Generating Profitability by Managing Spend

August 9, 2004 by admin

As a key strategic initiative, companies are rapidly embracing the idea of improving corporate profitability by managing spend. They also place more and more emphasis on the role of the chief procurement officer (CPO). According to the value proposition, any savings realized by negotiating lower prices have a direct and positive impact on profitability. However, putting the theory into practice is not as easy as it sounds. To realize the value of managing spend successfully, companies must first consider options to gain clear visibility into how spend is distributed across different categories of products and services and across their suppliers. Second, they must formulate appropriate purchasing strategies to address different categories and suppliers. Third, enterprises should discover new price thresholds by increasing competition and transparency – by using electronic reverse auctions, for example. Last, and most important, any new prices must be realized as tangible savings by distributing them across the entire organization and enforcing compliance with procurement processes.

Promise and paradox of e-sourcing

In actual practice, most companies distribute their spend across subsidiaries that use different standards to define master data. For example, various systems might list a material item or supplier under different master codes. Moreover, data critical to purchasing decisions is distributed across heterogeneous systems. The financial data needed to assign cost centers and pay invoices often resides in the finance system. Material and supplier data, required to analyze spend and identify suppliers, usually resides in supply chain systems. Contracts necessary to enforce compliance might reside in yet another system – or remain paper-based. Purchasing activity produces extensive data, and fragmentation of critical decision-support data across multiple systems makes purchasing processes labor- and time-intensive.

Purchasing Life-cycle

Purchasing Life-cycle

Although still in their adolescence, e-sourcing and e-procurement have demonstrated process efficiency: the ability to procure faster, to require fewer resources to enforce compliance, and to discover lower price points through the use of e-sourcing and auctioning tools. E-sourcing is used to negotiate lower prices, better terms, and conditions. E-procurement is used to streamline the approval of suppliers and to standardize procurement. Today, both processes work well on a standalone basis. However, true and sustainable savings can be generated only if both are connected to and integrated with ERP systems, such as financial and supply chain management systems, and the suppliers’ processes.

Fully integrated purchasing life cycle

mySAP SRM enables a fully integrated e-purchasing platform that allows organizations to manage all purchasing-related and supplier-facing relationships. Built upon the SAP NetWeaver integration and application platform, mySAP SRM closes the loop between sourcing and procurement processes. It integrates with various ERP, SCM, and product life-cycle management systems. And it extends the procurement and sourcing processes to all suppliers. mySAP SRM supports the complete purchasing life cycle: from strategy development to procurement execution. This support translates into sustainable savings by providing better quality data to the category manager responsible for negotiating new contracts. Purchasing departments shift their focus from managing procurement transactions to enforcing compliance and management exceptions. Buyers can now fulfill a more strategic role. Instead of following up on the status of purchase orders, they can ensure that end users procure items under contract.
This shift in focus from clerical activities in a call center to more strategic activities begins to pay off when contracts are re-negotiated. At this point, better data is available on the amount of materials consumed in the previous period and on the quality of the suppliers’ performance. The time saved by electronic management of transactions can be put to better use by defining requirements, evaluating alternative suppliers, and negotiating better terms and conditions. Savings continue to be harvested from the improved quality of data available to the buyer and through the reuse of specifications and supplier evaluation criteria.
mySAP SRM supports the sourcing process: the ability to analyze spending per category, measure contract compliance and supplier performance, conduct requests for quotations and reverse auctions (bidding and awarding), and create and publish contracts. Full integration with e-procurement enables process buyers to select items and services from catalogs at the best negotiated prices, which are called “off contracts”. They can also create a purchase order, have it approved, and send it to suppliers.

mySAP SRM enables collaboration with suppliers

Integration

Integration

Supplier collaboration is an effective mechanism for reducing risks along with time-consuming and costly errors. It can take many shapes: from order collaboration to collaboration in designing specifications and contracts. Order collaboration in mySAP SRM allows suppliers to receive purchase orders directly in their back-end systems or have them posted on a personalized portal accessible only by the supplier. Suppliers are then requested to confirm receipt of the purchase order. The confirmation alone saves significant time: buyers do not have to chase orders. Ample warning is given if an alternate order must be created because the supplier cannot deliver on time or has an incomplete quantity. Suppliers submit invoices online, which further reduces the effort the finance department must expend to verify invoices and issue payments.
Suppliers can also collaborate during the bidding process by submitting bids electronically and participating in online auctions. Typically, an incremental savings of four to seven percent can be realized from the increased visibility and competition created by online reverse auctions.

Lowering TCO

The need to analyze additional data grows as e-sourcing expands to encompass additional spend categories. The categories move beyond indirect materials to direct materials and combinations of services and materials in which multiple lotting can occur. Lotting applies when a supplier can bundle items or items and services. Because this data is usually distributed internally and externally across many different systems, the total cost of integrating with non-SAP systems and extracting and presenting information in category dashboards is significantly lower with mySAP SRM powered by SAP NetWeaver. The costs are lower than best-of-breed systems, which can prove inflexible and expensive to maintain over time. SAP benchmark data collected from various case studies shows that the total cost of maintaining and operating a fully integrated mySAP SRM system is 27–33 percent lower than that of a best-of-breed solution.

SAP Solutions

SAP Solutions

Emerging trends in sourcing suggest a growing demand for solutions to provide the intelligence and support necessary in making critical and complex decisions. The next wave of savings will be realized through lotting and bundling of complementary products and services into batches that suppliers could offer at increasingly competitive prices. Buying a computer and peripherals along with the installation services is a good example. The ability to analyze suppliers and determine the best value will require the inclusion of Web services, offered by application vendors, in the sourcing processes.
SAP is the market leader with its SRM solutions. mySAP SRM has been developed upon the design of Enterprise Services Architecture (ESA) powered by SAP NetWeaver, the most advanced and ideally suited platform. Data imported from companies such as Dun and Bradstreet (identifying businesses worldwide) already can be leveraged for further evaluation of a suppliers’ presence and credibility in the market. In the future, market trends like the impact of futures and currency fluctuations on market conditions will enable buyers to run predictive simulations and estimate the best timing and methods for sourcing. Based upon these simulations, buyers might choose to run events under certain conditions and across different regions to exploit the market situations that best affect their profitability.

Usman Sheikh

Usman Sheikh

Tags: ,

Leave a Reply