort can add 20% or more to what everything ‘appears’ to cost when just the value of paid invoices is calculated. That’s why efficiency cannot be ignored.
In order to be managed, the purchase needs to be visible to the appropriate people in two different time periods: Request-to-pay period which may last days, weeks, or months; and the historical period – usually several years after the fact.
In contrast… spend that pops up after the fact as an invoice then takes days or weeks to validate and never gets properly categorized cannot be thought of as 'under management'.