An effective way to reveal business improvement opportunities is to look deeper into our Suppliers spend. Suppliers’ spend includes material & services to be used not only directly for our business end products production but also for our business functionality. Spend analysis can drive us into useful conclusions & help us target points to improve our business competitiveness.
Below mentioned five basic check points to apply on our spend analysis, in order to point out business improvement opportunities.
- 80% – 20% Rule
At least 80% of our suppliers’ spent should come from 20% of our suppliers list or less. If this rule in our business is significantly different, e.g 80% of suppliers’ spend comes from 50% of our suppliers, then we have a significant spend spreading, which has an high probability to miss savings and Suppliers’ better services.
- Maximum one or two Suppliers per category
Taking into account the importance of a supply for my business and the probability of failure of the supplier (delay, supply failure etc.) it is highly recommended to collaborate with no more than 1-2 suppliers per category. If we collaborate with more than two, without specific reason, probably we are missing saving opportunities and better service from the suppliers.
- Suppliers’ Credit ≥ Customers’ Credit (Weighted Average)
This rule ensures our business liquidity. If credit we provide to our customers is longer than the credit we agree with our suppliers, then there is a high potential to face liquidity issues.
- Minimum 80% of our spent under Contracts & Agreements
It is important that we have Contracts in place for at least 80% of our Purchase orders. This not only reduces significantly the purchase process (we don’t need to renegotiate every time the purchase terms & conditions) but also ensures good prices and volume rebates.
- Contract Bench-marking at least every two years
Agreements that haven’t been renegotiated or bench-marked for more than two years, without particular reason, have a high probability to include significant opportunities for cost and process optimization.