Spend analysis is an essential part of procurement that allows you to understand how you’re spending your budget and get the most out of it. A good spend analysis brings an organisation several different benefits, such as spend visibility, the identification of savings opportunities, spend forecasting and the ability to diversify reporting by tracking spending with different suppliers. Not sure how to go about your spend analysis? The guide below will help you.
Determine your objectives
Before you do anything else, you need to establish why you’re conducting the spend analysis. Your objectives will guide you as you gather data.
Do you want to understand sourcing at a granular level to spot savings opportunities?
Are you trying to understand key vendors so you can develop a strategy for working with them?
Are you wishing to provide visibility to senior management on key areas of spending that will affect margins?
Be clear on your objectives so you can focus your analysis correctly.
Identify information sources
Establish all the different sources available for your data. This means the different departments, business units and, if any, plants, and could include e-procurement systems, general ledgers, purchasing cards and accounts payable. Data can become easily siloed, so don’t just rely on your purchasing team or procurement team. Look across the entire organisation so that you capture all the necessary data. Don’t cut any corners when conducting this data audit. You’ll be surprised where you’ll uncover data in your organisation.
Gather data in a central location
Collect all your data and place it in one central database. This is easier said than done if the data is in different formats, different languages or different currencies, but there are programs available that can help you achieve this. The task will be much more straightforward if you have a single program that already stores much of your spend data. If not, focus on collecting the data and converting it into a single format.
Cleaning the data is an important next step so that you have accurate data and can make effective decisions based on it. Look for errors in descriptions and transactions, and correct them. Standardise your data. The data cleansing could take some time, so don’t make it a job all for one person, and be sure to be thorough. Before cleaning the data, put in place clear guidelines to ensure consistency throughout the whole database.
Group your suppliers
Grouping suppliers will help you to gain an accurate picture of how many suppliers you have and how much you’re spending with them. To manage your suppliers better, group them (or link them). Some suppliers may belong to a parent company, in which case you might find it useful to aggregate them to increase your purchasing power.
Categorise your spending
You can use established systems such as the United Nations Products and Services Code (UNPSC) or you can create your own company-based categories, but categorising your spending is important. Categorise office supplies, marketing, travel, legal, direct and indirect expenditures so you can form a category strategy and make some savings. You need to see where your money is going, so be as specific as your circumstances demand.
Analyse the spend data
Cleansing and categorising your spending data sets you up perfectly to compare your performance against existing key performance indicators (KPIs) and define new ones. Charts and graphs will help you to spot underlying trends and any anomalies. A lot of organisations focus heavily on analysing the supplier performance side of their procurement activities, but you should also be tracking your savings, cost reduction and more.
When you’ve identified your spend per supplier, make sure you’ve negotiated the best contract deals. Check, too, that your suppliers are buying from preferred suppliers, and consider reducing your number of suppliers.
Repeat the process
A spend analysis is an excellent starting point to uncover savings opportunities, but you should refresh your data regularly to be sure everyone is following contract terms, buyers are buying from preferred suppliers and you’re spotting savings opportunities.
Keep notes on each analysis as well so you can see what has worked and what hasn’t. Stay up to date on best practices in spending so you can become more and more efficient.
A procurement spend analysis is an important tool to identify savings opportunities and, generally, to track how you’re spending money and whether you’re spending it effectively. If you’d like a hand performing your spend analysis, visit our Cost Transformation page and find out more about how we can help you with this.