Tendering for Contracts Training - Spend Management

Who Should I Speak
  • Principal Contracts Officer

  • Purchasing and Contracts Unit

  • G D S Supplies Group

  • Purchasing Consortium

  • Purchasing Department

  • Corporate Resources Group

  • Corporate Contracts

  • Purchasing Officer

  • Corporate Purchasing Manager

  • Purchasing and Contracts Unit

  • Corporate Purchasing Officer

  • Building Services Manager
  • Spend Management
    Spend management is the way in which companies control and optimize the money they spend. It involves cutting operating and other costs associated with doing business. These costs typically show up as "operating costs" or SG&A (Selling, General and Administrative) costs, but can also be found in other areas and in other members of the supply chain.

    tendering for contracts training Whether it is the money spent on goods or services for direct inputs (raw goods and materials used in the manufacture of products), indirect material (office supplies and other expenses that do not go into a finished product), or services (temporary and contract labor, print services, etc.), a company needs a mechanism by which they are not only able to save money but control costs.

    Spend Management is meant to represent a holistic view of the activities involved in the "source-to-pay" process. This process includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts.

    Cost reduction vs Revenue generation
    Companies divide money into two major buckets - revenue and cost. In hard economic times, when revenue is harder to come by, companies often turn to cost cutting initiatives. Cost cutting will increase net income. An increase in net income leads to a greater earnings per share and ultimately a higher market value (higher market capitalization).

    Because cost cutting affects a company's bottom line directly, certain types of cost cutting can be the quickest way companies can increase their market value. The typical consensus is that the revenue to cost ratio is about 3 to 1; for instance, increasing revenue by £300 has about the same effect as cutting costs by £100.

    tendering for contracts trainingThis is why, in hard times, companies typically turn to cost cutting measures such as layoffs and product quality reductions. However, most analysts agree that this short term tactic creates little long term value, nor any long term sustainable savings. This is why "Spend Management" has become a key long term strategy for companies seeking to maintain long term and sustainable value.

    Planning ahead is a good way of finding scope for efficiencies. It gives time to question and assess if alternative solutions are available (eg. forming a consortium or partnership), and if the timing is right.

    What is your Business

    Develop the best strategy
    based on proven business

    Pricing Strategy

    Marketing Strategy

    Sales Strategy

    It is recommended that your contracting efforts are linked to your business development plan, this improves the efficiency of your spending options.

    Spend Management is meant to represent a holistic view of the activities involved in the "source-to-pay" process. This process includes spend analysis, sourcing, procurement, receiving, payment settlement and management of accounts payable and general ledger accounts.

    tendering for contracts trainingSpend management systems
    Most recently, companies have been utilizing new tools such as e-sourcing (for bidding and reverse auctions), e-procurement (to control and monitor purchasing acivities and contracts), and e-spend analytics (to gain insight into how much money is being spent on what types of services or products).

    How spend management saves money
    These tools promise, not only to automate paper intensive and manual processes, but also to help monitor and control spending activity and to create an integrated process in which each activity feeds into another.

    Decreasing "maverick" spend -- "Maverick" spend is the process whereby requestors (those who are creating a request for an item or service that will be turned into an order to a supplier) by items or services that are outside the preferred process or system. This often means that a "maverick" purchase typically results in an individual or department buying an item in an ad-hoc fashion that results in paying a 20% premium for that item.

    Instead of buying from a preferred supplier with which the company has negotiated a contract with discount pricing, an individual goes outside the normal process and purchases that same item at retail.

    Know your own power
    How much resources
    can you invest,
    What are the limits?

    As part of general good practice, before going ahead with a tender: tendering for contracts training

    Check whether another supplier wants to form a partnership with you so there is an opportunity for some collaborative selling. A contractor can choose to work with a consortium when giving out new contracts.

    Some public sector agencies have e-procurement systems with a quote or e-auction facility. This is relatively new technology with only a few examples of local authorities piloting it in a collaborative way. However, e-auctions can be successfully used as a tool for collaborative e-procurement where a number of public sector agencies take advantage of their local authority's electronic auction for particular goods or services.

    If savings have been made (financial or time savings), always record these, no matter how small. It can be useful information to include in the report and help you build up an efficiency picture of your business for future reference.

    Don't tender unless you
    have the time, manpower
    and knowledge of the
    processes and procedures
    and resources required

  • Improve your selling power

  • Form a (local) consortium

  • Spend Management & Economics
    Increase of spend economies of scale -- By directing more spend toward a particular supplier, a company can negotiate more favorable pricing based on how much money it spends with that supplier in a given year. Many companies may purchase like items from many suppliers at different prices. By consolidating this "spend", and directing it toward one or a few suppliers, companies are able to get bigger discounts.

    This is often hard to enforce unless some control mechanism (often technological) is put in place that:
    • prohibits this type of purchasing
    • sets up penalties for these types of purchases
    • puts into place some type of approval or check and balance system.
    tendering for contracts training Strategic Sourcing or Supplier Rationalization
    The activity that a company goes through is called strategic sourcing (also called "supplier rationalization"). This takes a commodity-by-commodity look, taking into account business unit, location, and other requirements to find opportunities for economies of scale savings.

    Increase process efficiencies-- Automating sourcing, procurement and payment processes can greatly improve the efficiency of paper based and manual processes. However, different companies have had varying degrees of success in this area. The general idea is not to just automate, but also use the technology to improve upon these processes.

    Don't spend hours saving
    pennies, consider the total
    cost of each project

  • Give a better deal

  • Negotiate, negotiate, negotiate

  • Procurement Efficiency
    Increase procurement efficiency -- This involves using e-sourcing tools for the bidding and contract award process (similar to EBay, in which you may have one buyer and many suppliers, or one supplier and many buyers). These supply chain management tools also help to develop product requirements that can be sent to suppliers (typically called an "RFP" or Request For Proposal). A buyer (i.e. an individual at a company that has determined a need for a particular product) will develop a document that lists the need (i.e. the type of product they need and why), specifications, the bidding process (how the process will work and how suppliers will be scored), rules for the bidding process, and other factors.

    Process savings can be measured in various ways such as: how long it takes to process a purchase order, how many individuals need to touch the purchase order before it can be sent ("touch points"), how long it takes to reconcile and pay the supplier, as well as many other methods to measure these process improvements.

    Offer alternatives
    branded products may
    not always be the best

  • Get the best deal for your efforts

  • Get it in writing

  • Read and understand the small print

  • Request for Proposal Handbook

    Buyers & Suppliers
    Buyers will then invite suppliers to register online, and open the event for a set period of time so that suppliers can bid. At the end, the buyer awards the contract to one of several suppliers. The award can be based on price, delivery time (the time it takes the supplier to fulfill an order), or other factors such as quality or how closely the product meets the needs.
    tendering for contracts training The e-sourcing of direct items (raw materials) is often much more complex than indirect (office supplies, etc.), as the deciding factor is not just price but also the way the product fits into the overall manufacturing of a product.

    The way a company collaborates and transacts with their suppliers is a critical part of spend management as well. This is sometimes called "Supplier Relationship Management". This term is often incorrectly used in place of "Spend Management".

    Spend management in context
    Spend Management is a subset of Total Cost Management, which takes into consideration financial management aspects such as tax/VAT, exchange rates, the impact of demand (i.e. sales), manufacturing, and other factors.

    When considered from a holistic viewpoint, Spend Management can start to feed into supply management, as it also affects how assets (capital and otherwise) and inventory are procured and managed. Spend Management (and in a bigger view Total Cost Management) starts to inform a company of Total Cost of Ownership, and is often used to understand the total cost of items such as assets (from their acquisition, to their use and depreciation, and finally to the assets' retirement).

    In the end, however, Spend Management is about creating long-term and sustainable savings. True Spend Management (and by extension Total Cost Management) is considered by many to be an ongoing cyclical process.