Staying ahead of the competition with efficient and effective spend management

Spend Classification: the foundation for spend analysis and management

Management guru Peter Drucker once said, “What’s measured, improves.” Spend management is no exception to this. However, the effectiveness of spend management is directly linked to the quality of the spend analytics available to any organization, and the quality of spend analytics is directly dependent on the accuracy of spend classification.

The widely adopted 5W-1H (Who, What, When, Where, Why, and How) methodology can be applied for spend classification as well.

• Usually, the information about “How Much” (amount being spent) and “When” (point in time) are readily available through different purchasing documents such as Quotations, Requisitions, Orders, Invoices, etc.
• The information about “What” (products and services purchased) can be captured from the purchasing categories used while creating different types of purchasing documents. Logical and comprehensive categorization is critical for accurate classification of different types of spends done by an organization.
• To make spend classification more meaningful and actionable, it is necessary to get complete information about “Where” (location), for “Who” (person/department), and “Why” (purpose) the expense is incurred.

For example, knowing that an organization spends $1 million for stationery items in a year across its 20 distribution centers in a specific geography is important information, but it cannot help anyone take action to reduce stationery expenses. On the other hand, if the breakdown of stationery spends by each distribution center, by months, by specific type of stationery items, by person/department, and by exact purpose is made available, it would be easy to identify outliers and exceptions and take appropriate actions to reduce the spending.

Spend management is not just about analyzing the spends incurred in the past and deciding the actions needed to control/reduce them in the future. Organizations that do not proactively forecast their spends, do not spread them appropriately — taking into consideration the cash flows — and do not proactively control the actual spends often end up with excess spending. In some areas, this causes spending to be restricted in other critical areas, thereby impacting key organizational goals. Many organizations conduct spend forecasting and budgeting in order to not only better manage their cash flows and working capital, but also to avoid undesirable situations which impact strategic goals. However, if the requisition-to-pay process is not tightly integrated with budgetary control, then controlling actual spends within budgeted amounts becomes a highly effort-intensive and error-prone task.

It is crucial to budget at the appropriate level of granularity, or it is difficult to effectively manage spends. In the example above, if budgeting is done only at the level of “stationery” as a spend category, then exercising control on distribution center stationary expenses or on specific sub-categories within “stationery” would be impossible to control. Therefore, spend classification using the 5W-1H methodology is necessary for effective budgetary control.

Inspirage can help

Inspirage has deep expertise in implementing procure-to-pay solutions that holistically support spend classification, spend analysis, and spend management (including budgetary control) capabilities across different industry verticals. These robust and scalable solutions are built with Procurement Transaction Account Builder (Procurement TAB) at its core.

What is Procurement TAB?

Transaction Account Builder (TAB) is a highly configurable rule-based account derivation engine that is primarily a part of Oracle Fusion Subledger Accounting. It is leveraged by Oracle Fusion Procurement Cloud for account derivation on procurement documents such as purchase requisitions and purchase orders.

Procurement TAB works with an organization’s Chart of Accounts (CoA) at its base. The Chart of Accounts typically consists of multiple account segments which form an account code combination with each segment representing a specific accounting attribute. For effective spend classification, the CoA should at least have one segment to represent each of the key attributes of spend.

• Where (for example, plant or warehouse)
• Whom (for which person/department)
• What (products/services purchased)
• Why (purpose)

An organization can use additional segments for a more granular classification of spend.

How is Procurement TAB configured?

Procurement TAB enables business users to author and manage their unique account derivation policies for generating the accounts in purchasing documents. The key components of such a policy configuration are:

• Account definition: Account rules are linked at the code combination level or at the segment level to different account types (Accrual, Charge, Variance).
• Account rules: An aggregation of seeded account sources and/or custom mapping sets for different purchasing scenarios which are used for a code combination or for specific segments.
• Mapping sets: Either linked to seeded account sources or independent. They are objects which hold mappings between attributes of purchasing documents (such as business unit, ship-to location, purchasing category, etc.) and corresponding account codes.
• Rule conditions: Decide applicability of relevant account sources/mapping sets for specific purchasing scenarios.

Common purchasing scenarios for which account derivation is usually configured include:

• Asset item purchase into inventory/expense destinations
• Expense purchase for goods/services for non-stockable goods with/without item code
• Inventory-expense purchase for stockable goods which are expensed out
• Outside processing of manufactured items
• Fixed asset purchase when the purchase amount is transferred to the fixed asset module and capitalized

Seeded account defaulting rules delivered within TAB address the common purchasing scenarios of customers, thereby substantially reducing efforts to set up from scratch. To achieve account defaulting for specific/unique scenarios, either the seeded rules can be extended by adding a layer of customization (by way of custom mapping sets and rule conditions for their applicability), or completely new account rules (with corresponding mapping sets) can be created and included in the account definition.

Procurement TAB Benefits

The following are a handful of ways that Procurement TAB helps with spend management:

Error-free spend classification

• Procurement TAB eliminates the need for manual input of accounts on purchasing documents.
• The accounts derived based on the key attributes of spend, as per 5W-1H methodology, form the basis of spend classification, free of any manual errors.

Fast and accurate spend analysis

• The 5W-1H of every spend can be precisely identified using account code values for each of the account segments.
• Using Oracle BI, the spend data classified at this granularity can be easily sliced and diced for in-depth spend analysis.

Actionable insights

• Spend patterns can be mapped for different spend categories by time, location, cost center, and purpose, represented by corresponding account codes.
• The outliers and exceptions can be easily identified, and appropriate actions to manage the spends in those areas can be worked out and implemented.

Spend forecasting and budgetary control

• With historical spend data classified by spend category, location, purpose, etc., spend forecasting can be done at a more granular level. This will help in allocating appropriate budget amounts for different spend.
• The actual spend can be proactively managed with budgetary control in place.

 

 
A comprehensively designed and implemented Procurement TAB solution — which not only supports the regular procure-to-pay process but also helps in efficiently and effectively managing spend — is the key driver in becoming a leader in spend management. Inspirage has successfully guided customers from different industry sectors to significantly improve their spend management capabilities using Oracle Fusion Procurement Cloud. If you are unsure about moving to Oracle Cloud due to gaps between your business requirements and Oracle’s Cloud offering, it’s possible that we have already built a solution to bridge that gap. If not, we can customize something to fit. We will do the work behind the scenes, so you can focus on growing your business.

Please visit the Oracle Cloud Marketplace to see a complete listing of Inspirage Solutions.

As the Integrated Supply Chain Specialists, with recognition from Gartner, IDC, and winners of Oracle’s ERPM (Enterprise Resource Planning & Management) & Supply Chain Management Cloud Partner of the Year (Global) awards in recent years, Inspirage is uniquely qualified to be your success partner. Whether you are upgrading your on-prem system or have decided to move to the cloud where continuous improvement is built-in, our team is prepared to guide you on your transformational journey. Contact us to learn more.