When the CFO states that your organization needs to save money, you listen! When your supervisor makes a “suggestion,” you listen! When your spouse tells you what he/she wants for an anniversary gift, you listen! When your favorite song plays on the radio, you listen!
When data speaks; DO YOU LISTEN?
An earlier blog posting, “Finding Opportunities in Spend Analysis” (May 24, 2016), focused on the mechanics of spend analysis in detail. As you go through these mechanics and perform the activities associated with sound spend data analysis, ask yourself the question, “What is the data saying?” or “Am I letting the data speak?” All too often, we don’t ask those questions and drive toward a pre-fixed solution regardless of what the data is actually telling us. Or worse, we force the data to fit a pre-determined sourcing strategy. Strategic Sourcing approaches are guided by the data and our ability to interpret the data, not the other way around. Remember, the key is to turn data into useful information.
How does one know if you are listening or not? Your organization is likely on the right path if you consistently do the following. If not…well then, listen up!
- Recognize that system generated data does not guarantee accuracy – garbage in, garbage out!
- Cross-validate data with other available sources
- Accounts Payable
- Multiple and/or decentralized internal systems
- Supplier Reports
- Internal files or spreadsheets
- Perform a “sniff test” or “sanity check” with data results
- Cross-validate key data elements throughout the analysis to assure accuracy of:
- Units of Measure – materials and services
- Unit Cost
- Detailed Product or Service / Role Descriptions
- Item SKU number
- Number of orders
- Understand and test key assumptions made in analytical calculations
- Ask yourself questions to validate if the “data-story” makes sense. “How is the data the same or different from…
- …what incumbent suppliers are telling us?”
- …what internal operations or business leaders are telling us?”
- …what I expected?”
- Embrace line item transactional detail as critical to a sourcing project’s effectiveness
- Understand the implications of averages vs. weighted averages
- Confirm that the data and analysis reflects key cost drivers of the category, including Total Cost of Ownership (TCO) drivers
- Structure and organize the raw data into a robust aggregated view that aligns with a go-to-market strategy based on insight from the data
- Use the information generated by the data analysis to help set and drive the sourcing strategy
An important aspect to listening to the data is to be sure you have data that is actually worth listening to. If the data is speaking “gibberish,” then you are listening to gibberish and subsequent sourcing strategies, assessments, analysis and decisions will likely reflect that perspective. Therefore, it is critical to establish solid spend baseline data that is worth listening to.
When building a data driven spend baseline it is important to take a step back and think about the key cost drivers of the category before obtaining the data. Build out the initial columns in the spend baseline file to capture the key category dynamics. If there are gaps in knowledge of key cost drivers, contact suppliers and stimulate a discussion on key aspects that impact their costs.
Regardless of category, the baseline spend should show a story from raw data through go-to-market bid sheet alignment. A baseline typically shows the previous 12 month actuals but you should take into account future year projected increases / decreases in volume. A solid baseline will include the following:
- Raw Data – Spend data grouped into the main spend areas, which includes detailed line level transaction data that captures applicable cost drivers
- Rolled Up/Structured Data - Takes the detailed raw data and shapes it into something that is easier to manage (rolled up by SKU, description, location, service or labor type, etc.)
- Rolled Up/Structured Data Strategy Alignment – This takes the rolled up data developed from the detailed data and structures it in a way that aligns with a meaningful go-to-market strategy
- Bid Sheet Template – Thinking about how the baseline will become the RFP bid sheet helps test if the spend data picture is robust. Also, this process ensures it will be easy to compare bids to the baseline.
- Summary View of Baseline – This should be a high-level summary view using the key/main segments of the identified spend. This is how the bid sheet summary should also look to ensure ease of comparison.
Some questions to ask yourself when developing meaningful baseline data:
- Is all the spend data for the category accounted for?
- Is the data providing transaction level detail?
- Have any assumptions in the data calculations been tested?
- Has the data been validated / triangulated against AP information and supplier provided data?
- Have you accounted for all of the costs that make up the total cost for the category?
- Are the key stakeholders aligned around the data?
- Can the baseline file be easily amended to use as a bid sheet to solicit responses from suppliers?
Once you have established a solid, meaningful spend data baseline, listen to that data! Are there pricing discrepancies within an across suppliers? Could volume be rolled up into a different basket of goods/service to leverage spend? Are there patterns of buying that are causing inefficiencies? Can we challenge the current state buying approach to find additional benefits? Is a change in strategy warranted?
The consequences of not “listening” are significant. With inaccurate or incomplete information you are at risk of going to market ineffectively:
- wrong message
- wrong suppliers
- wrong cost drivers
- wrong goals
- wrong strategy
In addition, the credibility of the project and project sponsor within your organization can be severely damaged.
Many organizations claim to be “data driven” in their approach to sourcing; but few have a process in place that compliments this claim. Gathering and analyzing data and turning it into actionable information that drives a category sourcing strategy is best practice. When done properly, the data is SCREAMING at us. The only question is whether or not we are listening!
Learn more at nitorpartners.com.