Imagine embarking on a cross-country road trip without consulting a map or GPS system to determine the quickest route, doing no research on which highways might be closed or restricted, and not performing a pre-departure vehicle maintenance check that would show the radiator hose has just a few hours of life left.
You might find a good burger stand by accident, but with such little visibility into how to best reach the destination, chances are the trip will take longer and cost more than it should, or you’ll get lost. The same is true for procurement spend analysis, says Jim Fleming, CPSM, CPSD, Program Manager, Certification at Institute for Supply Management® (ISM®). “If spend metrics don’t have some degree of granularity,” he says, “you end up just trying to pick something out of the air.”
Supply managers cannot afford that kind of budgetary flailing, especially in an environment where — according to 2014 cross-industry benchmark data from CAPS Research, the Tempe, Arizona-based program jointly sponsored by Arizona State University and ISM — the average company’s tiny (1.7 percent of employees) supply management workforce oversees a sizeable chunk (44.1 percent) of total spend of sales/revenue dollars.
To find cost savings and execute such sourcing strategies as supplier rationalization, a procurement organization should have line-by-line insight into how effectively it manages spend. And that’s where spend with line-item visibility comes in. “(Procurement) manages almost 50 percent of corporate spend with less than 2 percent of the head count,” Fleming says. “When you have this big bucket of money, how do you determine where to put your energy and resources? With the right data, you can prioritize things and make an impact on the biggest items.”
Meaning of the Metric
Spend with line-item visibility is often considered an ideal analytic step after spend under management, which is a foundational procurement metric. Spend under management can be a polarizing metric because some practitioners feel its definition is vague, but there’s no such ambiguity with spend with line-item visibility — not with a large volume of data that can be broken down by product, category or supplier, by stock keeping unit (SKU), or by direct or indirect material/service.
The initial data mining can be labor intensive, but Fleming says that, eventually, an ERP system or robotic process automation can quickly extract and synthesize the numbers. Also, he recommends invoices, not POs, as the primary data source. “There’s a massive database to draw from and get the information into bite-size chunks,” he says. “A PO might have 10 different items and you might not be able to break them down into individual items. An invoice usually has a greater level of granularity.”
According to 2013 research by The Hackett Group, a Miami-based business consultancy, 89 percent of “world-class” organizations have “significant” line-item visibility on send data, compared to 42 percent of typical companies. That correlates, Hackett Group researchers found, with higher spend cost reductions and better supply base rationalization.
“You can find suppliers that you haven’t used in two or three years and don’t need to be in your system,” Fleming says. “Or you may find a supplier who is selling you 1,000 SKUs, but you can get a better price on 400 of them. You can’t do that if you don’t have the data to look at line item by line item. So, you can make decisions from that data to rationalize out of suppliers, so you don’t have to manage them with your limited head count. That’s better prioritizing of the resource space.”
Fleming was a supply chain manager at Intel Corporation from 2007-14. He found line-item visibility valuable when his team — as part of Intel’s company-wide philosophy shift from “yield is king” to “cost is king” — was charged with reducing silicon wafer-production costs by as much as 50 percent.
“I could only do that when I knew exactly where the money was being spent,” Fleming says. “We went through some painful iterations to take the data we had across multiple systems and get it into an integrated ERP system. But when we finished that process, I was able to see where I needed to put resources to drive down costs. That clarity helped us know what to do.”
Fleming has two line-item visibility suggestions:
Focus on addressable spend. Expenses involving suppliers, contract services, transportation and warehousing are costs that procurement can reduce through line-item visibility. Such costs as taxes and utilities are likely non-addressable and not the best use of practitioners’ focus and energy.
Involve the finance department. The Monthly Metric has discussed how finance should not be viewed as a numbers-crunching killjoy, but rather as procurement’s partner in achieving organizational goals. Fleming says the finance department at Intel was a key resource during the wafer cost-reduction endeavor, providing important clarity on data.
There is a law of diminishing returns for even the highest-performing supply management organizations, and as they get more line-item visibility, year-over-year savings percentages level off. Fortunately, Fleming says, spend with line-item visibility is a multiuse supply chain metric, applicable beyond material and supplier costs. It can be used in logistics and to provide insights into total cost of ownership.
“My experience is that there are usually more opportunities available, and there’s never a situation where you feel you have all the data you need,” he says. “So, you find ways to pull in additional sources of line-item spend data and bundle those things together. And eventually, there is another benchmark standard. So, companies — whether through supplier involvement, new technologies or more integration between stakeholders — will always be able to find additional savings. I’ve never seen a company that thinks it’s found all the savings it can find.”
To suggest a metric to be covered in the future, leave a comment on this page or email me at email@example.com.