Without the right data, your initiatives won't work

Mike Verespej -- Purchasing, 12/9/2004

The themes are universal. Drive the organization forward. Manage and reduce costs. Add value. Control spend.

But if you don't have the right data in your system, none of that will happen and you will be left scratching your head and wondering why your procurement and e-procurement initiatives didn't work.

"You need to do a thorough spend analysis up front—that is, determine what you are spending with whom and do it both by supplier and by business unit," says James Flynn, manager of strategic procurement at Limited Brands in Columbus, Ohio. "Until that is completed, no amount of technology" will get spending under control.

Flynn's not alone in his view. Nearly everyone in attendance—from buyers to consultants—at the Conference Board's Purchasing Conference in New York last month had virtually the same assessment of what it takes to make procurement initiatives successful.

• Timely and accurate data.
• Organizational buy-in.
• Visibility into the data.
• Putting close to 100% of your spend through the system.

But all of the buyers in attendance agreed that all of the work starts with the right data.

"The key to success is not the e-procurement solution, it's taking the time to build a spend analysis database and understanding what you are spending today," says Flynn.

"You have to rationalize your data capture or your tools won't work well," says Rion Needs, senior vice president of global procurement at American Express, which channels 100% of its spend through its online initiatives.

"The value of strategic spending initiatives is enormous and real," asserts David McCormick, president of Sunnyvale, Calif.-based Ariba. "But there are many obstacles" for those embarking on that journey, including an absence of good information, resistance by people in an organization and a lack of processes to make it work.

"Information is the starting point in understanding where the opportunities are," says McCormick. "You can only drive action throughout your organization when you have accurate information that you can deliver at the right time to the right people. The companies who are excellent at spend management do it with facts and figures that get top management buy-in."

Less than five years ago, Limited—a fashion retailer whose store brands include Victoria's Secret, Bath & Body Works and Express—was putting only about 10% of its spend through e-procurement initiatives.

But, now thanks to the extensive database that it developed and now updates monthly, Limited is generating savings of 15% to 20% and currently has 250 'projects' covering $1 billion in spend versus the four-to-five events that it was conducting five years ago to manage just $50 million in spend.

Similarly, in less than two years, consumer goods company Procter & Gamble—even though only 12.4% of its spend goes through an e-sourcing tool that enables them to select the supplier with the best value and price—has already achieved considerable savings, says Dennis Begg, associate director of purchasing innovation at the Cincinnati-based company.

It's reduced purchase costs of direct materials/ingredients by 13% to 22%; marketing costs by 10% to 15%; direct materials/packaging by 10% to 50%; and transportation costs by 5% to 20%.

Sustained value and savings are also what American Express strives to achieve. Between 2001 and 2003, its online procurement process was responsible for $588 million of savings and it anticipates an additional $200 million in savings in 2004.

And it's what Needs calls true savings since his group is only allowed to "count" the savings that come off the actual profit-and-loss statements in the first year of an initiative.

But, as he explains, cost savings is just the initial way that strategic sourcing can pay dividends. "You can only do so much on the rate side or the price side," says Needs. "How you change behaviors with regard to procurement is what will create the most value. The more manual processes you eliminate and the more you shift [how] people buy, the more you can create sustainable value" because procurement professionals can then focus on how they can change what the company buys.

How do you convince top management to allocate resources toward strategic sourcing initiatives?

A number of companies have adopted the self-funding approach. That is, they use savings from initiatives to fund further initiatives.

Other companies have been a bit more clever in the technique they use to persuade top management.

Indeed, one buyer told PURCHASING Magazine that a chief procurement officer at chemical giant DuPont once walked into his boss' office during budget discussions and said: "We pay back 3-to-1 for every dollar you give us, so you just tell me how much you want to spend."

Caught off-guard, but, nonetheless able to grasp what he had heard, the boss simply replied: "You just spend whatever you want."