How to identify cost savings for items having only One Vendor? Chapter 05
Chapter 05 — Analyze and identify cost savings for items having one vendor
We have previously mentioned that Tail Spend is all about Consolidation and Elimination. But the issue with Consolidation is figuring out its How part. Should we consolidate using the Commodity Description or Vendor? We will attempt to answer this question in this Chapter.
As you may recall, in Chapter 04 we managed to cover the “Hidden Tail” portion wherever the “Contract Available” condition was fulfilled. That is, in both Major Spend and Tail Spend section (as shown in the picture below, highlighted as “A”). Now, let us focus on the “B” part and find out cost-saving opportunities wherever the “Contract Not Available” condition exists.
For ease of use, I will rearrange my pivot table according to the picture shown below. We only need to show data for “Contract Not Available”. So, total spend comes out to be about USD 108.3 Million, out of which roughly about USD 39.2 million comprises of the “Tail Spend” class.
When we are looking for New Contract consolidation opportunities, we should not limit ourselves just to Tail Spend only. Therefore, I will find the Contract consolidation opportunity for both Major Spend and Tail Spend together. To do that, we will make use of our “PO Class” and “Vendor Class” columns. Follow the below-mentioned steps carefully.
Step 1: Filters
Add “Contract” field and choose “Contract Not Available”
Add “Spend Class” field (By default both the values i.e. Major Spend and Tail Spend will be selected)
Step 2: Rows
Add three fields here in the order shown. First — PO Class, Second — Legal Name (i.e. Vendor Name), and lastly the Third, Commodity Description.
Step 3: Columns
Add the “Vendor Class” field here.
Step 4: Values
Add two fields here. First — Sum of “Total PO Value” (I have renamed it to “$” for ease of readability). Second — Count of “Commodity Description”
You can add the same field two times in the pivot table but it has to be added in different sections. The objective of adding the Count of “Commodity Description” field is to know how many items are present for each instance. If this is not clear to you at this stage, do not worry. You can proceed forward as I will demonstrate it clear in the upcoming sections (if you want still want to see an example, jump to Single Vendor — Single PO section and picture shown there).
Step 5: Formatting and design of the pivot table
This one is an optional step for improving the formatting of our pivot table. Follow steps 1, 2, 3, and 4 as shown in the picture below.
Once you have successfully completed steps 1, 2, 3, 4, and 5, your pivot table should look similar to the picture shown below.
We are all set! We needed this table to meet the objective we set out at the beginning of this chapter, that is, how to consolidate. This table will help us figure out consolidation opportunities. Let us start by understanding the structure of this table first.
In the rows, we have a PO class with 3 options (Single PO, Between 1 and 12, and More Than 12). In the Columns, we have two layers. The upper layer contains the Vendor class with 3 options (Single Vendor, Between 1 and 5, and More Than 5). The bottom layer contains Spend and Count of Items. This information will help us to know various scenarios such as :
1.) Items with Single PO & Single Vendor and their Spend
2.) Items with High Number of POs (More Than 12) and High Number of Vendors (More than 5) and their Spend
1.) Single Vendor — Single PO | Strategy: Consolidate by Vendor
Let us now focus on our 1st Area to explore cost-saving opportunities. That is on the items that have a Single Vendor and Single PO scenario. The below-mentioned picture is a subsection of our pivot table and clearly highlights the Single Vendor-Single PO case (Note: I have sorted out the spend in descending order).
As you can see above, we have a vendor “RDO Equipment CO”. We have purchased 6 different kinds of items from this vendor but only each time only one item was bought (hence one PO for that item). This is a very common scenario.
For vendors that have supplied multiple commodity items to us but each item is bought only once per year, it is recommended to consolidate by Vendor instead of commodity description.
So, we can discuss with vendor “RDO Equipment Co” and discuss a Contract (contract size USD 267k). Now, sort the Nos column in descending order. In this example, I have kept my criteria for consolidation as a minimum of 10 or more items (you can change it as per your requirement). In the picture shown below, we have discovered USD 351.9 K as a potential Contract opportunity.
Done!
2.) Single Vendor — High No. of POs (“More Than 12"POs) | Strategy: Consolidate by Vendor
We now move to our second opportunity. Single Vendor — More Than 12 POs. I have followed the same approach as highlighted above. Sort the value in descending order and select the minimum amount to be considered fit for contract. In my case, it is USD 10,000. So, anything above that value will then be discussed with vendor and brought under a contract. As highlighted in the picture shown below, we have a potential of $1.1 Million that can be brought under new contracts.
Now you should schedule discussions with these vendors to negotiate. If you need further details (such as item description, PO number, dates, location, etc), you can add that particular field from the pivot table and expand to get the details.
Conclusion
In this chapter, we learned how to identify cost-saving opportunities for Single Vendor cases.
Chapter 06
In the next chapter, we will learn how to identify cost-saving opportunities for items with High No. of Vendor scenarios.
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