Powerful Approach for Managing Your Spend and Risk

 
 
 

Spend Management

Master Your Spend Management

The mastery of all categories of expenditure will continue to be a critical task for today’s procurement professional. There is no shortage of methods to perform the tasks related to spend management.

Spend under management is best understood within the context of the bigger picture or Total Spend.

NLPA has designed the Procurement Funnel™ for this purpose.

Procurement Funnel

The Procurement Funnel is a visual model that illustrates a correlation between an organization’s expenses and the amount of cost savings that it has achieved or can achieve. It is used to help procurement departments focus on the factors that can limit its cost savings results and the aspects of performance that can be improved to increase cost savings. The Procurement Funnel is designed to be used constantly to keep a procurement department on track towards its objectives. Using a model like the Procurement Funnel over time is a core characteristic of procurement best practices.

The Procurement Funnel contains five procurement Key Results Indicators:

  1. Total Spend
  2. Spend Under Management
  3. Addressed Spend Under Management
  4. Negotiated Savings
  5. Realized Savings

All the spend that goes into the top of the funnel does not necessarily come out of the bottom of the funnel as savings. It gets funneled through and your Realized Savings is less than your Total Spend.

Thought must be given to the width of that funnel. The goal of procurement teams should be to keep the funnel wide. A narrow funnel would mean your Realized Savings would be small compared to your Total Spend. The goal is to ensure that the funnel is as wide as possible so as much of your Total Spend as practical can come out of the bottom in the form of Realized Savings. 

A critical question:

How do you maximize the width of your Procurement Funnel?

The answer is to maximize the width of The Procurement Funnel by achieving maximum performance on the KPI’s that serve as multipliers between sections of the funnel.

Consider using the following four procurement KPI’s.

These four KPI’s represent activities you should focus on improving. They are:

  1. Percentage of Spend Under Management
  2. Percentage of Spend Under Management Addressed
  3. Percentage of Savings for Addressed Spend
  4. Percentage of Compliance

True visibility in supply chain performance and performance gaps is essential. We advise you to examine the elements of the Procurement Funnel™ in relation to other performance areas.

The following is a diagnostic tool:

Tool 7: Supply Chain Visibility by the Assessment of Diagnostic Supply Chain Metrics

Supply Chain Visibility

Sources: Open Source | NLPA | ASCM

The following are the benefits organizations can realize the following benefits from the leverage of the Supply Chain Visibility by the Assessment of Diagnostic Supply Chain Metrics:

  1. It sheds light on the cost of poor supply chain performance.
  2. It measures the performance gaps in critical supply chain activities.
  3. It serves as a platform for continuous improvement.
  4. It facilitates the collection of critical performance data in one place.
  5. It provides an important criteria for selecting procurement and supply chain technology.
  6. It provides essential information for decision making.

Related material:

NLPA Library: Looking for authoritative procurement templates, tools, webinars, and more? Stop trying to create resources from scratch and start taking advantage of having exactly what you need right at your fingertips in the NLPA Library.

Want a More Rewarding Procurement Career?

Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.

Earning your SPSM® Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential.

Download the SPSM® Certification Infopack today to learn how to get started on your journey to a more rewarding procurement career!

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Procurement Leader’s Guide to a More Successful Team

Are you frustrated with the results of your purchasing department?

You’re not alone. Developing a team to deliver measurable results and exceed goals can be challenging. The key is having a plan to identify and act on opportunities for improvement.

Learn the seven steps for transforming your team’s skills and you’ll achieve greater results more easily.

Download


Copyright 2020. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By David Millington, SPSM, SPSM2, SPSM3 - Director of Education (Next Level Purchasing Association)

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