Spend analysis is a process by which expenditure data is evaluated after it is collected and categorized. This process is carried out either by human effort or with the help of software. Companies carry out spend analysis in order to bring about an increase in profitability once the areas that cause wasteful expenditure have been identified. Sourcing and procurement services invariably carry out spend analysis by asking typical questions that include:
- What is being bought?
- Who is it being bought from and
- Who is paying for it?
The answers are generally quite revealing. They indicate that companies may buy the same products from different suppliers, they probably could get better prices if they were to buy from the same supplier and often in spite of the large volume of the order they do not get any discounts. It is therefore extremely important to carry out an effective spend analysis and sourcing so that there is a better return on investment.
Effectiveness of Spend Analysis
The success of sourcing and procurement services depends on the quality of the spend analysis. Today spend analysis is an excellent weapon when you are attempting to squeeze greater savings from each procurement process. At a conservative estimate, more than “90% of the Fortune 100 companies are implementing strategic sourcing programme, and….they are able to determine precisely what they pay for materials, products and services, when they pay for it and with whom”.
Ultimately, it is necessary that after all data has been extracted from diverse systems and analysed, spend analysis succeeds in firstly identifying opportunities for cost cutting and secondly reveal those differences that are critical among various suppliers. It is understood that certain organizations have taken the help of spend analysis to slash “certain bids by as much as 90 percent after consolidating and analysing over $30 billion worth of purchases from 50 different accounts payable systems.” It is evident that an effective spend analysis program can help save as much as “10% in the cost of goods sold, with additional savings elsewhere.” It is therefore well appreciated that spend analysis should be the permanent option if costs are to be cut. Effective spend analysis must mean that all expenditures be tracked as an ongoing activity for its full benefits to be realized.
The Method
One method of achieving full advantages from spend analysis is by:
- Automating the basic process of aggregation of spend data from all possible sources,
- Standardization of this data in accordance with an appropriate system of coding,
- Carrying out a detailed data analysis so that the trends are made visible for all to see.
With the help of this analysis it will be possible for purchase managers and concerned executives to be able to optimize all sourcing decisions thereby arriving at the correct solutions to corporate requirements governing the performance of suppliers.
Consistency Pays
For the full advantages of spend analysis to be realized it is essential for it to be applied consistently since the one-time effort is more likely to yield results that are inaccurate. A good attempt at spend analysis will be painstaking since the data will have to be collected from diverse departments, different corporate locations and systems. The attempt will also demand a total reconciliation of both terminology and style and the classification of products to very minute levels. Only then will it be possible to conduct searches with precision on relevant spend categories. A proper understanding of spend profile may be possible only after several months due to the immensity of data and the limitations in the methodology.
Finally, it must be appreciated that analysis must be carried out repeatedly (monthly, quarterly, and annually) in order to be able to identify the changes in spend both in terms of the product and the supplier. Naturally, this is possible only with the help of the right kind of tools. Further, it is mandatory that such spend analysis must involve at least one of the chief executives and the association of all the concerned stakeholders.
