What is spend management?
Spend management is a strategy that innovative companies employ to control and optimize the money they spend. Spend management includes a number of familiar disciplines that are designed to reduce costs, improve efficiencies, improve controls and optimize cash flow. Typically, spend management deals with indirect expenses for supplies and services, or those expenses that do not go into a finished or manufactured product. Spend management can also be described as a “strategic” approach to the financial management of the business and often includes the following functional disciplines:
- Spend analysis
- Process management
- Contract management
Spend management, when executed properly, becomes a very effective mechanism to reduce costs near term and control costs long term.
Impact of spend management strategy – To understand the impact of an effective spend management strategy, we’ll identify some potential benefits:
- Spend analysis – A detailed review of spend by expense category, and by supplier, allows one to plan, prioritize, assign and manage the spend plan across the organization. The spend analysis is a data driven exercise that can focus the management team on the biggest expense opportunities to the smallest, to both reduce costs and mitigate risks.
- Sourcing – The business environment is a rapidly changing, competitive environment. Researching and interviewing new suppliers, new solutions and new pricing and terms is a key ingredient in keeping your business competitive. While developing partnerships with proven suppliers provides stability to an organization, overlooking new opportunities can provide your competitors with significant financial advantages and cost your organization in higher expenses.
- Purchasing – An effective purchasing function involves defining requirements accurately, then bidding, quoting, negotiation and analysis of competing opportunities. Many organizations take a number of short-cuts in this area and feel that a highly charged negotiation session with suppliers is all that is needed to be effective. An effective purchasing function reduces costs near term and long term using a process driven model that addresses all components of a purchase, including the transmission of a purchase order for selected buys.
- Receipt – Once a purchase order is generated, a product is shipped or service delivered, the receipt process needs to occur to validate shipment, complete the P.O. process and prepare for payment. Organizations that do not have a formal receipt process open themselves up to possible risk and exposure, due to fraudulent invoices, incomplete shipments and more.
- Payables – The best, most secure payables process includes a three-way match. The three-way match requires that a purchase order (PO) be matched to a vendor packing slip and then to the matching invoice before payment occurs. Some dealerships utilize an effective three way match process, but most utilize a two-way match process. Again, a payables process that is tightly controlled reduces risk and can potentially reduce costs if early payment discounts are pursued. Additionally, how a supplier is paid represents yet another cost reduction opportunity.
- Audits – Periodic audits of suppliers is a productive and necessary activity. While recovering supplier overcharges through audits will not drive new levels of profitability in your store, it is important to review your most expensive expense categories on a regular basis to prevent “price creep” from occurring. Your management team or accounts payable group should have regular scheduled supplier audits to complete. This discipline also requires ready access to pricing or contracts which can often be a challenge in dealerships.
- Process management – An effective spend management approach can drive internal efficiencies with a focus on process improvements. There are hundreds of processes within an organization, executed daily that cost your organization money. Processes need to be challenged in a continuous, methodical way to reduce labor, reduce costs and improve results. Do you ship packages across town using next day air rates? A process improvement will reduce your costs. Do you pull three credit bureaus for every potential sale of a car? A process improvement will reduce your costs. Does your service department collect the correct credit card information for each sale? A process improvement can reduce your costs.
- Contract management – Effective contract management will provide at least three benefits to an organization. Managing contracts so that auto-renewals do not occur can reduce automatic price increases. Managing contracts in a timely basis will allow enough time to source and quote competing suppliers to take advantage of favorable market conditions. And managing supplier contracts proactively can reduce risk associated with under-performing or risky suppliers.
A well-conceived and executed spend management plan can have a very positive impact on costs and ultimately your profitability. There is considerable research that suggests cost savings impact of 15-25% of your spend can be achieved with a centralized approach to spend management.
Your 2012 spend management strategy – An effective spend management strategy should include all of the above components for obvious reasons. Spend management is a very linear process in which one component is supported and tied to the other…a process focus. Since 2012 is providing you and your team with a fresh start, now might be a good time to develop your spend management strategy for this year.
The next steps to developing your spend management strategy should include the following:
- Define your 2012 cost savings objectives (see December article in Dealer magazine).
- Organize your team – Assign responsibility for each component of your strategy.
- Set expectations – Each component of your strategy needs to be articulated, quantified and spelled out.
- Communicate the strategy – get your entire team aligned and on-board with your strategy.
- Execute – Develop the internal discipline to manage the process regularly, as part of your regular weekly or monthly management meetings.
- Measure and report – If it cannot be measured, it probably won’t be accomplished. Set a reasonable metric to every objective and component and measure against your plan.
Summary – Executive management and financial/procurement leaders in many industries are making a concerted effort to develop a “holistic” approach to managing and controlling company assets and resources. Spend management is a financial platform that is data-driven, analytical and process oriented to drive near term improvements in costs that are sustainable over time. Spend management is crucial to organizations that are interested in improving efficiencies, providing a predictable cost structure and sustaining strong levels of profitability. This might be the perfect time to develop your spend management strategy.
To learn more about the development of a 2012 spend management strategy, stop by and visit us at the NADA show in the StrategicSource booth #3352 or #4215. We will provide you with a complimentary suite of electronic Spend Management Strategy tools.