Spend analysis is the important procedure of collecting spend information from each buying resources, cleansing that data, analyzing and categorizing that data to understand spending patterns and identify saving opportunities. The data included in the spend analysis may incorporate buying data, payment data, P-card spends data and credit card data. Procurement/ strategic sourcing experts are generally liable for conducting spend analysis in the organization. The data isn’t just helpful for sourcing experts yet additionally for budget owners and management.
If you have ever performed spend analysis, you might agree that this could be an overwhelming task, if you don’t have the correct tools and technologies set up.
Most of the spend analysis tools have fundamental features that can help with your spend analysis effort. If you don’t have these tools set up, don’t worry we will cover how to conduct spend analysis without those tools as well.
Let’s understand the basics of spend analysis.
There are three main areas of spend analysis – visibility, analysis, and process. When you influence these three zones, you will have the option to identify what you are spending, with whom you are spending and the ROI on that spend.
Conducting a proper, six-step spend analysis will give you overall visibility into your spend. Regardless of whether it’s your first spend analysis or your thirtieth, you need to ensure that it was a success. How? By utilizing key performance indicators (KPIs), you can measure your success. Gaining visibility is basic to successful spend analysis. After all, you can’t save what you can’t see.
Once your data is cleansed and sorted out into relevant categories, you are ready to start analyzing. Look for trends and confirm you are utilizing supplier data to get competitive pricing. Utilize this pool of aggregated spend data to comprehend where you spend is going and whom is it with. Your resulting data can be utilized by your CPO or CFO to get insights and spot trends in your current spending. Different departments can likewise utilize this information to perform inventory management, budget, and plan, and set a strategic sourcing guide.
Procurement Process Improvements:
This is where you can start planning your process guide or implement a course correction if it is important. To improve your processes, you have to start with the credible data you accumulated in your spend analysis. This data empowers you to turn your procurement process from technical to strategic sourcing. How? Since its fact-based, and you can use that fact-based data to change behaviors and improve your decision making procedure. For instance, you can create a spend report by category and then after your next spend analysis, you can think about outcomes and monitor how processes and behaviors have transformed.
The process of spend analysis includes gathering buy history data to answer and evaluate the who, what, when, where, why, and how of an organization’s expenditures.
- What are we buying?
- Who is buying it?
- Who are we buying it from?
- How often do we buy?
- When did we buy it?
- How much did we pay?
- Where were the items delivered to? (geographical location)
- Are we getting what we had been promised?
- How does the data compare from previous years?
Benefits of Spend Analysis
There are numerous advantages of spend analysis; according to APQC (American Productivity & Quality Center) – Best in class organizations who have implemented spend analysis programs have lowered their expense of procurement due to cycle time reduction.
Significantly, you define the use cases upfront within your team and with senior management so that an information structure and clear data can be defined upfront.
Before we get into how to conduct spend analysis, how about we look at some of the benefits of spend analysis and its common use cases.
- Savings Opportunity Identification
- The most common use case is recognizing opportunities for savings/cost reduction. Procurement experts are charged with cost reduction and they need the information to all the more likely understand spend at the line item level to come up with a savings pipeline.
- Spend analysis done in the right way can help procurement professionals achieve saving goals as well as helps in better forecasting the savings for the future quarters, months or years.
- Diversity Reporting
- The most important key metrics organizations tracking are spending with diverse vendors. That need is driven either by being a decent corporate citizen or a need driven by their key clients. Many customers required their vendors to have a specific amount spent with diverse vendors.
- Having data at one single place assists with better understanding and spending with diversity vendors yet additionally helps uncover chances to engage more with differing vendors in specific categories.
- Moreover, this diversity reporting is required by the sales team to respond to RFPs, so having this information handy prompts a quicker turnaround of RFP responses by your sales teams.
- Spend Visibility
- Regardless of whether it is the CFO of the company or whether it is a department budget owner, they are looking for better visibility into the organization or their department spend. The objective is to understand the amount they are spending yet also help to understand where they are spending money.
- Spend Forecasting
- The ability to forecast spend is a significant advantage of spend analysis. There are multiple teams in the organization that can utilize the spend data to figure future spending.
- For instance, finance and planning can utilize the spend data to understand recurring vendors’ expenditures alongside long-term contracts to forecast the next few year’s expenditure budgets.
- Additionally, similar data can be utilized by sourcing teams to work with department owners to assist them to forecast the spending on their key categories and vendors.
Having an idea about your spend management is critical for every financial aspect of business strategy, from contracting to product development. Once you know where your money goes, you can settle on better decisions about where and how it ought to be spent.
6 Easy Steps for Conducting a Spend Analysis
While spending analysis projects differ in shape and size, they regularly incorporate six key steps from spend identification to analysis.
- Step 1: Identify Data Sources
- To begin a spend analysis, the initial step is to check the extent of spending. Identify all the sources accessible for your spend data, from all of your plants, business units, and departments. This incorporates accounts payable, pCard, eProcurement systems, general ledger, etc.
- Start by recognizing the areas of your business that make purchases, for example, procurement, marketing, and finance.
- Step 2: Gather
- and consolidate each spent data into one central database. This can be troublesome if your data is in various formats, various languages, and various currencies, anywhere there are programs available explicitly designed to achieve this.
- Step 3: Data Cleansing
- Cleansing is tied with detecting errors and removing corrupt records and redundancies from a set of data. This incorporates finding and correcting errors in transactions and descriptions, as well as standardizing the spend data for simple viewing. Through data cleansing, you can detect which contacts in your database are irrelevant or incomplete. Typos are removed and missing codes are approved and corrected for cutting-edge information.
- Step 4: Group
- Group your suppliers for better supplier management. Purchases made from IBM Corp., IBM, or Cognos should all be grouped since they’re a similar supplier.
- Step 5: Categorize
- Categorize your spending. Regardless of whether you use eClass, UNSPSC, or your company-explicit categories, you should have the option to figure out where your money is being spent. For example, purchases made from Microsoft like Microsoft Office, Surface, and Skype should all be grouped. Simultaneously, categorize the data into important groups to identify how and where the business is spending its money.
- Categorization is tied in with blending all purchasing transactions to a solitary taxonomy, empowering procurement to gain visibility to the worldwide spending to make better sourcing decisions.
- Step 6: Analyze
- Since data is extracted, cleansed, grouped and catered, you can analyze it to distinguish opportunities for savings and other improvements. Analyze your spend data. There are two ways to deal with this analysis:
- Use a reporting or Business intelligence tool: If your organization has such a tool, then load the categorized data into the system. If you don’t have access to such a tool, check with your marketing team or data analytics group if they have one.
- If the data analysis tool isn’t available, then utilize your old friend Microsoft Excel to run the analysis.
- Make sure that you have negotiated the best contract deals per provider now that all of your spending is identified per supplier. Ensure that all of your buyers are buying from preferred suppliers. Decrease the number of suppliers per category.
- The focus of data analysis is to distinguish trends dependent on your objectives. If the objective was improved visibility, then this exercise ought to be focused on recognizing spend trends over time. If the focus is on identifying saving opportunities, then the analysis ought to be on understanding cost variance, supplier proliferation and so on.
Spend analysis done right can prompt higher savings and better visibility into the organization’s spend. Procurement experts can utilize this tool to engage with stakeholders in a fact, data-based style.
It increases procurement professionals’ productivity as well as helps elevate the value of procurement in the company and it is an incredible step towards transforming procurement into a strategic, value-adding function. Truventor.ai has a complete dashboard and analytics to tell you exactly what are the saving you’re making and how to even optimise your sourcing and procurement spend.