Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

Supplier Spend by Region: A New Way to Tackle Fragmentation

May 11, 2015 at 9:07 AM / by PowerAdvocate

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In this week’s post, we explain how Regional Fragmentation Analysis (RFA) – the 8th analysis in our Smart Savings Series – will provide you with visibility into your top suppliers’ fragmentation across the regions in which you operate. Conducting an RFA reveals consolidation opportunities in areas where your high-spend vendors are present, but significantly underutilized. By renegotiating contracts based on the output of this analysis, our experience suggests you will achieve 10%+ savings.

 

What is Regional Fragmentation Analysis?

Regional Fragmentation Analysis is a means of visualizing how well your spend with a top vendor is regionally distributed within each of the categories of products and services this vendor offers. By conducting this analysis, you’ll benchmark percentages of category spend, and uncover discrepancies across your areas of operation. Significant discrepancies represent opportunities for consolidation and volume-driven savings.

Depicted below is a Regional Fragmentation Analysis that PowerAdvocate recently conducted for an E&P client (actual data has been disguised). It reveals the client’s spend breakdown with its largest OFS provider by category and region, and highlights areas of opportunity.

 

RFA

 

How Do I Evaluate and Address a Regional Fragmentation Analysis?

Once you’ve executed an RFA, you should look for categories where the relevant supplier’s share of spend in certain regions is at least several times greater than its share in other regions. Take the Artificial Lift Services category in the chart above – Supplier A is the dominant vendor in Regions 1 and 3, but provides only 8% and 5% of category spend in Regions 2 and 4. Because this vendor supplies at least some services in these latter two regions, you can be confident that it does have a presence there, and is simply being underutilized.

After zeroing in high-discrepancy categories, you will still need to determine where consolidation is actually feasible. For instance, there may be certain services required in Regions 2 and 4 that Supplier A cannot provide, making consolidation impossible. However, situations like this should be the exception, and will likely only preclude a portion of any consolidation opportunity, rather than all of it.

When you’ve identified which categories to target, you should pursue the same approach laid out in previous posts on spend consolidation. First, for each opportunity, you should determine how much spend you can redistribute to the relevant top supplier, and then renegotiate your terms with this supplier around added volume. Second, you need to ensure that your team in the field drives the incremental spend to the suppliers with whom you’ve renegotiated.

If you’re interested in a more tactical step-by-step guide to conducting Regional Fragmentation Analysis, we invite you to read our follow-on post, Tactical Savings Guide – Regional Fragmentation Analysis.

 

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