I’m pleased to let you know that we are putting the finishing touches on CPO Rising 2012: Keeping Score and it will be available soon. The report has many interesting statistics as well as case studies focused on unique, best practice approaches taken by leading Chief Procurement Officers and their departments. One interesting case focuses on demand aggregation; today we’ll look at the first of two scenarios where this strategy can prove valuable and the underlying strategy or solution that can be used to support it.
Within large enterprises and large supply chains, demand aggregation can prove to be a highly valuable strategy that can deliver savings, lower supply management TCO, and provide greater assurance of supply.
Demand Aggregation Scenario: Multiple Requisitions within Large Enterprises
Procurement groups that function within large holding companies or companies that are frequent acquirers face numerous system and organizational challenges that make it very difficult to understand and view the overall needs and spend of the enterprise. When working with numerous back-end systems, the ability to simply run a report for each back-end system, combine that data into Excel ora simple database, and then perform an analysis or run a few queries is a largely futile exercise. There are very few who would argue that a manual analysis of the different category structures, different data structures, and the unique practices followed by the different units or regions whose transactions are captured by one system is ideal (That said, performing manual spend analysis is better than doing none).
Trying to analyze that spend can be like comparing apples to oranges industrial fasteners, a process that will yield limited fruit. Spend analysis is the automated solution that can aggregate the data across the enterprise to identify sourcing opportunities, rationalize suppliers, and help monitor and improve compliance. The focus of spend analysis is historical by nature and designed to improve the arc of sourcing historical contracts on their renewal. One reason why spend analysis is so effective is that it serves as a centralized hub that provides an overall view into historical spend. Of course, spend analysis does not capture new requisition information, much less aggregate it. That requires another supply management technology – eProcurement.
Like Spend Analysis, eProcurement fills a need that an ERP system cannot ably provide. And, like Spend Analysis, eProcurement serves as a centralized hub that can be linked to different back-end systems. eProcurement systems automate the requisition to order process and drive value via process efficiencies but also via visibility and control; when the solutions are well-adopted and have good (i.e. quantity and quality) supplier content, they can drive a strong return and serve as the foundation to a procurement transformation.
When a need is found within a supplier catalog, a requisition is generated with what should be a pretty straightforward and seamless approval. There are times, however, when a requisitioner has identified a need for a new item or service. In this scenario, it generally falls to the procurement department to source the new need. The process that the procurement team uses to find a supplier who can meet the requisitioner’s requirements and ultimately create a purchase order will depend on the specific dollar amount and category of the requisition as well as policies linked to the requisitioner or business unit. For example, large orders may require a full-blown competitive bid, mid-sized orders may need ‘three bids and a buy,’ and others may require no price shopping at all.
In many large enterprises, a surprisingly high number of similar requisitions for new categories can come in an any given period (think of the strategy behind many large corporate acquisitions – buying companies in similar businesses. These companies are also likely to buy and use the same things to run their operations). When an enterprise has an eProcurement system, it has a much better ability to view all open and recently filled requisitions and then ‘aggregate’ the demand or spend across those different requisitions. By combining the spend of several requisitions or leveraging one that was just filled, the procurement team can gain efficiencies in the sourcing process and potentially find more savings. Admittedly, some eProcurement solutions handle this process better (and more elegantly) than others, but, what is clear is that enterprises without an eProcurement solution have a much more limited ability to view and understand what it is buying today (or this month) and gain any benefit by aggregating the demand.
