How can Procurement add value with poor information?

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PI May head.jpgA newly launched service by Purchasing Index allows Procurement practitioners to create instantaneous reports in many highly visual formats at the touch of a button. It empowers users to interrogate information instantly and to agree and take immediate action.

"When presenting the service to prospective client organisations the most frequent concern raised by senior management is whether the organisation’s spend information is of sufficient quality to make use of such an advanced and powerful tool," Alan Low, MD of Purchasing Index, told SmartProcurement.

PI’s response, based on extensive experience, is two fold:

First, while most organisations would like to have better quality information, the current information is all they have to run the business.

Second, Procurement will still need to deliver value while the organization is improving information quality.

Here is an example of how the Spendtrak service can help.

Organisation A has many different business units geographically spread around South Africa. Some business units have procurement systems, other do not. All supplier invoices are paid through a central finance department. The company is planning to implement an ERP (Enterprise Resource Planning) system, but this will take some three years to complete. Procurement is trying to add greater value to the whole organisation, through initiatives such as rationalising suppliers, central management of major supplier relationships, increased BBBEE spend and reduced procurement administration costs. However, current categorisation of spend is poor.

Examining payment information, the Spendtrak service would enable Organisation A to loosely categorise suppliers by the main types of goods and services that they provide (i.e. KPMG – “consulting and advisory services”, etc). This would enable the procurement team to build instant views aimed at identifying the number of unique suppliers per category.

PI May 1.jpgThe bar charts alongside show the number of unique suppliers for electrical equipment (82) and, on the right, the amount of money spent with each supplier over a 12-month period in descending order.

Action: From here Procurement can work with the business units to get agreement on how to accumulate greater spend with fewer, preferred suppliers (with the correct BBBEE accreditation) and attempt to negotiate lower prices, better service, etc.

PI May 2.jpgFor any organisation to know the up-to-date status of all its suppliers is a lot of work. The map view (alongside) can help Organisation A identify the suppliers whose status is unknown, their relative importance in terms of the business conducted over the last year, for example, and where they are based in South Africa.

Action: Begin calling the suppliers from top down to get their BEE status.

PI May 3.jpgSimilarly, the issue of balancing supply chain costs against service is a constant issue for all organisations. Organisation A could rapidly build views like the “heatmap” alongside, showing how many supplier invoices have a value of R500 or less, which is less than the internal cost of handling an average procure-to-pay transaction. In this specific case almost 40% of all supplier invoices were for less than R500. The colours show that there are a lot of common suppliers and the grouping would enable procurement to identify the relevant cost centre managers.

Action: Discuss and implement immediate corrective action to reduce internal administration costs and supplier fulfillment costs. Re-negotiate prices and/or settlement discounts to reflect savings for suppliers.

Working closely with clients, PI can affirm that organisations can make significant strides in reducing costs with relatively little information. Instant reporting and high visualisation for users can allow procurement to identify opportunities quickly so as to become more effective and productive.

If you are interested in discussing Spendtrak in greater detail, please contact Alan Low on alan@pibenchmark.co.za.

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