No matter what type of business you’re in, spend management is an important concept in keeping costs down. But what is spend management, and what are some of the best cost reduction strategies for businesses today?
First, spend management is the practice of managing procurement and supplier relationships to not only understand where the dollars are going, but maximize those dollars. It’s sometimes known as spend analysis, and is a comprehensive approach to focusing on both direct spend and indirect spend in order to control costs.
For some companies, shipping is one of the biggest spend categories. That might include using a third-party logistics provider or managing your own shipping operations, including warehousing and fulfillment. You might use FedEx, UPS, and DHL. Or you might just use USPS and regional carriers. Understanding those costs, and how they mesh with your labor and product costs, can help your company better manage cash flow and vendor relationships.
In this era of SaaS and digitization, it’s easier than ever to manage costs along the supply chain and determine where costs can be negotiated or trimmed, and which costs are in good shape. Intelligent spend management can drive efficiencies by using automated approaches that minimize manual errors and help uncover inefficiencies. Automation and digitization can help you lower your bills by giving you visibility into your spending, and also showcasing cost savings opportunities. Spend management allows more effective collaboration between internal teams and external vendors.
Companies work hard to deliver and follow budgets every year. A spend management solution makes it easier to abide by those budgets when each department can track their spend data in real time, whether it’s legal spend, shipping spend, or manufacturing spend. Expense management is most effective when it is automated with spend management software incorporating preferred suppliers and invoice processing. Legal spend management, for example, may use law firms contracted as preferred suppliers at set rates for specified services.
How is spend analysis done?
To conduct spend analytics, the finance team must identify all the sources of spending, which can include shipping, 3PL costs, insurance, marketing, office supplies, products/components, salaries, legal, travel, rent, and many other business costs. The process is complex because the data can be fragmented across multiple systems and data types, from expense reports to legal operations.
One person or department, like the finance team, should be responsible for coordinating and cleaning the data if done on an overall company basis. It’s possible to also just use spend management for a specific department or function, like shipping. The spend management process would be the same, but it would be a more focused initiative.
The data should be standardized, after ensuring that duplicate entries are removed. The data is then parsed using categories that make sense to your organization for expense management. Using the legal department’s example again, the legal team’s expenses may be separated from the shipping department, though there may be some overlap in expense types like IT services. Shipping spend might be broken down into transportation, accessorial fees, shipping supplies, 3PL costs, warehousing, labor, and IT.
An analysis or spend management software tool can make it easier to collect and parse the data, and then to analyze it. The finance team should look for patterns when investigating a single department’s costs as well as comparing expense categories and individual supplier relationships across the company. The team can better understand which categories or departments are driving the highest costs, and whether there is room to improve these costs by changing suppliers, negotiating rates, or changing in-house processes.
Shipping may be one of the higher cost departments. Looking closely at accessorial fees or drilling down into shipping costs for specific zones or shipping times might reveal some potential for cost savings. Perhaps using a 3PL is more cost-effective than running your own warehouse, and paying labor for picking and packing.
The team should identify cost outliers to understand why the costs are so different. These outliers might be targeted by the procurement team for a strategic spend management initiative, to bring costs down or more in line with similar vendors or products. Or the information could be used by the procurement organization to develop a plan going forward to change how they deal with supplier management and prioritize operational cost reduction for your business. Having hard numbers and data helps with this effort.
What is a should-cost analysis?
What should something cost? That is the basis for a “should-cost” analysis. This term was developed several decades ago by the government to help procurement departments know what reasonable prices were for products and vendors. The idea is to provide cost savings by analyzing what products and services should cost based on labor, overhead, materials, and profit margins.
A should-cost analysis is more easily accomplished using a spend management tool, where the company has a good grasp of the costs involved in producing that product, and knowing what other companies are selling it for. It’s helpful when the company has a good grasp of efficient manufacturing and distributing processes. Having should-cost data at hand makes negotiating much easier and less adversarial.
Compare should-cost analysis to strategic sourcing, another popular procurement process. With strategic sourcing, procurement professionals find potential suppliers and differentiate them by geography, size, capabilities and other pertinent categories. These suppliers can then offer quotes for their services or products, and the procurement professionals recommend which vendors to use and what quantities to buy. This is a popular method in supply chain management when the company is purchasing commonly available products or services. It’s a useful spend management system when the company can’t do a should-cost analysis because they don’t have the proper resources.
A company like Shipware can help shippers with a should-cost analysis for shipping services, in anticipation of pending negotiations. With a deep bench of research on current shipping prices per vendor, and experts who used to work in-house at carriers like FedEx and UPS, a should-cost analysis is easy to do and can result in savings.
What is a cost analysis tool?
If conducting a business spend management analysis sounds like a good idea, you are right. It’s easier to do using analysis software which can make the process more efficient and less error-prone. It can also find patterns that may otherwise not be obvious. A spend management analysis tool can incorporate the digitization of the invoice processing information, the vendor contract management, and the analysis software. A cost analysis tool makes it easier to get that insight into your company’s spending across the whole company or in drilling down by department.
Companies can spend a lot of money on this cost analysis tool from SAP Ariba, but it’s possible to gain a lot of value on specific aspects of your spend management, like shipping. Shipware’s Spend Management Portal gives companies visibility and real-time logistics and shipping analytics, which can be evaluated on a big picture or a granular level, drilling down into shipping cost variables. The information can be viewed and shared in interactive charts, making it accessible and understandable at a glance.
Data provides actionable information. When it’s real time data, actions can be taken more quickly. If a shipping manager sees that costs are rising for packages using a certain accessorial fee, the manager can dig in to potentially tweak that process. The manager can monitor expansions or contractions in certain markets or product types, to ensure lower costs while maintaining service levels. The portal can also be used to model various scenarios to understand the impact business changes can have on transportation and shipping costs. The manager can see in real time how accessorial fees, rate increases and other variables affect the shipping costs in interactive charts. The charts and dashboards can be easily shared in discussions and presentations, with dashboards customized to the user.
The data a shipper sees in this Spend Management Portal isn’t just test or model data – it’s actually the company’s own data, making the analysis accurate and actionable. It can be used for real-time decisions and optimization campaigns, where the results will be seen quickly. Trends and patterns are easy to spot and can be used for budgeting purposes and for key performance indicators.
Companies smart enough to use spend management solutions often also use invoice auditing programs to ensure their companies are paying what they’re contracted to pay and for the services they received. Shipware’s invoice auditing program runs behind the scenes, monitoring invoices and comparing them against shipper data. If a parcel was charged an incorrect accessorial fee, the auditing program will catch it and automatically apply for a credit. This happens nightly with no work required from the customer. The credits appear in your account.
Shipware’s invoice auditing program costs nothing out of pocket and is paid for with a portion of the savings earned from the carrier credits. The basic Spend Management Portal can be added on at no cost to the company, when bundling it with another Shipware solution like invoice auditing or the parcel contract negotiation service. Understanding your spend management can help you negotiate carrier contracts just like you might negotiate other vendor contracts, because you have great data and analysis to use while negotiating.
To learn more about how Shipware can help you lower your shipping spend, call us at (858) 879-2020.
