Using spend analytics to identify your highest value suppliers
Tuesday, 17 Nov 2015
In my previous blog post, I introduced a new approach to spend management across the organization. Making spend visible to each business manager - using self-service spend analytics - builds a great foundation.
Product Marketing Manager
But what else you can do with spend analytics? In this blog, I take a look at how to use spend analytics to identify your highest value suppliers. Have you already equipped everyone involved in negotiating vendor contracts with insights into spend categories and payment performance?
Identify your highest value suppliers per spend category
Spend analytics can enable those employees who negotiate vendor contracts to identify your highest value suppliers. Once identified, vendor managers can focus on building stronger relationships with these strategic suppliers, thereby bringing more value to your business.
A category management approach makes rationalizing your supply base and selecting your highest value suppliers a lot simpler. Many companies find an organization-specific spend classification system much easier to work with than a generic one (e.g. UNSPSC). Organization-wide category-based spend visibility gives you the insight needed to rationalize your supply base and to identify your strategic, preferred and other long tail suppliers for each category.
Purchase-to-Pay solutions make spend management even easier
Deploying a purchase-to-pay solution which captures all spend and delivers out-of-the-box purchase-to-pay analytics simplifies spend and supplier base management even further. Spend visibility has to go beyond purchase order (PO) spend to include non-PO spend such as spend associated with recurring payments.
Basware makes it a lot easier to both capture actual invoice spend with highly automated Accounts Payable automation, and increase spend under management. Below is a screenshot of a dashboard which (1) delivers insight into category-specific spend, (2) identifies top suppliers, and (3) monitors how much of spend is currently managed.
What’s more, the dashboard displays your category-specific pareto curve which shows the share of spend represented by percentage of your suppliers (e.g. 80/20-rule).
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The importance of financial insights when negotiating vendor contracts
By connecting your key suppliers to a networked purchase-to-pay process and enabling spend analytics, you can improve both internal and external collaboration. Visibility into actual supplier spend, current payment terms and payment accuracy give you the information you need to manage your supply base and negotiate better contracts with suppliers. In fact, insights into on-time payment performance with your suppliers can be more important than you think.
I recently spoke with a sourcing manager of a business that just acquired a much smaller business. After the acquisition, he discovered that the smaller business actually had better contractual terms than they did! It turns out that volume is not the only thing that matters when negotiating prices – a reputation for on-time payment can carry a lot of weight - and it turned out the larger company had a reputation for paying that supplier late. This example shows the importance of having visibility not only into supplier spend, but also into payment performance. That's where spend and financial insights come into play to enable a more holistic understanding of the supplier relationship, which in turn enables better contract negotiations.
Transforming procurement into a profit-enhancing function
When the Procurement function gains financial visibility, it can become a better negotiator, a more strategic function and a stronger contributor to the company’s financial performance. Shared financial goals, supplier metrics and visibility into payment performance enable Procurement to transform itself from a cost saving function into a profit-enhancing and revenue generating function.
By leveraging networked purchase-to-pay, your Procurement and Finance departments can collaborate to tap into early pay discounts (or extend Days Payable Outstanding, if desired). Supplier relationships are also improved by making suppliers less reliant on their customers paying on time. By decreasing their Days Sales Outstanding (DSO) they are better able to plan their working capital.
To summarize, purchase-to-pay analytics plays a major role in understanding supplier spend, finding the highest value suppliers, and negotiating better contracts with them. Financial, spend, and supplier insights deliver significant business impact, enable better supplier relationships, and foster more opportunities to grow your business.
My next analytics blog posts will further explore how analytics delivers insights to finance leaders – to enable them not only to manage spend, but also to identify opportunities for business growth and make cash available just-in-time.
In the meanwhile, I invite you to watch a video about Basware Analytics for Purchase-to-Pay.
Or, if you have questions, contact us to find out more.