Enterprises often focus too narrowly on cost savings and lose sight of critical measures like improving bottom line impact, reducing Total Cost of Ownership (TCO), improving customer satisfaction and achieving global cost competitiveness. The approach outlined in this paper focuses on achieving these outcomes by maximizing their Source to pay (S2P) function and becoming a maturity ranking five “best in class” S2P operation.
Best-in-class sourcing and procurement organizations achieve performance levels that are – at a minimum – two to five times higher than average organizations. For a typical US $5 billion company, that can mean a total spend reduction of US $100 to175 million and a margin increase of between 100 and 300basis points in three years or less – statistics that no Chief Financial Officer (CFO) can afford to ignore.
Best- in-Class S2P also emphasizes the role and impact of the “non-pricing levers” of the source to pay process like adherence to compliance, effective demand management, PO Management (P2P) and spend visibility, to elevate S2P organization performance.
This article highlights how CPOs and CFOs can deliver bottom-line impact by:
Setting cost-savings and Spend Under Management (SUM) Enterprise and Business Unit Objectives of uplifting their SUM to above 85%+ world class status or a Maturity Ranking 5 S2P Operations
Managing the spend portfolio effectively within each Business Unit (BU) / Profit & Loss (P/L)
Setting organizational and policy framework for effective spend analytics, sourcing, contract management and buying processes through a compliance and controlled P2P process
Partnering with third-party service provider to achieve the desired results by bringing in experts that can uplift the SUM throughout the total enterprise as well as by commodities with focus on compliance and control.
Managing 100% of the Addressable Spend, 100% of the Time “it is an attitude”!
A first step for finance executives looking to achieve organization wide best in-class business results is to ensure that source to pay operations influences and impacts 100% of addressable spend, 100% of the time. Most S2P leaders will say this cannot be accomplished, but today there are companies striving for S2P excellence by having an attitude and goal of uplifting the enterprise Spend Under Management as an “enterprise initiative” impacting the spend in each BU/P&L touching each category and supplier who supplies a product or service with a goal of achieving 85%+ enterprise SUM.
According to industry research, enterprises have been able to achieve a 5% to 20% cost out savings for each new dollar of spend brought under management. This can result in millions or even tens of millions in cost savings that can be either reinvested or dropped to the bottom line as realized savings impacting Earnings Per Share (EPS), Operating Profit and Working Capital.
Spend Under Management (SUM) definition is when sourcing, contracting, buying and spend decision making are influenced by seasoned procurement professionals, deploying best-in-class S2P and supply management practices throughout the end to end S2P process penetrating the entire enterprise spend including touching all BU and P&Ls linking savings to the business outcomes of EPS, Operating Profit and Working Capital of the organization.
Spend Under Management Enablers are:
Procurement policies and procedures that are well documented and follow a best practice methodology
S2P e- procurement tools and applications are utilized to manage the spend throughout the S2P end to end processes
Well-defined savings strategies are assigned to each functional leader through spend portfolios and category playbooks and linked to EPS, Operating Profit and Working Capital
When pricing levers and non-pricing levers for savings are clearly Identified and leveraged
Spend Under Management is measured by the following five measures including the best in class benchmarks:
Overall Enterprise Spend Under Management with a target of 85%+
Category Spend Under Management with a target of 90%+
Supplier Spend Under Management with a target of 90%+
Within each BU/P&L with a target of 85%+
Technology Flow through (spend which flows through spend analytic tools, e-sourcing, contract management, and procure to pay automation with a high degree of spend managed by tools and technology
Aim High on Enterprise Objectives while the CFO & CPO partner for Spend Management Excellence
Organizations should adopt a holistic approach to Source to Pay. This helps set robust savings targets, timelines and strategies for increasing SUM by the S2P organization, business units and individual P&Ls, which provides the CFO and CPO offices visibility into:
Which spend categories have been addressed and sourced successfully through end to end S2P
Best-in-class performance levels by spend categories
Clear visibility into pricing and non-pricing levers for savings in the S2P processes
Timelines and complexity associated with bringing various spend categories under management by a S2P organization
Advancing savings target and spend under management strategies onto the executive boardroom agenda as an enterprise strategy with confidence the targets can be achieved
The process of tying cost-savings objectives to top-line financial measures and business outcomes such as operating profit, earnings per share and working capital requirements become the normal expectation
A Spend Portfolio Management Approach to Savings and Spend Reduction
The spend portfolio is a critical methodology for enterprises, business units, P&L and source to pay leaders who are implementing S2P business transformations, robust savings targets and spend reduction initiatives.
Defines and details actual spend of the Business Units (BU), P&Ls and the overall enterprise
Parses enterprise objectives for cost savings, SUM, and so forth, by business unit and P&L by utilizing a robust spend analytics process
Explicitly links cost-savings targets directly to top-line corporate financial objectives such as operating profit, earnings per share and working capital requirements
Details what, when, how and by whom cost savings will be pursued
Forecast savings for the CFO by BU and P&Ls
Helps define a suitable procurement technology roadmap for pricing and non pricing lever opportunities
Defines how savings will be identified, validated, implemented, reported and distributed back to the P&L and BU through a five-step savings tracking process that includes:
Framing the savings
Validate the savings
Implement the savings
Reporting of the savings
Distribution of the savings
Setting cost savings and SUM goals at an enterprise levelbrings in:
30-40% greater addressable spend visibility
20-40% less maverick spending
5-10% reductions in working capital requirements
Incremental ROI on existing Technology investments
Consistent process execution approaching Six Sigma performance
Organize and Govern for Best in Class S2P Performance
In order to meet the cost saving and SUM objectives, it is essential to establish both organizational and policy frameworks that support true enterprise process integration. However, this strategy works very effectively where:
A CPO or lead S2P executive reports directly to the CFO or up through the finance organization via the Chief Financial Officer (CFO)
Spend Under Management and cost-savings are boardroom-agenda items
An executive steering group meets regularly and frequently to manage performance to goals and to hold BU or P&L leaders directly accountable to manage the spend portfolios of their respective operations achieving realized savings through Self-Funding and P&L Positive Savings
Initiatives - a Must
For finance and S2P executives looking to put their companies on a path to enhanced S2P performance, there are two possible routes. The first option is to invest in acquiring people and technology, integrating best practices, implementing performance metrics and establishing clear savings targets through a detailed spend analysis.
The alternative is to partner with a third-party service organization that is experienced in all of these areas and can begin delivering savings in the shortest possible time frame and increasing velocity. Many S2P organizations do both, investing in their direct and indirect or core spend categories and leverage service providers as partners to manage indirect spend categories that are not core to their business success. This approach and secret sauce will get an organization closer to managing 100% of the addressable spend 100% of the time. Corbus S2P, is a disciplined methodology that can be adapted to deliver on any set of business objectives that a CFO/Source to Pay organization may set for itself to achieve business outcomes.
About Corbus Source to Pay and Supply Chain Solutions
Corbus S2P and Supply Chain practice delivers end-to-end supply chain solutions, enabled by its deep domain experience, best-in-class technology and strategic partnerships. With over 300 S2P and supply chain experts, Corbus has over 17 years experience in working with global companies to provide services that include Forecasting and Planning, Sourcing and Procurement, Fulfillment and Logistics and After Market Services. Corbus has been continually recognized as a top rated service provider and was ranked as a Top Procurement Outsourcing Vendor.
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