When you are a $35.2 billion company with over 100,000 employees in 38 countries, what you spend on materials carries a lot of weight.
That's certainly the case at GlaxoSmithKline (GSK), where armies of procurement specialists spend their days hammering out contracts that leverage the pharmaceutical giant's buying muscle. At the center of this activity are strategic sourcing platforms and tools designed to ensure that GSK gets the best price on everything—from the pallets it uses to ship its finished products to the hotel rates it gets for employee travel.
But just because London-based GSK has an arsenal of best-priced contracts under its belt, doesn't mean that the firm is assured of getting those cost reductions on a regular basis. Given the global scope of the company and the fact that contract and purchasing data is sprinkled across a variety of far-flung systems, GSK has struggled to get a clear picture of its spend profile and to make sure that the hard-won procurement contracts actually translate into viable and consistent savings.
"If you don't know what you bought, who you bought from, how much you paid and who's using it, it becomes real difficult to have a procurement process that really leverages on-going savings," explains Gregg R. Brandyberry, vice president, procurement, global systems and operations for GSK. "The idea is to close the loop to best-value purchasing, and to do that, you need a great sourcing platform to make sure you get the best price, but you also have to have ways to ensure everyone is buying off contracted deals and you don't have any maverick spending."
The way GSK and manufacturers of all types are ensuring that happens is by leveraging new business analytics capabilities being added to strategic sourcing and e-procurement platforms. These modules, encompassing everything from spend analysis to contract management, are designed to take sourcing platforms to the next level. Without these types of tools, manufacturers often have insufficient visibility into their spending patterns, resulting in a host of issues, including the inability to maximize buying leverage, optimize budgeting and planning and drive continuous improvement in supplier performance and contract compliance. According to studies conducted by Aberdeen Group Inc. (Boston), inadequate insight into spending patterns is costing businesses $260 billion in missed savings opportunities annually. In contrast, manufacturers that deploy spend analysis strategies can reduce their total spending by 12% (based on a weighted average), Aberdeen research found.
One of the keys to achieving this kind of savings, experts say, is to integrate these kinds of analytics into the base sourcing platform, instead of performing them in separate systems or through periodic consulting engagements. Traditionally, spend analysis has been a complex and costly endeavor involving consultants who sift through data, aggregate it, clean it up and then generate reports that oftentimes take months to complete. Much of the new software automates this process, applying data warehouse and data cleansing techniques to normalize and categorize data between systems on a more regular basis. There are also real-time reporting capabilities so companies can get different views of the data in a much more timely fashion.
"Rather than doing spend analytics as a periodic way to read through the tea leaves to find opportunities for consolidation or to ensure that people are doing what they should be in terms of using systems and contracts, spend analysis is becoming a key part of the overall instrument," says Pierre Mitchell, vice president, research and supply management at AMR Research Inc. (Boston).
Onramp to Strategic Sourcing
Vendors that offer strategic sourcing platforms have been busy over the last year adding analytics functionality. Companies like VerticalNet (Malvern, PA) and Emptoris Inc. (Burlington, MA), the maker of the Expense Map product GSK is using, have acquired companies for the sole purpose of adding spend analysis and other analytic capabilities to their offerings. Others like Ariba Inc. (Sunnyvale, CA) have added new or enhanced business analytics components, making them a more prominent part of their strategic sourcing suites, and they have recently acquired Softface Inc., a privately-held spending performance management company. And some like Frictionless Commerce (Cambridge, MA) and ERP maker SAP America (Walldorf, Germany) maintain that analytics capabilities have always been a core part of their application suites. SAP, for example, provides e-procurement and analytics capabilities as part of its mySAP supplier relationship management. Its global spend analysis function utilizes the Master Data Management and business intelligence of SAP's NetWeaver application and integration platform, which SAP officials say gives it a key differentiator.
Emptoris, which purchased Zeborg, a spend analytics company, last September, did so for the very purpose of rounding out its platform with what it saw as a critical capability for long-term success. "We saw that spend analysis is really the on-ramp to strategic sourcing and a core competency we needed to own," says Steve Ricketts, Emptoris' vice president of marketing. The company has worked to integrate the Expense Map spend analysis product with its own sourcing portfolio. Companies can work with the spend analytics module first, Ricketts explains, to identify areas that might be a fit for strategic sourcing activities like online auctions that otherwise wouldn't have been apparent due to the lack of data.
PPG Industries (Pittsburgh), an $8.8 billion manufacturer of coatings, chemicals and glass, is one such company that has prioritized spend analysis, prior to any kind of online procurement activity. Trying to get visibility into what it was spending on indirect materials was a daunting task considering that relevant data was housed in over 22 data sources. After doing spend analysis with a couple of solutions, PPG switched in 2003 to Ariba Analysis. Since then, the company has been able to capture information that helps identify pricing anomalies and additional savings opportunities as well as point out commodity purchases that lend themselves to subsequent sourcing events.
PPG's purchasing of electrical components such as conduits, switches or wiring is a good example. With Ariba Analysis, the company learned it had 307 suppliers for this category in North America alone. When the smoke cleared, PPG leveraged the data uncovered by Ariba Analysis to shrink that pool down to six suppliers with results in excess of 10% savings. "We were buying the same item at different prices, sometimes from the same supplier in the United States," explains Jim Polak, PPG's director of general purchasing. "By aggregating all the information, we were able to get insight so we could issue a single bid and leverage our spend. By offering greater volumes to fewer suppliers, you lower the cost of doing business."
Garnering savings at these levels is one of the few remaining ways manufacturers can squeeze more from less. That's certainly the goal of Kennametal Inc. (see "On The Cutting Edge," MA, May 2004, p.34), a $1.8 billion cutting tool manufacturer based in Latrobe, PA, which used to do an exhausting spend analysis about once a year. The analysis could take up to six months and involved manually pulling together data from different systems and prodding managers to put line-item detail into Excel spreadsheets. "And even then, we didn't have anything ... in a form where it could be widely distributed," says Jim Cebula, Kennametal's global director of purchasing.
Now, the firm uses VerticalNet's spend analysis services to get a strategic look into its global spending. The solution's compliance functionality allows Kennametal to drill down into terms and conditions on contracts to ensure employees are buying materials from select suppliers based on agreed-upon terms. The process has been deemed a must for Kennametal to stay competitive. "Being in the manufacturing business, we live in a world where there's a recession. We couldn't raise our prices, we couldn't increase sales too easily and we didn't want to cut people," Cebula says. "Cutting expenses is a real driving force for us." One big opportunity that arose was cutting spending on the high-speed steel that Kennametal used to make drill bits. Cebula says while the company had some idea of what it bought, when it used spend analysis to get the global picture, the number was far higher than anyone expected. Based on that knowledge, Kennametal opted to have a global auction, inviting suppliers of that material to place bids, and ended up saving $2 million annually, based on that one deal.
Of course, aside from the technology, organizations are going to have to make some cultural shifts to make sure the knowledge resulting from spend analysis and other e-procurement analytics takes root. GSK's Brandyberry believes you can't have procurement organizations police corporate spending, but you can put them in a position to provide top managers with the knowledge they need to make informed buying decisions. It's all about good communication. Says Brandyberry: "You have to have a technology enabler, but you need to back it up with policy and process, training and education. You have to make people understand what the lost opportunity is."