What is Spend Analysis in Procurement?
Spend analysis is the process of collecting, cleansing, classifying, and analyzing procurement data in order to gain visibility and insight into an organization’s spending patterns. In procurement, spend analysis is an important tool for understanding how money is being spent, identifying opportunities for cost savings and optimization, and making data-driven decisions to improve procurement performance.
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An important requirement for the success of procurement management is that it should be aligned with organizational goals and objectives. If organizational objectives demand the lowest total cost of ownership, all procurement processes from material identification to supplier selection to ordering and receipt of material should be performed at low cost.
The concept of ‘strategic sourcing’ is applied as a systematic approach for improving an organization’s supply base and increasing the overall value proposition of the organization by lowering costs.
It aims at getting the best products/services at the best value. Strategic sourcing focuses on developing supply channels at the lowest total cost on a long-term basis instead of fulfilling the usual purchasing objective of identifying a supplier who can deliver at the lowest price.
Spend analysis is one of the key procurement processes that play an important role in the success/failure of a strategic sourcing plan.
In other words, Spend analysis is the process of collecting, categorizing, and analyzing spending data in order to identify strategic opportunities, optimize procurement spending, achieve cost savings, improve operational performance, and monitor supplier compliance.
It analyses the historical spending data of an organization in order to provide answers to questions concerning spend visibility, procurement compliance, and control. A typical example of spend analysis is a case of knowing about a particular commodity being sourced from many suppliers across various divisions in the organization. A simple rationalization effort involves identifying and consolidating low-cost suppliers to purchase the commodity. This not only reduces cost but also helps in building partnerships with few low-cost channels of supply.
The information acquired from spend analysis includes:
- Organization-wide knowledge on how, and on what expenditure has been incurred over the years and the effectiveness with which expenditure has been done
- Categories of purchase expenditure over the period across the organization
- Spend amount and spending patterns for each category
- Spending across different divisions, cost centers, and regions and demand aggregation
- Information on supplier markets involved
- Number of suppliers, nature of contracts, categories of items sourced from each supplier, spend per supplier, and supplier performance
- Categories and suppliers of strategic importance
- Information on procurement compliance
The knowledge of the above information can result in the identification of:
- Strategic sourcing opportunities
- Potential for supplier rationalization and supply market exploitation
- Ways of expense reduction
- Methods for streamlining and optimization of procurement processes
The major task involved in spend analysis is the aggregation and enrichment of data to facilitate reporting. As mentioned in the introductory case, though most organizations electronically process procurement through enterprise-wide packages like ERP, it is possible that their data is not available at a single location or database. For large corporations, data is normally spread over many procurement applications, supply chain applications, and legacy systems. Thus, it is important to aggregate data from all these sources.
Data aggregation leads to the process of data enrichment. Different divisions may procure the same item but could have coded it into the system with different coding standards. For example, some might have used Dun & Bradstreet’s coding nomenclature while others could have used some other standard. This is a typical problem in data aggregation as different applications tend to have different masters that define item categories in different ways.
Data enriching involves using the same set of codes and nomenclature to define similar master data and parameters across the organization. Thus, spend analysis for a large corporation always starts with data aggregation and rationalization effort which are normally done through software packages. If the existing ERP or data warehouse provides a monolithic instance of data, it may be possible to just use an analytic package to perform spend analysis.
Benefits of Spend Analysis in Procurement
Spend analysis can provide several benefits to procurement organizations
- Cost savings: By analyzing spend data, procurement organizations can identify opportunities to consolidate spend, negotiate better prices with suppliers, and identify areas where costs can be reduced.
- Supplier management: Spend analysis can help procurement organizations to identify the best-performing suppliers, evaluate supplier performance, and identify potential risks in the supply chain.
- Strategic sourcing: Spend analysis can provide insights into where the organization is spending its money and help identify areas where strategic sourcing can be applied to reduce costs and improve performance.
- Compliance: By analyzing spend data, procurement organizations can ensure that suppliers are compliant with regulatory requirements, such as environmental or social responsibility standards.
- Improved decision-making: Spend analysis provides valuable insights into procurement data, allowing procurement managers to make data-driven decisions that can improve procurement performance.
- Better budgeting: Spend analysis provides visibility into spending patterns, enabling procurement organizations to create more accurate budgets and forecasts.
Types of Spend Analysis
Apart from the item category and supplier-related information, some of the analyses, which are performed for an efficient spending analysis, are mentioned in table below:
|Cost Breakdown Analysis
|To understand the current cost position and cost drivers
|Category Performance Analysis
|To identify opportunities for cost reduction and category rationalization and substitution
|Supplier Concentration Analysis
|To consolidate supplier base and spot opportunities
|Material Substitution Analysis
|To analyze the possibility of using alternate materials
|Purchasing Contract Analysis
|To understand purchasing behavior and competitive position
|Supplier Market Analysis
|To leverage bargaining power with suppliers
|Buying Practice Analysis
|To analyze the role of customers in industry and buying practices
|Supplier Analysis involving Profitability, Cost, Quality, and Service
|To analyze the supplier’s financial, operational, and industry strengths
The analyses shown in Figure are meant to thoroughly analyze the expenditure pattern and identify opportunities for strategic sourcing that fulfill supply and procurement management objectives.