For Dental Service Organizations (DSOs), Group Purchasing Organizations (GPOs), and multi-location dental practices, Spend Under Management (SUM) is a Key Performance Indicator (KPI) that should be treated with critical importance.
Knowing what SUM is and how it can lead to improved financial performance should be well-understood by all organizations looking to leverage and optimize spending across locations or within a group of members.
With the right tools and processes, optimizing your SUM, and improving profits, is easier than you may think.
In this article, we’ll tackle the definition of SUM and how it can be utilized to improve outcomes and increase the value of your practice. We’ll also get into how modern procurement systems can help utilize automation to track and improve your SUM.
Let’s get started.
In a perfect world, every penny your organization spends would be well spent, helping you to optimize returns and supporting your growth and long-term business objectives. But in reality, dental organizations often struggle to achieve the company-wide visibility and control over their procurement spend they need to leverage collective purchasing power.
For DSOs looking to evaluate purchasing patterns and develop strategic sourcing and procurement practices, SUM is one of the most valuable metrics at your disposal.
Spend under management is the total amount of company-wide spend (across all locations) that is actively managed and follows company policies and guidelines. The figure can include all suppliers or spend categories and product groups but may be divided into separate metrics to represent specific locations, regions, or categories.
To calculate your SUM, divide the total spend that is actively sourced and follows company buying policies and guidelines by the total spend, then turn it into a percentage by multiplying your result by 100.
Example:
Total supply spend that follows company buying policies: $450,000
Total organizational spend on supplies: $750,000
$450,000 ÷ $750,000 = 0.60 × 100 = 60%
SUM is an important Key Performance Indicator (KPI) for DSOs because it reflects your maturity and ability to control purchasing behavior and prevent overspending, and other common inventory management and procurement mistakes, such as:
By keeping a watchful eye over your SUM, you can monitor performance and ensure you see improvements and slowly increase your span of control over spend by quickly nipping any employee or process issues in the bud before problems perpetuate.
Large DSOs with 15+ locations have started to lean towards centralized procurement. Centralized procurement is where a central office handles purchasing decisions and strategies, typically a Purchasing Director or Chief Financial Officer (CFO).
In contrast, decentralized procurement means purchasing activities are managed at the practice level. The benefits of centralized procurement include the benefits of scale, more efficient use of resources, extracting higher value from contracts, and improved spend management.
Having your company purchases under control allows you to drive business initiatives and unlock the hidden value that lies within your spend.
Strategic procurement strategies enable you to drive long-term business results to your bottom line. By taking a more holistic and service-centered view, procurement can unearth value and create competitive advantage by:
Implementing best procurement practices and inventory management can help improve operational efficiencies and contribute to a healthy EBITDA, making for a well-run practice, attracting investors, and increasing your market value.
Dental practitioners are in the business of providing health care, and most lack the business acumen or time to implement sound business processes.
When it comes to how they spend their dollars and procure the supplies they need to run their business and service patients, practices tend to lack intention and vision, relying on transactional purchases that simply get them through the day-to-day with no consideration given to the long-term impacts of their decision making.
Poor spend management creates confusion and leads to a lack of organization, inflated spending, and financial write-offs due to expired, damaged, or lost stock. Ad hoc buying fails to leverage your volumes, takes too much time away from and frustrates employees, and puts your practice's long-term viability and reputation at risk, including increased opportunities for fraud and theft.
If you’re profit & loss statement is seeing red, or you’re experiencing mounting debt, frequent financial errors, and poor cash flow, your organization, may have poor spend control. Causes of poor control over spend include:
Declining or stagnant reimbursement rates, rising costs, high employee turnover rates, and an increasingly competitive environment are some of the current obstacles facing practices. As a result, practices grapple with operational inefficiencies, increased operating costs, and cash flow problems, and maintaining control over spend becomes more complex and, yet, more necessary.
Hoping for improved profits and growth, many organizations focus on revenue growth, with cost reductions and process improvements taking a back seat.
However, while waiting, these organizations miss out on opportunities that could potentially make that revenue growth more profitable. Instead, by focusing on improving your SUM, you can maximize the dollars you spend while minimizing risks, improving cash flow, and bettering your business relationships, and ensuring your business grows — profitably.
Spend under management provides the foundation for a thriving, healthy business capable of setting and meeting organizational objectives, leading to trust and reliability within your organization and improved supplier relationships. This foundation of trust and reliability also reverberates outwards, improving your brand reputation with customers and within the industry.
Vendors, most especially when demand outpaces supply, are extremely selective and strategic as to where they spend their efforts and offer their most aggressive pricing. Simply put, wasting a supplier's time negotiating cost savings only to not follow through with the orders promised is a surefire way to demotivate suppliers and lose their trust and attention, along with their best pricing.
By improving your SUM, you ensure you can “say as you do and do as you say,” so those hard worked for price reductions and improved payment terms can manifest into realized profit improvements and a healthier EBITDA.
As your dental organization grows exponentially larger, so do the opportunities and challenges. For multi-location practices, capitalizing on opportunities and synergizing operations requires deep procurement analytics and reporting. The right tools will help identify problematic trends and patterns as well as highlight your procurement wins so they can be replicated across the organization.
Chief Financial Officers (CFOs) and Procurement Directors are challenged by disparate systems and a lack of standard procedures to manage their business spend. Manual processes reliant on numerous emails, faxes, phone calls, spreadsheets, and supplier portals are tedious, ineffective, and highly susceptible to human error.
This is why more and more dental organizations are choosing to leverage technology to remove information silos, streamline procurement best practices and gain control of spend.
A digital spend management platform can help you:
In order to manage your spend, you must first be able to see your spend. Unifying all your locations through one digital platform allows you to gain visibility on who is buying what, when, from who, and at what price.
Gaining a view of common items, spend categories, and suppliers allows you to easily identify where you hold the most potential for quick improvements and establish longer-term strategies to synergize operations and procurement strategies.
Rogue purchases that don’t follow purchasing protocols end up unaccounted for only later to surface as an unplanned invoice, contributing to budget blowouts and cash flow problems. Increased visibility ensures better data for all, including your finance department.
Spending time to strategically manage your supply chain can help you mitigate your risks and keep your practice safe while also having a big impact on your ability to save.
A digital spend management platform offers market visibility, so you can easily analyze supplier pricing and access documents for quality and regulatory compliance validations. So you can ensure your organization is selecting trustworthy suppliers with short lead times and competitive pricing.
As spend management allows you to control and reduce spend and has a direct penny-to-penny impact on profits, a comprehensive digital spend management platform that empowers you with market visibility, spend control, and real-time analytics enables you to execute strategy and deliver improved business results.
By offering a singular holistic view of your procurement data for every location under your management, Method’s digital spend management platform can help DSOs align their actions and decision-making with their business priorities.
Identify high-value suppliers and improve sourcing opportunities with a detailed product catalog of over 750,000 dental supplies and access to a 2,000+ dental-specific supplier database.
Make well-informed decisions and reduce risk with the control and visibility you need to increase your spend under management and:
Method provides you with actionable insights and helps you to measure your KPIs and ensure ongoing improvements, so you can meet your organizational objectives, improve your EBITDA, and make life easier for your employees while increasing the value of your business.
As CEOs and leaders well know, getting your employee “buy-in” is essential to the success of any project. To get employees on board, they must understand the benefits to the company as a whole, but even more critically, it’s important to let them know what's in it for them by presenting individual benefits such as less stress and chaos.
Remind them (and yourself) that change takes time, and this is an iterative process, but work done now will save time later. Let them know you’ve invested in a system that alleviates their workload and empowers them to buy faster and easier while making smart purchasing decisions for the betterment of the company and their future.
Support their success by making your expectations clear. Creating and communicating an official sourcing policy and procedure manuals will provide a reference for training and retraining employees and ensure clear and consistent communication. However, employees have questions or want to voice objections. It’s important to listen to them and provide resources for support.
Most importantly, align with the right partner with a proven track record of customer success that can deliver high adoption rates with a system your team will use, so you can get that spend under management and start your path to improved profitability and growth.
Ready to control your spend and improve your EBITDA? Contact us now to learn more and arrange for a personalized demo.
