Spend analysis is an essential part of procurement that allows you to understand how you are spending your budget and get the most out of it. Conducting a thorough procurement 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. If you are not sure how to go about your financial review, the step-by-step guide below will help you.
Determine your objectives
Before you do anything else, you need to establish why you are conducting the spend analysis. Your objectives will guide you as you gather data. Consider what you need to achieve from this evaluation:
- 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 from the outset.
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 do not just rely on your purchasing team or procurement team. Look across the entire organisation so that you capture all the necessary data. Do not cut any corners when conducting this data audit. You will be surprised where you will uncover critical data across 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. This administrative task will be much more straightforward if you use a dedicated procurement spend analysis software platform that already stores much of your spend data. If not, focus on collecting the data and converting it into a single format so it can be interpreted easily.
Cleanse data
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 immediately. Standardise your data fields. The data cleansing could take some time, so do not make it a job all for one person, and be sure to be exceptionally 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 are spending with them. To manage your suppliers better, group them or link them logically. Some suppliers may belong to a parent company, in which case you might find it useful to aggregate them to increase your purchasing power. Visualising this combined volume gives your team the necessary leverage to negotiate better deals.
Categorise your spending
You can use established systems such as the United Nations Standard Products and Services Code (UNSPSC), 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. Generating detailed procurement spend analysis reports 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 contract compliance. Deployed correctly, customised procurement spend analysis reports turn raw data lines into actionable commercial intelligence.
When you have identified your spend per supplier using your procurement spend analysis software, make sure you have negotiated the best contract deals. Check, too, that your suppliers are buying from preferred suppliers, and consider reducing your number of suppliers to consolidate volume.
Repeat the process
A procurement 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 are spotting savings opportunities.
Keep notes on each analysis as well so you can see what has worked and what has not. Incorporating modern system rules into your regular review workflow ensures your database remains dynamic and accurate. Stay up to date on best practices in spending so you can become more and more efficient.
Strategic Spend Optimisation
Ultimately, a procurement spend analysis is an important tool to identify savings opportunities and, generally, to track how you are spending money and whether you are spending it effectively. At Barkers, our practitioner-led team understands how to combine analytics with practical sourcing expertise to protect your corporate margins. Contact our specialists today to explore how our tailored procurement spend analysis software insights can optimise your procurement workflows and drive sustainable efficiency.