Spend Analysis in Procurement: What You Need to Know

By: Moamen Gaballa,

CenterPoint Group
CPG Prospectus

“Spend analysis” is exactly what its name suggests. It’s the formal process of analyzing how an organization spends money. Spend analysis turns raw, real-time data about where an organization’s money goes into usable information and actionable insights. 

Spend analysis in procurement is essential. Without it, making strategic sourcing decisions is all but impossible. Organizations that follow a spend analysis process procure materials and services at a much lower cost than those that don’t. The median savings is $11 million, according to APQC (American Productivity & Quality Center).

Keep reading for more information about the benefits of spend analysis for your procurement processes and your organization overall. 

Procurement manager sits at table in open office, video conferencing with supplier about renegotiating contract terms.

9 Procurement Spend Analysis Example Benefits 

Spend analysis yields a real-time “snapshot” of how much an organization is spending, on what, with whom, and whether the spending is within budget and essential.

Spend analysis in procurement can benefit you and your organization in several ways. The benefits include:

  • Revealing opportunities for cost reduction.
    Spend analysis brings excessive spending, whatever its cause, to light, giving organizations the chance to control it. For example, different departments in organizations without clear, consistent procurement processes end up buying many similar products from different suppliers. They may even buy the same item from different suppliers at different price points.
  • Reducing and managing the risk of unauthorized spending.
    Spend analysis spotlights payments occurring outside Procure-to-Pay (P2P) processes. Such spend may be accidental or deliberate maverick spend. It may also happen through such social engineering schemes as invoice fraud.
  • Contributing to forecasting and budgeting.
    Spend analysis provides a baseline from which to estimate future spending and to raise or lower budgets, as needed.
  • Helping improve organizational efficiency.
    Spend analysis can highlight chances to control spending by removing redundant tasks or reducing cycle times, changes that can save time as well as money. 
  • Providing opportunities for supplier benchmarking and consolidation.
    Spend analysis helps optimize supply chains by furnishing objective performance metrics suppliers must meet—lead time, on-time deliveries, and others. Supplier spend analysis may reveal a need to contract with more cost-effective suppliers or reduce your supplier pool.
  • Encouraging contract compliance among suppliers.
    Spend analysis can help identify and track suppliers with non-contracted spend or spend with non-contracted vendors. 
  • Reducing supply chain disruption risks.
    Spend analysis can classify “sole-source suppliers, large-volume suppliers, and those suppliers that provide critical components or commodities,” allowing organizations to assess their supply chains’ stability and make any needed adjustments.
  • Determining an organization’s sustainability profile and impact.

    Spend analysis can determine which “hot spots” in procurement contribute the most to an organization’s climate footprint. 

  • Highlighting opportunities to diversify an organization’s supplier base.

    Spend analysis can categorize how much spending occurs with diverse suppliers and identify opportunities to expand the supplier pool.

    Procurement manager reviews procurement spend analysis data on tablet computer, overlaid with transparent bar graph.

How To Do Spend Analysis in Procurement

Now that you know how important procurement spend analysis is, here are the steps you should follow to do it:

  1. Identify all data sources.

Your spend data can make or break your spend analysis, especially if the data is filled with errors or bias. Review your organization’s spend by department: finance, marketing, or any other department spending money. Fill in any data gaps from your suppliers.

  1. Order the data.

Data collected from multiple sources tend to be messy. For instance, the data might be in different currencies or different languages. Consolidate your data into a central database, using a clear, consistent format.

  1. Clean up the data.

Unclean data can lead to faulty analysis and thus flawed decision-making. Take the time to scrape such errors from your data as duplications, definitions, and errors in records. The cleaner your data, the higher quality and more useful your spend analysis will be.

Procurement executive stands at conference table explaining spend analysis reports to four members of procurement team.

  1. Group your data by supplier.

Showing what your organization spends with each supplier can bring cost savings options to light. You might renegotiate contracts with suppliers as a result, or even limit how many suppliers you use going forward.

  1. Categorize your spend.

A spend taxonomy is a hierarchy of unique, clearly defined categories and subcategories, from general to specific. This arrangement is vital for determining whether you have scope for savings or negotiations in your spend.

  1. Analyze your data.

Measure your data against key performance indicators (KPIs)—savings, cost reduction, supplier performance, and so on. Such comparison lets you assess your spend’s effectiveness.

Dealing with a huge amount of data from multiple, varied sources and turning it into useful information is an arduous task. A membership in CenterPoint Group can help.

As part of our comprehensive service, we’ll perform procurement spend analysis for you in critical categories. You’ll gain transparency in high-transaction spend categories and information about how much you could save in our programs.

To get started, contact us online or call us at 866-229-6205.

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