“Only a truly integrated spend management solution can fetch value for your company and result in intelligent procurement.”
Limited supply chain visibility, poor supplier transparency, new regulations, spend creep, contract management, risk mitigation, and the growing need to do “more with less” are some of the key challenges that procurement companies face. Spend creep has become one of the biggest challenges for companies today as companies are spending extensively to stay ahead of the competitors.
Unnecessary spend happens when businesses buy additional items, products or services, from suppliers that aren’t needed. Also, it happens because of misguided bid management process, weaker supply chain management systems, and lack of auditing and spend analysis. Therefore, procurement professionals need to have the right spend management solutions to tackle these challenges efficiently and effectively.
At SpendEdge, we understand the impact that spend management solutions can have on your business. And to help companies identify latent opportunities to devise strategic plans to minimize their expenditure in every category, our team of experts have provided a comprehensive guide to spend management.
Consolidating suppliers within specific supply markets, reducing purchasing and supplier management costs, and increasing the efficiency of your procurement process can be a complex process. Know how you can make better purchasing decisions by getting in touch with us now.
What is Spend Management?
The process of end-to-end management of spend is traditionally termed as spend management. Spend management solutions comprise all aspects of spend classification, spend analysis, spend categorization, spend performance, and data management. With the aid of spend management solutions, companies can control and optimize their expense and can effectively improve their bottom line. An effective spend management system needs to have the following in place:
- Structured events
- Effective contract management
- A preferred list of suppliers with supplier development programs
- Periodic audits of suppliers and supply chain
- Centralization of data
- Spend analysis and spend visibility involving spend data management
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Why Spend Management is Important?
Spend management solutions allow businesses to connect the whole source process such expenses, procurement, invoicing and payment on a single technology platform. This leads to better efficiencies and costs savings. Let’s look at some of the major ways in which a holistic spend management solution can deliver value and savings and more strategic benefits such as better decision-making ability and improved agility.
Benefit #1. Helps in reducing the cost of goods and services
Spend management solutions helps in reducing the overall costs of goods and services in the following ways:
- Helps avoid unnecessary purchases
- Increases opportunities to capture early payment discounts
- Minimize the chances of loss caused by improper invoices and duplicate payment
Benefit #2: Improves the procurement process
Spend management done by automating supply chain management, catalog management, and contract management saves a lot of time for procurement professionals. Furthermore, it facilitates better data management. Such benefits allow businesses to amplify the spending range, leading to more purchases in different categories.
Benefit #3: Helps mitigate risk
Spend analysis and management helps in improving visibility into supplier’s data. This, in turn, helps in calculating potential costs of known risks and mitigating risk by identifying:
- Issues caused by non-performance of supplier
- Liabilities caused by non-compliance of supplier
Benefit #4: Strategic Benefits
The most significant benefit that spend management solutions provides include an increase in visibility and transparency into the procurement process, spending, and contract commitments. This results in better decision making, improved organizational agility, increased financial control, and improved workforce productivity.
Steps to Strategic Spend Management
Organizations, to sustain and maintain an edge over competitors, need to be strategic in their approach when it comes to spend management. Today, there is a need for companies to determine effective ways of investment to meet ongoing demands and fuel growth for the future.
SpendEdge has identified the five crucial steps that companies must follow in order to change their passive and tactical spend management process to proactive and strategic one:
Step #1: Develop a good understanding of spend management processes
Every company needs to have a holistic understanding of spend processes and should have a defined policy for procurement. When companies fail to do so, they end up overspending on unnecessary products and services. So, it is very important to understand what is happening with regard to spend in various categories so that businesses can harden their existing policies or add new ones if needed.
Step #2: Build in flexibility
Once strong spend management policies and processes are in place, the company will have a well-defined framework for managing their expenses, but it may not work in all situations. Therefore, it is crucial to building flexibility to allow employees to meet business goals. However, there should be a proper reason for changing the policy because if employees bend it too often without proper justification, it may result in losing negotiated discounts or other benefits.
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Step #3: Hold the accountability of business leaders
To make spend management a source of growth for the organization, it is very important that there is an open line of communication between the finance team and business leaders. Sharing information is important to understand the reason behind rising costs and source where savings could be achieved. Also, there is a need for the finance team to put across their opinions when patterns of spending are out of the norm or business decisions are not in line with the business policy.
Step #4: Have a regular communication on spend policy
To have a strong spend policy is not just enough but its effective enforcement is equally important. This implies that businesses should ensure that employees are regularly reminded of the business policy beyond the original onboarding process. After working in the role for some time, employees tend to forget about certain policies. Therefore, it is important to remind them to ensure compliance. Also, reviewing policies at least annually and then communicating the changes done to employees in no time is equally important.
Step #5: Align business goals with spend management strategy
Since there is a direct relation between cash flow and spend analysis, it is important that policies for spend data management map to the goals of the organization such as growth and expansion. If there is any change in the business objectives, the spend management strategy must change accordingly. With a proper understanding of the role of spend management in cash flow management and growth, organizations can position themselves better to achieve those objectives.
Best Practices for Deploying Spend Management Solutions
Perform data classification
Procurement companies need to perform data classification to identify the best commodities and sourcing experts. With the better classification of data, companies can perform better supply management and can improve the approach of spending in required areas.
Classify levels of spending
Spend management is considered to be effective if the spend data is classified in different levels that can allow companies to have better spend visibility on commodities as well as suppliers. Also, it enables companies to compare price and non-price attributes. Furthermore, it allows managers to develop better spend strategies and optimize sourcing which makes spend management more efficient.
Utilize business intelligence services to improve supply chain management
By leveraging business intelligence services, companies can seek better information about suppliers, their performance, financial risk scores, and inventory. This can help in devising better spend strategies and can provide optimized spend data.
Increase the frequency of spend analysis
For effective spend management, businesses need to increase the frequency of spend analysis. The monthly spend data can help companies access recent spending positions as well as evaluate and compare it with past performances.
Final Tips for Better Spend Management
Tip #1: You need to have hold of all spend-data sources inside and outside your business. Sometimes your suppliers or affiliates can have better data than you. Utilize it
Tip #2: It is important that you cleanse your data as payments are often made by third parties outside your financial system, to one-time vendors which pose a risk.
Tip #3: You need to do a detailed analysis of spend by your business. The analysis should be able to identify the item bought, the buying entity, and source from whom it is bought. You should aim for 95% accuracy.
Tip #4: Analyze your spend data at regular intervals. A frequent analysis is required because with the dynamic business environment, there is a frequent change in prices which may result in the failure of suppliers and the supply chain.
Tip #5: Analysis is a continuous process and you must work on improving it. Integrate automation where-ever possible as spend data is a work in progress and delay can result in inefficient supply management.
Identifying latent saving opportunities and creating strategic plans can reduce your organization’s expenditure in every category. Also, gaining in-depth insights can help you make better purchasing decisions. Want to know how? Request a free demo below.