How to Use Your Spend Cube

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🎣 The Catch Up

Hi Reader,

Based on last week’s poll, most of you don’t mind a longer email as long as it’s packed with value! Noted. Thanks!

For the last couple weeks, we’ve been discussing Spend Cubes.

Here are the previous two parts:

• Part 1: How to Build a Great Commodity Code Taxonomy

• Part 2: How to Build a Spend Cube from Scratch

Now that we’re all on the same footing, I want to know…

I’ll share the final results of the poll next week.

In this last installment on Spend Cubes, I cover how you should be using a Spend Cube to maximize its value.

As always, wishing you a great week ahead. Don’t hesitate to reply if you have any questions when reading. I read every reply.

Best,

Joël

P.S. In case you missed it, here was my most popular LinkedIn post of the week:
Procurement systems are NOT a substitute for good supplier relationships.

🌙 Sunday Night Note

Extracting the Value from Your Spend Cube

Now that your commodity code structure is well-defined and you’ve built a solid spend cube, it’s time to discuss what to do with these “newfound powers”…

Having a well-oiled Spend Cube with perfect data is great but if it doesn’t drive you towards meaningful action, then it’s just a way of satisfying your OCD tendencies… 😅

There are 2 types of actions that can be derived from Spend Analysis:

• Forward-looking actions (strategy setting)

• Backward-looking actions (measurement/correction)

Let’s define these in detail:

Forward-Looking Actions

Forward-looking actions imply analyzing your Spend Cube data with the objective of:

• Identifying opportunities that contain new, unexploited pockets of value

• Crafting a strategy to capture this value

For any given ‘slice’ of company spend (e.g. category or subcategory of goods/services with similar characteristics), this can take many forms:

• Consolidating spend with fewer suppliers (leveraging volume)

• Diversifying spend with more suppliers (mitigating risk for critical commodities)

• Developing suppliers who have potential but no scale

• Make vs. Buy (where possible)

• Identifying and leveraging spend patterns (e.g. seasonal purchasing)

• Reducing/Eliminating demand

• Playing with logistical elements (e.g. lot sizes) to create savings opportunities (freight, packaging fees, delivery fees).

• Aligning payment terms to the market in a given category to positively influence cash flow

• Etc.

There are as many strategies possible as there are markets, so don’t limit yourself to the Kraljic Matrix…. There’s always a new strategy to invent. However, don’t forget that formal sourcing and/or contracting are often your greatest tools to achieve a strategy.

BUT, be careful!

One of the biggest mistakes you can make when setting forward-looking strategies is assuming the past is a reliable predictor of the future...

The past will give you a good idea to start from but you should bring relevant stakeholders into the discussion to review forecasts before committing to a strategy. You’ll often find your assumptions need to be tweaked before going forward.

If you’ve been in Procurement a while, the above is ‘steak and potatoes’. No surprises here…

However, there’s also a second, less intuitive, set of forward-looking actions you can craft with a Spend Cube: business transformation opportunities.

Changing the nature of how work gets done in your business can be tied to massive benefits. This can often be true even without changing the external inputs (volume or source of goods/services purchased).

This includes:

• Implementing new systems/applications

• Re-engineering your business processes

These two optimization categories are all about uncovering opportunities for increased efficiency in the business and assembling the required internal/external expertise to make it happen (e.g. IT, HR, consulting, software, machinery, etc.).

However, it requires Business Analysis skills… Increasingly, top performing Procurement teams are building this capability internally instead of leaving it in IT (where it sits traditionally).

You can apply Business Analysis to any category/function but the best place to start if you’re just starting out is with your own function. Your Procurement processes…

Some examples:

• Leading the implementation of new, more efficient purchasing channels for certain categories (Pcard, catalog, non-catalog, non-PO, etc.)

• Automating manual, repetitive processes

• Creating automated workflows for complex procurement involving multiple stakeholders (e.g. IT software purchases)

• Consolidating business units into central purchasing systems (instead of multiple separate disparate systems)

• Reviewing and optimizing how purchasing master data is governed (created, modified, deleted)

• Evaluating consignment vs. owned stock

• Evaluating Vendor Managed Inventory vs. self managed

• Building a Spend Cube!

• Etc.

In short, the results of your Spend Cube analyses will get more impactful and creative if you build Business Analysis skills into your Procurement function.

This leads us to backward-looking actions.

Backward-Looking Actions

Backward-looking actions are used to validate and course correct strategies. You start by looking at your Spend Cube to measure/validate the impact of a forward-looking action after a given time period. Based on the results, a new action is often necessary.

For example, if I decide to set new ordering lot sizes for a given set of materials to decrease the numbers of overall deliveries in an attempt to save the associated delivery and packaging fees, I want to validate that the change is having the desired impact vs. my baseline spend without impacting operations negatively.

A few months after implementing the change, I can use my Spend Cube to validate that my business case assumptions were correct (e.g. less deliveries for the same amount of goods translates to lower delivery and packaging fees at the levels predicted).

If that’s not the case, I need to figure out why and adjust as needed.

Therefore, when taking a forward-looking action, you should always define when and how you will measure your backward-looking action.

These could include:

• Confirming that consolidating spend with fewer suppliers yielded the theoretical savings associated

• Confirming that supplier development efforts have resulted in the desired impacts (e.g. increased volume purchased, higher performance than legacy vendors)

• That making internally was more cost effective than buying (or vice versa)

• That contracts/catalogs put in place were effectively leveraged by all relevant stakeholders (e.g. and follow-up with maverick spenders as needed)

• That a business transformation initiative business case is materializing:

  • A PCard program returned the desired rebates

  • Automated processes yield the same outcomes at much lower effort

  • Master data quality has increased and is increasing efficiency

  • A Spend Cube has enabled us to identify savings opportunities that outweigh the cost of putting it in place.

Backward-looking actions are about either:

• Doing nothing because your assumptions were spot-on (spoiler: this never happens).

• Course correcting your approach if your initial assumptions were faulty

  • E.g. Adjusting benefit/savings calculations and projections and changing the project scope or timeline as required given this change.

• Reducing and correcting value leakage

  • E.g. Identifying key stakeholders who are not adopting the desired strategy to understand why and address it.

  • E.g. Increasing new process/system adoption, if a transformation initiative.

The key to good backward-looking actions if defining them when you’re taking a forward-looking action…

• How are you going to measure success for your initial action (formulas)?

• Do you require new data in your Spend Cube to be able to calculate this? If yes, build this cost into your initiative.

• When are you going to check in on this action?

If you don’t do this at the start of an initiative as an organization, backward-looking actions (measurement of benefits) have a way of disappearing off the radar…

That’s great if the strategy wasn’t the right one and nobody wants to face the music… But it’s not so great if you want to be a results focused organization…

So what’s the lesson here?

Decide on the rules of the game before you start playing.

Every Procurement leader should be asking their teams to plan backwards-looking (measurement/corrective) actions as they sign off on forward-looking actions.

If strategies aren’t panning out as planned, leave the egos at the door. Find out why. Find out what you can learn about the ‘why’. Institutionalize the solution to the ‘why’ in your processes, documentation, checklists, etc. Adjust and move on.

It rarely matters who missed something at the outset… The “learning organization” is focused on putting in place the best processes and business rules over time.

It will always come out on top vs. a “blame game organization”…

Why?

When you’re trying to find out who made a bad decision instead of how you prevent it from happening again, information stops flowing freely. Everyone is focused on covering their hides instead of getting the best insights…

Often, that’s also why certain organizations don’t want to fund a Spend Cube… It introduces a fear of accountability into the mix… 😅

Thankfully, that means there’s plenty of savings runway for great strategies for the rest of us!

Woah… This has all gotten a bit philosophical… Let’s go back to the key messages:

TL;DR:

• If you have a Spend Cube but you don’t use it to drive ACTION, it’s useless 😅

• Actions are either forward-looking (strategies) or backward-looking (measurement and correction)

  • Forward-looking actions are tied either Procurement or business transformation opportunities.

  • Backward-looking actions are tied to forward-looking actions and should be defined/scheduled when taking a forward-looking action.

    • Build the cost of getting required measurement data in your Spend Cube as part of your forward-looking action

• Backward-looking actions should be focused on improving organizational decision performance to get to the best results!

💭 Quote of the Week

💎 Hidden Gem

If after my post you are thinking: “That’s all well and good Joël… But what about when our initiative concerns intangible benefits? How are we supposed to determine backward-looking (measurement) actions then?”

This book is for you… I guarantee it’s possible to build a business case on “intangible” benefits.

How to Measure Anything : Finding the Value of Intangibles in Business
by Douglas W. Hubbard

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