This post lays out the details behind a tactical execution of Supplier Growth Analysis (if you’re not sure what Supplier Growth Analysis is, check out our high-level intro piece on the subject), and provides strategies for maximizing savings with high-spend, high-growth vendors through contract renegotiation. Specifically, it outlines:
- Data requirements: What data do you need access to?
- Steps of the analysis: What are the steps to follow in running the analysis?
- Suggestions on execution: How have we seen other companies actually execute and realize the savings opportunities uncovered by the analysis?
There is only one data requirement to run this analysis effectively: fully rolled-up supplier families. Even so, most E&P firms do not have cleanly aggregated parent and subsidiary organizations in their data. If you have this problem, we can help – just ask us how.
Fully Rolled-Up Supplier Families: Without complete and accurate supplier hierarchies, this analysis will produce incorrect results that will ultimately cost you significant savings. For one, you will likely leave suppliers out of consideration because their subsidiaries have not been rolled up, making them appear smaller than they are. Second, you will leave money on the negotiating table as you present year-over-year growth rates that are artificially low because you haven’t incorporated subsidiary spend.
The chart below underscores the importance of supplier organization; it depicts a PowerAdvocate client before and after it invested in supplier familying.
How to Run the Analysis and Identify the Savings Opportunity
With in-tact supplier families, executing this analysis is fairly straightforward. Here are the steps required to identify savings opportunities using Supplier Growth Analysis:
- If possible, export total spend by supplier for 2013 and 2014 separately. If summarized exports are not possible, export this data in transactional form, and create pivot tables in Excel to achieve aggregated spend amounts by supplier.
- Arrange your 2014 data such that this year’s top suppliers are sorted in descending order by spend. Add in corresponding 2013 spend amounts for these suppliers in an adjacent column. Because your 2013 and 2014 top suppliers will include different vendors and rank differently by spend, populating the 2013 column can be done most efficiently through use of the VLOOKUP or INDEX MATCH functions in Excel.
- Add in a new column next to those including 2013 and 2014 spend amounts, and fill it with year-over-year growth percentages. These can be calculated by subtracting 2013 spend from 2014 spend and dividing the result by 2013 spend.
- Copy and paste data on however many top suppliers you want to include in the analysis (top 10, top 20, etc.) into a separate section of your worksheet or a separate tab and then sort the rows in descending order by year-over-year growth percentage.
- Create a column chart to reflect the growth percentages, and layer on a scatterplot to reflect corresponding 2014 spend amounts. The output should look something like this:
How to Execute on the Savings Opportunity
Once you’ve conducted Supplier Growth Analysis, you’ll want to start prioritizing vendors. Just by looking at the analysis’ output, you’ll be able to quickly identify suppliers that are both high-spend and high-growth (i.e., primary targets for renegotiation). However, you will likely want to segment accounts more scientifically. This can be done in a number of ways.
First, you can plot your top accounts as data points on a chart according to their growth and spend amounts, and segment these data points into quadrants. The output would look something like this:
Another option is to sort your top suppliers by year-over-year spend growth in dollar amounts. The list of prioritization methods could go on, though no matter which method you employ, you will end up with roughly the same vendors at the “top of the list”.
Once you’ve determined which suppliers to address, you should examine your existing contracts with these suppliers to determine whether or not they are structured in a way that aptly rewards you for increased spend volume. If there are no price adjustment clauses in place, or you feel the clauses that are in place are insufficient, there’s opportunity for renegotiation. How you renegotiate savings is up to you, though citing accurate data on year-over-year growth and spend volume will undoubtedly provide you with leverage in the process.
In our experience, such renegotiation will result in 10%+ savings with any given high-spend, high-growth supplier. And, when dealing with your biggest suppliers, that will result in tens of millions of dollars in discounts.
Need help accessing the data needed for this (and other) analysis?
Need help running the analysis?
Need help executing supplier negotiations?
We can help – ask us how.