Spend Under Management – Everything a Procurement Professional Should Know
For procurement experts, spend management is a term that should be treated with the utmost importance. Being able to know how use spend under management (SUM) to your advantage is the ultimate proof of your skills as a procurement expert!
For this article, we are going to learn more about spend under management. We will tackle its definition, check out how you can take advantage of it, and how to use modern procurement systems to keep track of your procurement spend under management.
Once you’re done reading this article, you should have a grasp of what spend management is and how to use it like a professional.
Defining Spend Under Management
In a perfect world, every cent your business spends would generate an optimal return and help support your organizational goals for growth, innovation, and competitive strength. But in the real world, companies often struggle to achieve total visibility into, and control over, their spend.
Spend Under Management (SUM) is one of the most important metrics you can use in evaluating in developing strategic sourcing and procurement processes. Your spend under management is easier to optimize than you might think by implementing the right tools and following a clear process. This article will learn you more about this!
For every procurement manager, the ability to procure materials within the shortest possible time and with a favorable budget of your choice are just some of the qualities of a job well done. Of course, one can’t forget about the budget used to procure the materials.
In fact, one can argue that only the best procurement managers are able to create a procurement system so amazing that these people are able to buy what they need without overshooting their budget.
Sounds too farfetched right? Actually, it’s possible by keeping a watchful eye over your spend under management.
Spend under management is the total amount of spending that is actively managed by you as a procurement manager. This figure can include every product group, category, or supplier that you are working with, or can be divided into separate metrics that represent a specific region or category.
Spend under management is an important metric for a procurement organization because it reflects maturity and controls overspending. For example: “as a procurement manager, I have increased my span of control over my spend from 70% to 80% over the past six months.
Before we go deeper into the discussion of spend under management, you must first know the following:
1. Addressable spend
The addressable spend compromises every dollar that the organization spends with commercial suppliers on direct and indirect materials.
The expenditures excluded here are the tax payments, charitable donations, dividends, stock repurchases, securities, and employee base salaries and bonuses.
It is important to take note that addressable spending means all sourceable spending and not just simply the products and services that are sourced by the procurement professionals or experts.
2. Spend influenced
This is the area of spend in the addressable spend of an organization in which procurement teams exert some influence by overseeing or managing the sourcing process and implementing procurement processes and policies.
3. Spend under sourcing
This is the area of spend in the organization’s addressable spend which is covered by formal sourcing strategies that also include documentary category plans.
Efficiency and Spend Under Management
First, we’ll introduce you to the idea of internal procurement analytics.
Since spend under management is under the procurement process as a whole, it’s only important for a procurement manager to learn more about efficiency and procurement analytics.
We have an article that is especially focused on the topic of procurement analytics. For those who are interested in learning more about it, you can click on the link above.
Purchasing performance consists of two elements; efficiency and effectiveness. effectiveness means “doing the right things” and Efficiency means “doing the things right”
Effectiveness is another dimension of procurement performance measurement, Purchasing effectiveness is the extent to which an established goal or standard is being met. A strategy or activity is either effective or not: a goal is reached or not. Effectiveness within procurement is related to the goal of obtaining the right material of the right quality, at the right time and right place. The process will contribute to innovation and reduce your company’s supply risk. It makes sense that every procurement plan should include effectiveness measures and criteria to assess the effectiveness of procurement performance.
Efficiency is the relationship between planned and actual sacrifices made in order to realize a goal. Procurement performance is critical to the success of every firm. Superior performance leads to competitiveness. Thus it became vital to check the efficiency of the procurement process. Efficiency means the organization is “doing things right”.
This lesson will be about effectiveness: internal analytics will help you build a perfect Personal Procurement Plan. In another module, we will dive further into the details of efficiency, when we dive into how to implement a good procurement process.
The Power of Internal Procurement Analytics
So why do we have to learn more about procurement analytics? Does it have anything to do about spend under management?
The answer to this question is a resounding yes. Procurement analytics takes a big portion on the effectiveness of spend under management because it is only through analysis of data and matching the records of past and present procurements that procurement teams can create a budget line for future procurements.
As stated by KPMG, “CEOs are looking to the procurement function to take on a broader and deeper set of strategic responsibilities than ever before.”
Analytics is widely regarded as one of the most important resources and disruptive forces in procurement. According to a recent survey by Deloitte, most Chief Procurement Officers (CPOs) consider analytics as the technology area with the most impact on business. What’s more, Ernst and Young identified analytics as the most disruptive force in procurement over the next decade.
Procurement analytics is the process of collecting and analyzing procurement data to form meaningful insights and aid effective business decision-making.
Procurement analysis typically involves collecting data from a number of different sourcing systems such as ERPs, classifying data to standard or use-case specific taxonomies, and displaying data in a visualization dashboard or within business intelligence tools.
The need for procurement analytics has developed from many organizations’ desire to get a consolidated view on the procurement spend. Initially offered through one-off projects such as spend cubes, procurement analytics has evolved to encompass a number of specialized solutions, dashboards, and types of automation software.
Hereunder- we will first start with a short introduction to the latest update on procurement data, then we will dive into the three steps of procurement analytics and some important metrics to build your own procurement plan.
Data might sound very boring to procurement managers, but understanding what can be achieved with is crucial for Procurement Managers. But don’t worry, we won’t go into every detail. That being said, you probably agree that every professional should understand more than just the basics of analytics, right?
As you might know, “you have to have the procurement data available to be able to mine it.” Yet, current common practices in data governance and management are limited to the collection of raw transactional data. Common sources of data may include your company’s ERP system, any procurement system such as Ariba, Coupa, or Bravo, third-party Group Purchasing Organizations, or even your suppliers.
Many providers restrict their data acquisition to only readily available electronic data, thereby missing a significant “chunk” of the total buying data. A common problem faced in companies is the issue of how to structure the front-end data entry process to ensure data quality. Because of inadequate data governance programs in most organizations, low usage of analytics is the current norm.
ERP systems are typically not designed to provide easy user interfaces that enable effective analytics. In the future, more fundamental data governance will be required to realize the benefits of analytic technologies for procurement. Master data governance will increasingly become an automated function, and us delivering input into the system will be replaced by learning algorithms that recognize data errors. Once data is captured, coded, and enriched, the real power of the data can be leveraged through merging with other data forms for analytic queries, dashboards, data visualization, and cognitive computing.
We also have a great article about these online procurement systems. These programs are designed to help the procurement manager in managing their data. You can click on the link above to learn more about them.
Purchase orders may be eliminated entirely, replaced by blanket order contracts. Suppliers will virtually track demand and service requests through system integration and will fulfill customer demand based on reorder point triggers and sensors.
Three American-based professors, Robert Handfield, Seongkyoon Jeong & Thomas Choi made a great overview of how data & spend management is handled nowadays and how that will most likely change in the future of your company. If you are interested in a deep-dive about the future of Procurement Data, make sure you check our Course & Reading materials later in this course!
+ What is spend under management?
Spend under management is the total amount of spending used for the procurement of materials.
+ Why is spend under management important?
Spend under management is important because you certainly don’t want to blow your budget on procurement alone.
+ Why is procurement analytics close to spend under management?
Procurement analytics help determine the right budget that should be used for spend under management.
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