A spend analysis is a process of analyzing the spending patterns of an organization. It enables organizations to understand where their money is going and how they can save money. The goal of spend analysis is to analyze spending habits and identify areas for cost savings, this is typically done by transforming the raw data into usable information thus finding insights into the company’s procurement activities and spending habits.
Why is Spend analysis important in procurement?
A spend analysis is usually done in order to:
- Find potential cost-cutting opportunities
- Enhance supplier’s performance
- Improve the sourcing process
- Determine unauthorized expenditures
- Increase diversity in your supplier base
- Improve budgeting and spending forecasting
There are many benefits to doing a spend analysis in procurement including:
- Giving insight into purchasing activities and expenditure patterns across the entire organization
- Providing opportunities for supplier benchmarking and consolidation.
- Encourages contract compliance while limiting supplier risk. By reporting on out-of-contract spending, spend analysis reduces the chances of invoice fraud and unauthorized and unorthodox spending.
- Shows the challenges in your organization’s procurement process and highlights ways to improve efficiency for example by removing redundant tasks and reducing cycle times.
- Contributes to the forecasting and budgeting processes, providing guidance for future strategic sourcing strategies.
- Used to determine a company’s sustainability profile and impact.
- Used to track historical spend for savings reporting against a pre-established baseline.
How does a spend analysis help?
- Overall Spend by Supplier
Doing a spend analysis could shed light on the fact that your business might have 80% of its spend with only 20% of your business's main suppliers. If that’s the case, then you can start focusing on cost savings options through renegotiation of your contracts and talks with your main suppliers. Your business might even end up limiting the number of its suppliers.
- Overall spend by category
A spend analysis done on your business’ spend with a focus on each category of your goods or services across locations can shed light on opportunities for cost savings for example, your business could be buying analogous goods or services from a lot of different suppliers, or your business could be buying non-contractual high-value goods or services.
- Overall spend by department
A lot of organizations that don’t have a well-aligned procurement system may end up buying a lot of similar products from different suppliers, more often than not different departments/branches of an organization would end up buying the same item from different suppliers at different price points.
A spend analysis can bring this situation to light and thus showcase opportunities to standardize and increase savings. On the other hand, a spend analysis can also showcase opportunities for diversifying your organization’s spend.
- Non-Contractual Spend
A spend analysis can also showcase why non-contractual spend is happening in your business maybe the product quality from your contracted supplier is poor, or maybe the shipment of the product is late. Regardless these things can happen and a spend analysis can shed light on them and limit them.
Now that we have demonstrated how important doing a spend analysis is, here are some tips for when you’re just starting out
- Identify all your data sources
This shouldn’t come as a surprise the source of your data is very important to your analysis as it can make or break your analysis especially if the data is filled with errors or bias. Regardless though, you need to know where your business is spending its money. Begin by reviewing your business’ spend by department this includes finance, marketing, procurement, or any other department that is spending money. You can fill any gaps in the data from your suppliers.
- Order the data
After you’ve collected your data from your data sources; it’s time to order it and put it in a clearer and more concise format since data collected from different sources is usually messy for example the data could be in different currencies as well as different formats, this step is important for your analysis.
- Clean up the data
Cleaning your data is very important for your analysis as unclean data can lead to a faulty analysis and thus false decision-making based on the unclean data. Take the time to scrape errors from your data these could be duplicates, errors in records, and definitions.
Now that you have collected, ordered, and cleaned your data it’s time to start your analysis. A spend analysis is not just about saving money. It shows stakeholders how your business and your procurement team are supporting their goals.
Dealing with a huge amount of data from a lot of different sources and turning it into useful information is an arduous task. CenterPoint Group can do this challenging task for you and provide you and your business with the results that you hope to accomplish.
Find out what your CenterPoint team can do for you today!
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The information contained in this article is intended for general information purposes only and is based on information available as of the initial date of publication. No representation is made that the information or references are complete or remain current. This article is not a substitute for review of current applicable government regulations, industry standards, or other standards specific to your business and/or activities and should not be construed as legal advice or opinion. Readers with specific questions should refer to the applicable standards or consult with an attorney.