Where’s The Money Gone?

By Andrew Downard – AD Supply Chain Group

Money2A seemingly simple question for a business leader to ask and one that most would think it would be easy to answer.  Unfortunately in many organisations it is not that easy to get a handle on where the money is going.  If we take an average business in the manufacturing sector then perhaps 25% of the money goes out the door on the cost of people, 15% might be taken up on overheads and 10% gets kept as profit.  So what about the remaining 50% of money that goes out the door?  This is money being paid to third parties for raw materials, goods and services.  Should be easy to get a handle on, right?  In most cases the answer is it’s not so easy at all!

But we have an ERP or Purchasing system you might say!  Again in most organisations Procurement only controls about 30% of the third party spend.  The purchasing files will only get you part of the answer.  The next straw that is usually grabbed is to say that the ‘accounts payable records’ will give the whole picture.  These will certainly get you more than the 30% procurement controlled spend but again still not the full 50%.  What about expense claims, petty cash or corporate credit cards?  All these are avenues by which money leaves the business to third parties.

Is this lack of clarity something to be concerned about you ask, our people are all ethical and operating in the best interests of the company!  The key question is whether all the spend is being optimised, are you getting the best deal for all the dollars you are spending?  Often the buying of the same goods and services is spread over several suppliers or products that are very similar are purchased separately again diluting the companies purchasing power.

So what to do about it!  A process called “Spend Mapping” can help bring some clarity to where the company’s money is going and whether there are opportunities to aggregate spend to get a better deal. A Spend Mapping project will go through the following stages:

Spend Analysis Step Step Detail
1. Identify
  • Search   all sources of information on where the organisation’s money is going:
  • Purchasing   Data – Payables Data – Purchasing Cards
  • Petty   Cash Vouchers – Expense Claims – Etc
2. Gather
  • Create   a single ‘database’ of information in common format (Take care as each source will come in a   different format)
3. Cleanse
  • Correct   errors, remove duplications, standardise descriptions and Units of Measure
4. Group
  • E.g.   Purchases from IBM, IBM Corp and Cognos are in fact the same company
5. Categorise
  • Find   a method to Categorise such as UNSPSC (www.unspsc.org)   , eCl@ss (www.eclass.de) or custom   developed. Avoid too broad groups such as ‘Travel’ or ‘Office Supplies’
6. Analyse
  • Basic   question; “Are you getting the best deal?”, is all spend under contract, are   only approved suppliers used, is there ‘rogue’ spend, are there Benchmarks?
7. Repeat
  • Continuous   improvement

Once you have developed this information you are ready for the next stage – Developing sourcing strategies for each of the categories you have identified.  And of course tightening internal controls if not all the dollars are going where you would want them to!

Andrew Downard is a Supply Chain consultant and Mindshop facilitator who specialises in helping clients realise the opportunities that are available in their Supply Chain, Logistics and Procurement activities.

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