Spend analysis is one of the key activities that procurement organizations use to identify savings opportunities, manage risks and optimize their buying power. Surprisingly, even some large global organizations do not have an accurate and consolidated clear view of their spend profile. Spend analysis delivers many benefits beyond identifying savings; it highlights inefficient processes, identifies non-compliant spend and is an aid to better supplier management. How clear is your spend visibility?
What can spend analysis tell us?
Spend analysis tools can provide answers to most of these questions:
- What are we buying?
- Who are we buying it from?
- How often do we buy?
- How much did we spend?
- Did we get what we asked for?
- Where were the items delivered to?
- How does the spend data compare to previous years?
The process of spend analysis involves collecting, cleansing and categorising historical data and reporting the processed information in such a way that is can be used in future decision making.
Challenges in spend analysis
One problem is the sheer volume of data. It is impossible to manage large files of data manually; even MS Excel is not an ideal solution. The trend is to use a cloud-based analytics solution where the processed information is presented in a user-friendly dashboard format that can be accessed from anywhere.
For completeness, data must be collected from all available sources including company-wide ERP or procure-to-pay systems, other accounts payable processes and from data obtained from suppliers. At this point, the data is not reliable. It may be incomplete; has the spend on credit cards been included? Purchases may have been allocated to the incorrect general ledger codes or invoices may have been paid outside payment policy. It happens.
Tail spend is both a challenge and an opportunity. There will be a high number of low-value transactions with multiple vendors in any organization. The most common way of identifying them is ranking the suppliers based on annual spend. The smaller suppliers (i.e. starting from the bottom of the list) whose business in total adds up to around 20% of total spend are then defined as the tail. It can include up to 80% of the total number of suppliers.
Doing an in-depth spend analysis on tail spend helps encourage compliance and identifies maverick spend. It also provides an opportunity for consolidation of suppliers.
Spend analysis data, when categorised, cleansed and summarised, provides spend visibility, i.e. the story behind the expenditure. Management reports, in various levels of detail, provide insights that can result in improved performance. Do you have a clear picture of how money is moving out of your organization?
Slicing and dicing the data
At the highest level, spend data can be analysed simply in many ways. For example:
- total expenditure by supplier
- total spend by category/commodity
- number of suppliers by commodity
- number of transactions by commodity
- spend value per business unit
- average spend value per employee
- average purchase order value
Category spend analysis
Allocating spend into predefined categories makes the data easier to navigate, interpret and understand. Focusing on prioritizing the top spend categories helps identify and forecast savings opportunities. It is also an opportunity to gain a deeper understanding of a category.
- Are you buying similar good and services from too many different vendors?
- Are you buying high-value goods and services from suppliers with no contract?
Having access to detailed information on spend by category aids resource allocation and helps teams prioritize activities that will deliver the highest return on investment for the level of effort required.
A spend cube is a unique way of taking a look at spend data in three dimensions: by suppliers, by business unit and by category of item or service. The 3 axes represent category (what are we buying), the business user or cost centre (who are we buying it for), and supplier (who are we buying it from). It allows you to “slice and dice” the data and view it from a variety of angles.
Benefits of clear spend visibility
- Identifying savings opportunities
- Improved data quality
- Better process efficiency
- Reducing maverick spend
- Minimising contract risk
- Better supplier relationships
- Internal benchmarking of spend per business unit
- Informs future sourcing strategy
Tips for starting your spend analysis
1: Identify all sources of data
Start by identifying the areas of your business that purchase items including procurement, finance and marketing. Interrogate all financial systems for external payments. Supplement any gaps with information gained from suppliers.
2: Extract and categorise the data
Collect the data into one central database. Data is usually in different formats and currencies. This step may require help from external resources to consolidate and present the data in a meaningful format.
3: Cleanse the data
Remove corrupt records and errors from the data. This includes eliminating discrepancies in descriptions, cleaning up definitions and removing duplicate transactions.
4: Now analyse the data!
Caliba Group provides a range of specialist procurement services including spend consolidation and data cleansing. We perform spend data analyses and provide visual results in a dashboard format. We help businesses perform better using the most effective solutions for their needs. Contact firstname.lastname@example.org for more information.