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Spend management

Spend management is the way in which companies control and optimize the money they spend. It involves cutting operating and other costs associated with doing business. These costs typically show up as "operating costs" or SG&A (Selling, General and Administrative) costs, but can also be found in other areas and in other members of the supply chain.

Whether it is the money spent on goods or services for direct inputs (raw goods and materials used in the manufacture of products), indirect material (Office supplies and other expenses that do not go into a finished product) or services (temporary and contract labor, print services etc), a company needs a mechanism by which they are not only able to save money but control costs.

Spend Management is meant to represent a holistic view of the activities involved in the "source-to-pay" process This process includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts.

Cost reduction vs Revenue generation

Money to a company falls into two major buckets - revenue and cost. Often in hard economic times when revenue is harder to come by, companies turn to cost cutting initiatives. Cost cutting will increase net income. An increase in net income leads to a greater earnings per share and ultimately a higher market value (higher market capitalization).

Because cost cutting affects a companies bottom line directly, certain types of cost cutting can be the quickest way companies can increase their market value. The typical consensus is that the revenue to cost ratio is 3 to 1 such that a company needs to bring in 3 times more revenue in order to achieve the same effect as cutting costs.

This is why in hard times, companies typically turn to cost cutting measures such as layoffs and product quality reductions. However, most analysts agree that this short term tactic creates little long term value, nor any long term sustainable savings. This is why "Spend Management" has become a key long term strategy for companies seeking to maintain long term and sustainable value.

Spend management systems

Most recently companies have been utilizing new tools such as e-sourcing (for bidding and reverse auctions), e-procurement (to control and monitor purchasing acivities and contracts) and e-spend analytics (to gain insight into how much money is being spent on what types of services or products).

The promise of these tools was not only to automate paper intensive and manual processes, but also to help monitor and control spending activity and to create an integrated process in which each activity feeds into another.

How spend management saves money

This is often hard to enforce unless some control mechanism (often technological), is put in place that:
1) prohibits this type of purchasing
2) sets up penalties for these types of purchases
3) puts into place some type of approval or check and balance system.

The activity that a company goes through is called strategic sourcing (also called "supplier rationalization"). This takes a commodity-by-commodity look, taking into account business unit, location, and other requirements to find opportunities for
economies of scale savings.

Process savings can be measured in various ways such as: how long it takes to process a purchase order, how many individuals need to touch the purchase order before it can be sent ("touch points"), how long it takes to reconcile and pay the supplier as well as many other methods to measure these process improvements.

A buyer (ie: an individual at a company that has determined a need for a particular product), will develop a document that lists the need (ie: the type of product they need and why), specifications, the bidding process (how the process will work and how suppliers will be scored), rules for the bidding process and other factors.

Buyers will then invite suppliers to register online and open the event for a set period of time so that suppliers can bid. At the end the buyer awards the contract to one of several suppliers. The award can be based on price, delivery time (the time it takes the supplier to fulfill an order) or other factors such as quality or how close the product meets the needs.

The e-sourcing of direct items (raw materials) is often much more complex than indirect (office supplies etc) as the deciding factor is not just price but also the way the product fits into the overall manufacturing of a product.

The way a company collaborates and transacts with their suppliers is a critical part of spend management as well. This is sometimes called "Supplier Relationship Management". This term is often incorrectly used in place of "Spend Management".

Spend management in context

Spend Management is a subset of Total Cost Management, which takes into consideration financial management aspects such as tax/vat, exchange rates, the impact of demand (ie: sales), manufacturing and other factors.

Spend Management when considered from a holistic viewpoint can start to feed into supply management as it also affects how assets (capitol and otherwise) and inventory are procured and managed. Spend Management (and in a bigger view Total Cost Management) starts to inform a company of Total Cost of Ownership and is often used to understand the total cost of items such as assets (from their acquisition to their use and depreciation and finally to the assets retirement).

In the end, however, Spend Management is about creating long-term and sustainable savings. True Spend Management (and by extention Total Cost Management) is considered by many to be an ongoing cyclical process.

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