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Spend Management for Supply Chain Management

Spend management is a strategic approach to saving money with smarter processes that also add to long term value for the company.

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Spend management is financial management to control and optimize the money a company spends. With green and sustainable business practices, spend management involves such things as reducing toxic chemicals, long distance transportation in the supply chain, and lifelong planning and design to enhance recycling potential of increasingly rare materials and energy requirements.

Spend management involves cutting operating and other costs associated with doing business. These costs typically show up are designated as "operating costs".

Operating costs are spent on goods and services for

  • Direct inputs
    ie: raw goods and materials used in the manufacture of products
  • Indirect material
    ie: office supplies and expenses that do not go into a finished product)
  • Services
    ie: temporary and contract labor, marketing services, etc.
Spend management is a sustainable business approach to "source-to-settle" process, which includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts.

Spend management encompasses broad business processes covering outsourcing, procurement, e-procurement, and supply chain management. In difficult economic times, when revenue is harder to come by, companies often turn to cost cutting to bridge those tough markets. Cost cutting can increase net income, and any increase in net income can lead to greater earnings per share and ultimately higher market value and capitalization.

Because cost cutting affects a company's bottom line directly, cost cutting can be the quickest way companies can increase their market value.

Revenue to Cost Ratios

Business metrics typically estimate that revenue to cost ratio is about 3 to 1. That means that increasing revenue by $300 equates to cutting costs by $100.

Companies typically turn to cost cutting measures such as layoffs and product quality reductions, but this short term tactic creates little long term value. Companies that use innovation to reduce costs, simplify product lines and reduce variable costs such as packaging and transportation, are better positioned for competition during tough economic markets and are positioned for greater leadership when the economy turns up.

Spend Management Systems

Companies have been developing new tools such as e-sourcing for bidding and reverse auction, e-procurement to control and monitor purchasing activities and contracts, and e-spend analytics to monitor and refine the money being spent on various types of services or products.

These tools automate paper intensive and manual processes, by monitoring operations and providing better control of spending. An integrated process allows data about all activities to feed into a central processing and reporting system.

Best Practices for Spend Management

Preferred Product System: Reduction of "maverick" buying of items or services that are outside the preferred process or system can simplify purchasing, better meet compliance of regulated materials and supplies, and allow for bulk purchasing.

Economies of Scale: By consolidating purchases with a particular supplier, a company can negotiate more favorable pricing based on how much money it spends with key suppliers in a given year.

Process Efficiencies: Automated sourcing, procurement and payment processes can improve efficiency over paper based and manual processes.

Procurement Efficiency: use of e-sourcing tools for bidding and contract award process can reduce spending costs.

Spend Management is a subset of Total Cost Management, which includes financial management strategies including tax/VAT, exchange rates, demand (sales), and manufacturing.

Edited by Carolyn Allen, owner/editor of California Green Solutions
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