One of the projects I am currently working on involves reviewing a full year’s worth of invoices from one of a customer’s key operational suppliers.
There are hundreds of PDF invoices, covering multiple operational sites and a large number of individual products.
On the face of it, the objective sounds relatively straightforward.
Understand how much has been spent with the supplier.
But once you start bringing all of that information together, it becomes much more than an invoice exercise.
It becomes a supplier spend analysis, and starts to answer a much more important question:
Do we really understand what we are buying?
Most businesses already have the information
This is something I come across regularly with SMEs.
The information usually exists.
Finance has the invoices.
Operations know what they order.
Purchasing may have purchase orders and supplier agreements.
Individual sites understand their own requirements.
The ERP or finance system will contain another part of the picture.
The problem is that these different pieces are rarely looked at together.
A £200 invoice doesn’t necessarily tell you very much.
Neither does looking at the spend from one operational site in isolation.
But bring a full year’s worth of purchasing together across the business and a very different picture can start to emerge.
This is a theme I have written about before when looking at how SMEs identify spending inefficiencies using data.
The challenge is often not a lack of information.
It is visibility.
What can supplier spend analysis actually tell you?
Price is an obvious place to start.
For example:
- Are different sites paying the same price for the same product?
- Have prices moved during the year?
- Are agreed prices being applied consistently?
- Are there products where the price varies significantly depending on where or when they are purchased?
All useful questions.
But price is only one part of the opportunity.
Once the information is brought together, we can also look at:
- total supplier spend across the business
- spend by operational site
- products purchased most frequently
- quantities and volumes by product
- differences in buying behaviour between locations
- similar products being used for the same purpose
- opportunities to standardise specifications
- potential product consolidation
- ordering frequency
- low-volume and infrequently purchased products
- changes in purchasing patterns over time
None of those things are particularly complicated individually.
The difficulty comes when the information is spread across hundreds of transactions.
Your supplier may have a better view of your spend than you do
There is another point which I think businesses sometimes overlook.
A local site might think:
“We spend around £30,000 a year with this supplier.”
Another site may think exactly the same.
And another.
Individually, none of those relationships may look particularly significant.
But the supplier may see the organisation as a customer worth several hundred thousand pounds.
They could actually have a clearer view of your total commercial value to them than you do.
That creates two very different starting positions when it comes to negotiation.
For growing SMEs, particularly those operating across multiple sites, divisions or operational teams, this is where procurement becomes more difficult to manage.
Nobody is necessarily doing anything wrong.
Each location may be making perfectly sensible purchasing decisions based on what it can see.
The question is whether those individual decisions still make sense when viewed across the whole business.
Better supplier negotiations start before the meeting
There can be a temptation when reviewing a supplier to start by asking for a price reduction.
“We spend a lot with you. What can you do?”
Sometimes that works.
But I would much rather go into that conversation understanding the requirement first.
For example:
- Can we consolidate products?
- Can we reduce the number of different specifications being purchased?
- Could order frequency be changed?
- Are different sites buying essentially the same item under different product codes?
- Could volumes be aggregated?
- Are we buying low volumes of products that could be replaced by something already used elsewhere?
- Are there differences in price that need explaining?
- Does our total level of spend justify a different commercial arrangement?
That is a much more informed discussion than simply asking a supplier for another 5%.
And it changes the conversation with alternative suppliers too.
If you decide to test the market, you can give potential suppliers a much clearer understanding of the opportunity.
They are not being asked to quote against a vague annual spend figure.
They can see products, quantities, frequencies, locations and the overall scale of the requirement.
That should lead to a better quality commercial response.
Cost reduction isn’t always about reducing the unit price
This is an important distinction.
Procurement cost reduction can easily become synonymous with getting suppliers to charge less.
There is nothing wrong with negotiating price.
But some of the biggest opportunities can sit elsewhere.
A business might be buying 20 similar products where 10 would do the job.
Different locations might have developed different preferences over time.
Small quantities might be purchased frequently when they could be consolidated.
Individual sites might negotiate independently when the organisation would be better leveraging its total requirement.
There can also be costs hidden in ordering, receiving, administration, stockholding and product complexity.
So the commercial question isn’t simply:
“Can we buy this product cheaper?”
It is:
“Are we buying the right things, in the right way, from the right supplier, at the right overall cost?”
That is a much more useful procurement question.
This is where procurement and business intelligence start to overlap
This particular project is also a good example of why I increasingly see procurement and business intelligence coming together.
Not because every business needs another dashboard.
And not because analytics is the answer to everything.
It is because procurement decisions become much better when the information behind them becomes easier to understand.
In this case, we are taking transactional information that already exists and turning it into something that can support a commercial decision.
That could mean understanding:
- where money is actually being spent
- which suppliers or products account for most of it
- how pricing changes over time
- whether sites behave differently
- where consolidation opportunities exist
- which areas warrant further investigation
That is procurement data being used to answer a business question.
And for me, that is where business intelligence becomes useful.
The connection to margin
Supplier spend should not be viewed in isolation either.
What a business buys, the price it pays and how efficiently it manages those purchases ultimately feed into profitability.
A small price difference may appear insignificant on an individual invoice.
Across a high-volume product and twelve months of activity, it could look very different.
Likewise, unnecessary product complexity or fragmented buying behaviour can quietly create additional cost.
This is particularly relevant to SME manufacturers, where purchasing decisions, stock, customer demand and margin are closely connected.
I have written previously about why SME manufacturers can struggle to see their true margin, and procurement is an important part of that picture.
If changes in supplier cost are not visible, or are disconnected from sales and product profitability, margin can move before anybody fully understands why.
There is a time-saving opportunity too
The other interesting part of this project is the time involved.
Someone could manually open hundreds of PDF invoices and copy each line into a spreadsheet.
Historically, that may have been the only realistic way to do it.
But it is not a particularly good use of someone’s time.
Increasingly, much of the repetitive work involved in extracting, structuring and preparing this information can be automated.
That doesn’t remove the need for people.
It changes where their time is spent.
Instead of spending hours transferring information from one place to another, that time can be used to understand:
- What is this telling us?
- Why is it happening?
- Is it important?
- What should we do about it?
That is considerably more valuable.
Most SMEs don’t need more data
This also links to a wider point I explored recently when asking whether UK SMEs really have a data problem, or a visibility problem.
Most SMEs already hold huge amounts of information.
- Invoices.
- Purchase orders.
- Stock records.
- Sales orders.
- Supplier data.
- Finance information.
- ERP data.
- Spreadsheets.
The problem is rarely that there isn’t enough information.
The problem is being able to bring the right pieces together when there is a decision to make.
It is why our approach to procurement and supply chain consultancy for SMEs increasingly starts with understanding the information that already exists alongside the commercial and operational situation.
Technology can help.
But the starting point should be the business question.
Start with the picture you already have
Businesses sometimes assume that improving procurement requires a new system, a major transformation programme or an immediate tender exercise.
Sometimes it does.
But not always.
Sometimes the starting point is considerably simpler.
Take the information you already have.
Bring it together.
Understand:
- what you are buying
- who you are buying it from
- how much you are spending
- what quantities you are buying
- what you are paying
- how prices have changed
- how behaviour differs across the business
Then decide what needs to change.
Because going into a supplier negotiation armed with a year’s worth of facts is very different to going into it armed with a feeling that:
“We probably spend quite a lot with them.”
Most businesses already have the pieces.
The opportunity is being able to see the whole picture.
Want to Know What Your Supplier Spend Is Really Telling You?
Our Supplier Spend Discovery is designed to give you a clear starting point.
We take the purchasing information you already have, whether that is invoices, purchase orders, supplier data or spreadsheets, and help you understand:
- where your money is really being spent
- pricing differences and inconsistencies
- product and supplier consolidation opportunities
- buying patterns across sites or teams
- potential cost reduction opportunities
- where further procurement action could add value
You do not need perfect data or a new system to get started.
The aim is simple: give you a clearer picture of what is happening today and where the opportunities may be.
If you would like to explore what a Supplier Spend Discovery could uncover in your business, get in touch with Alliance Procurement Solutions.