Data Is King

Today everything in business relies on data: sales, lost sales, materials in stock, efficiencies, budgets, demand, etc. It’s the exception to the rule that a business can run without at least some data as to the peaks and valleys of their sales.

This is no different for procurement. Today data is as important to an organization’s procurement and supply chain functions as it is to any other area. Data not only informs procurement about what’s going on, but is increasingly driving procurement decisions, such as how much to buy, how to enter negotiations, and even whether or not to eliminate the requirement for what is being procured.

Herein we’ll take a look at the ways data drives procurement, and how your organization can benefit from it.

Spend

How much you spend, what you spend it on, and how you spend is one of the most important data points for procurement professionals. What you will spend in the future is also important.

Why?

How much you spend gives you a number to work with, and helps the procurement professional set goals on reduction. What you spend it on can tell you if you’re spending too much for a material or service, or perhaps your organization is spending money on something it doesn’t need (ex. obsolete materials). How you spend can tell you if you spot buy, make multiple purchases resulting in paying for multiple shipments when you should consolidate them, and with how many suppliers.

Forecasting spend is important, too. What is that project in 12 months projected to cost you? Why?

Management

Gathering all of this information helps you manage that spend. Some companies can readily access this data and procurement professionals can begin tackling it. You may belong to a company like this.

Or, you may be part of a company that doesn’t have this data ready at hand. You may be the person that gives your IT department a heart attack. (It’s OK, they have health insurance.)

Managing this spend helps you and your organization make decisions on how to change certain purchasing trends, make decisions on how money will be spent, and why.

Unmanaged spend, also called Rogue Spend, accounts for roughly 29% of a company’s spend, according to The Hackett Group. If your annual spend is tens or hundreds of millions of dollars, your organization could be leaving millions or tens of millions of dollars on the table, something that directly effects the bottom line.

Getting spend under management helps you make decisions such as consolidating areas of spend and bidding out to find a single supplier that can supply it all in order to find better solutions that will help save money and avoid costs.

It can also help you begin the discussion on processes.

Process

Soft costs are hard for some people to grasp. They “technically” don’t exist, so why address them?

A perfect example is one I dealt with recently. Currently the company I work for has workers clean their own vehicles. The issue? That worker is being paid $30-$40/hour straight time to clean that vehicle. Lump on benefits, that’s roughly $45-$60/hour.

We began a project to contract vehicle washing services. Bids came back at around the $15/vehicle mark. A fraction of what it would cost for one of our workers to clean them. (The agreement is for approximately $65,000/year.) And vehicle cleaning would be done after hours, not affecting the work schedules of the workers.

The managers and supervisors we discussed this project with just shrugged their shoulders. “They’re on the payroll anyway, so why not just keep having them clean their own vehicles and not spend $65,000 a year?”

The issue is that these workers could be spending the time they are cleaning their vehicles doing their actual job. If you have ten or so workers taking time away from a job site throughout the month to power wash their vehicles, that reduces the efficiency of work done on that job and could extend the schedule of that job, even pushing it past the deadline. How much does all of that cost your company?

This could also include your procurement processes. Are there steps in your processes for purchasing, receiving, warehousing, and issuing materials? Or perhaps suppliers that provide services are late (costing you time and money) because of certain processes your organization follows such as unnecessary security checks.

Using spend data to look at your organization’s processes can help you address both hard and soft costs. The data gleaned from these calculations can help your organization become more efficient and effective.

Total Cost of Ownership

With spend managed you can begin to address Total Cost of Ownership. How is freight billed? How are shipments handled? How does the supplier bundle things? What’s the mark-up? What’s the cost of labor for the supplier to handle that product or service? What’s the cost of labor for your organization to accept that material or oversee that service? What are the manufacturing costs? What is the cost of holding inventory at the supplier’s location? What’s the cost of holding inventory at your location? Are there materials you can remove and still be effective?

All of these things, and more, go into the total cost of ownership. Tracking the total cost of ownership, perhaps through should-costing, can help you and your organization determine if you need certain materials or services, if there are features that can be removed, or if there are better ways of doing things.

Conclusion

Getting a handle on your data in procurement is as important as getting a handle on it in sales. As the procurement professional you need to be able to track how much is spent, what it’s spent on, how it’s spent, how much was spent in the past, and what your organization will spend in the future if you are to be effective in contributing to the conversation on how to change all of that for the better.

Should You Should-Cost? (The Answer is Yes)

Your supplier says they’re giving you the best deal. They promise they are saving you tons of money compared to their competitors.

But something in the back of your head tells you otherwise.

The supplier didn’t budge in negotiations during your last RFP. Nothing was gained, and the supplier said they actually had to raise prices, regardless of your business with them. They were the lower bid compared to the other bidders, but you still think that you’re not getting the best pricing.

Enter the Should-Cost Analysis

A should-cost analysis is a detailed breakdown of what a material or service should cost compared to what a supplier wants to charge for it.

Once complete, companies can compare their analysis against the bids of potential suppliers, or the pricing of a current supplier.

While there are some programs out there that enable companies to do this, a spreadsheet can generally fill this need.

Dig Into the Details

Should-costing is an in-depth process, and can take quite some time.

We will use a hammer as an example.

In order to should-cost the hammer, you will need to find out what kind of metal is used to make the hammer head. By weighing it, you can determine how much of that metal is used. Is there a rubber handle? Strip the rubber off and weigh it to determine how much rubber there is.

With these weights you can now search online for the current price of the steel and rubber, and determine the cost of the amount of material used.

Was the hammer made in the U.S.? Or China? Include the base salaries of workers in the country the product is made.

How long does it take to make one hammer? How many people are on the assembly line for the hammer? Machinery is most likely used in the process, too. Using an internet search, you can find videos on how things are made to give you a general idea of cycle times and personnel on the production line. (This “How It’s Made” video is perfect for helping you should-cost hammers: https://youtu.be/7xHVyT5oEL4)

Along with this information, corporate overhead, shipping, and any warranties will need to be factored into your should-cost analysis. Many times you can ask the supplier – in supplier workshops or in the RFP itself – the percentage of overhead they include. Or, for publicly traded companies, they include this in their annual report.

 

Putting It All Together

Once all of your information is gathered, organize it and add it up in a logical format.

How does your should-cost analysis match the supplier’s pricing? Is the supplier’s margin close, and they actually are giving you the best pricing? Or is there a large delta that you need to discuss with your supplier?

This information is excellent leverage during negotiations. Calling out suppliers on too-high pricing gives your organization a major advantage.

Note: Do not show the suppliers your should-cost analysis! Giving them an idea of the difference in terms of a percentage is enough. If they ask for it – tough! They came up with their pricing, they need to explain it to you.

To give you an idea what this looks like, here is a rough example of a should-cost analysis for a mini-excavator that I did. Again this is very rough, and doesn’t include shipping and warranty data.

Should-Cost 2

Conclusion

A should-cost analysis can be time consuming, but it is a valuable tool to your organization. With a solid should-cost analysis you and your team can gain a great deal of leverage over the suppliers you negotiation with.

Remember, this can be done with services, too. And, the more detailed the material or service analyzed, the more time it will take. But it will be time well spent!