Introduction
Many organizations are involved with some sort of strategic sourcing program. That said, strategic sourcing can move beyond cost-cutting and have a significant impact on companies’ finances and eventual growth. The crucial aspect of this is the ability to manage business spending. In fact, 38 percent of procurement leaders have rated spend analysis as the most critical area to receive investment.
In general, spend goes unchallenged as long as it is within the radar. And that is where companies go wrong. Concentrating on the budget should not be the yardstick to analyze the companies’ spend. The key objective should be to figure out if that spend is essential or not.
Beroe, one of the leading names when it comes to procurement intelligence, arms procurement teams with the right tools and data so to effectively analyze their spend data and make informed decisions that boost their bottom line.
Need help with spend analysis in procurement? Looking for a spend analysis report to step up your game? Take the hands of Beroe, invest in reliable procurement intelligence, and navigate in the right direction.
Understanding the basics:
What is spend analysis?
Spend analysis is a foundational organizational procedure that helps procurement teams figure out the upcoming, best steps in the sourcing process including where the most worthwhile savings opportunities exist and how to prioritize sourcing resources. It is the method by which spend data is gathered from different systems/sources such as e-Procurement, enterprise resource planning (ERP), and AP/accounting. The data is amassed, combined, analyzed, and cleansed into usable insights that can fuel rewarding outputs.
It's worth noting that spend analysis is just one piece of the larger picture that is spend management. It helps visualize data to make informed sourcing and supplier decisions. Procurement teams must have a well-defined spend analysis plan and that plan must be followed by a holistic strategy and swift implementation so to unlock optimum returns.
How businesses can benefit from spend analysis?
Did you know spend analysis can help cut costs by 3-5 percent annually?
Owing to all its benefits, spend analysis has become a key priority for procurement teams. Foremost, spend analysis can help improve performance by enabling teams to prioritize important things and deploy resources more efficiently.
Spend analysis can also provide key insights for the forecasting and budgeting process. It can minimize maverick buying, identify price arbitrages, and improve data quality.
Procurement spend analysis can help organizations manage risks better, develop a dynamic supplier base, and minimize supply chain disturbances.
In all, spend analysis is much more than just about saving short-term costs. If implemented right, it can make a big difference in the company's long-term growth and prosperity.
The Roadblocks on the Way
There are some fundamental challenges and limitations that prevent organizations from optimally capitalizing on spend analysis. Poor spend data quality is the biggest roadblock. In an interview with Beroe, SimPPLY, a spend analytics solution provider based in Sydney, Australia, addressed this challenge. Answering what are the challenges involved in spend cleansing before implementing a spend analytics solution, they said:
“The most important challenges are the availability and integrity of the data and its true level of granularity and completeness—these points were raised by many non-data-ready organizations who considered themselves not to be ready for a spend analytics solution. The other challenges are knowledge/ capability of where to find the right information and how to interpret and translate for compliance and meaningful decision drivers, both of which are often overlooked.”
The absence of standardized process and technology is another challenge for procurement teams that adds inefficacies and ineffectiveness to spend analysis.
Lack of in-house analytical capabilities is also a common obstacle. Not only organizations need to hire the right talents but that procurement analytics team must be trained regularly to be in sync with the ever-changing market and the dynamic needs and goals of the business.
To address these roadblocks and get the most out of spend analysis, companies should steer towards procurement intelligence. Beroe offers companies the functional expertise that enables them with more actionable spend-related insights. Contact Beroe today, tap on market intelligence, and ace spend analysis to stay ahead in the market.
Recommend Read: Reap the benefits of spend analysis with the right tools and expertise
Steps to Conduct Effective Spend Analysis
- Data Collection: The first step involves gathering comprehensive data from various sources, including procurement systems, invoices, contracts, and financial statements. This data serves as the foundation for the analysis.
- Data Cleansing and Validation: Clean and accurate data is essential for meaningful insights. This step involves removing duplicates, correcting errors, and standardizing data formats to ensure consistency.
- Categorization: Group the spend data into relevant categories such as direct materials, indirect spend, and services. This categorization aids in identifying spending patterns and areas of opportunity.
- Data Enrichment: Enhance the spend data with additional information like supplier details, contract terms, and geographical locations. Enriched data provides a deeper context for analysis.
- Supplier Segmentation: Classify suppliers based on their strategic importance, volume, and risk. This segmentation helps prioritize supplier management efforts.
- Analysis and Visualization: Utilize advanced analytics tools to identify trends, outliers, and patterns within the spend data. Visualization techniques like graphs and charts make the insights more accessible.
Best Practices for Effective Spend Analysis
- Cross-Functional Collaboration: Involve stakeholders from procurement, finance, and operations to ensure a holistic approach to spend analysis. Their insights contribute to a more comprehensive analysis.
- Regular Data Updates: Spending patterns evolve over time. Regularly update and refresh your spend data to capture these changes accurately.
- Benchmarking: Compare your organization's spending patterns with industry benchmarks to identify areas of over-spending or opportunities for improvement.
- Supplier Engagement: Collaborate with key suppliers to gather more detailed information about their offerings, pricing structures, and potential cost-saving opportunities.
- Technology Adoption: Leverage advanced spend analysis software to streamline data processing, improve accuracy, and uncover deeper insights.
Key Performance Indicators (KPIs) for Spend Analysis
- Spend Visibility: The percentage of total spend that is accurately categorized and visible through the analysis process.
- Savings Identification: The amount of potential cost savings identified through spend analysis, often calculated as a percentage of total spend.
- Supplier Performance: Assess supplier performance based on metrics like on-time delivery, quality, and adherence to contract terms.
- Maverick Spending: Measure the proportion of spending that occurs outside of established procurement processes and contracts.
Benefits of Effective Spend Analysis
- Cost Savings: By identifying areas of inefficiency and opportunities for negotiation with suppliers, organizations can achieve substantial cost savings.
- Strategic Sourcing: Spend analysis helps in making informed decisions about sourcing strategies, leading to better supplier selection and improved relationships.
- Risk Management: Analyzing spending patterns can reveal potential risks in the supply chain, allowing organizations to proactively address them.
- Compliance Improvement: Spend analysis helps ensure compliance with procurement policies and contracts, reducing the likelihood of maverick spending.
- Informed Decision-Making: With accurate spend insights, organizations can make data-driven decisions that align with their overall business strategy.
Spend Analysis 2023 Updates
A lot is happening in the procurement industry. Some are worth taking note of. In this section, we include the latest spend analysis updates of 2023. This section is regularly updated. (So, bookmark this page and visit again!)
Reduce Spend Cost, A Key Priority for CPOs
According to The Hackett Group's Key Issues Study, spend cost reduction is a key priority for the CPOs. The paper includes 10 issues procurement teams need to act on now, which lists reducing spend cost at the top.
Other procurement priorities on the list are reducing supply risk for supply continuity, acting as a strategic advisor to the business, boosting the digital transformation of procurement, and improving procurement agility. Increasing spend influence is another area, per the study, that CPOs are focusing on.
The latest research by The Hackett Group provides some interesting insights, pointing at the emerging and deepening trends that come on the back of the COVID-19 outbreak. For instance, corporate sustainability made it for the first time on this top 10 list.
Also, while reducing spend cost was always a task for procurement teams, it's not their biggest priority owing to the ongoing pandemic and its recovery phase. This puts investment in spend analytics even more important, prompting procurement experts to rely extensively on procurement intelligence that effectively navigates their sourcing strategy and overall risk management.
(Source)
Spend Analysis: Book recommendations
Spend Analysis: The Window Into Strategic Sourcing
Written by Kirit Pandit and Haralambos Marmanis, this book was originally published in 2008 and it still remains one of the favorites for procurement experts. It gives a holistic view of the subject, making it a must-read for executives in procurement, finance, supply chain management, and operations.
The book takes the readers through the basics like what is spend analysis and why it's important. It also provides technical details and in-depth insights, aiming to arm consultants and practitioners with practical understanding and toolkit to achieve the desired performance.
Add this book to your reading list if you want to expand your knowledge and dexterity of strategic sourcing and how smart spend analysis can unlock greater sourcing returns for a company. Learn how to identity cost reduction opportunities, negotiate results, prioritize sourcing projects and track important KPIs. Give 'Spend Analysis- The Window Into Strategic Sourcing' a read. The book is rated 4.8/5 on Amazon.
Get the preview of this book here.
Spend Analysis FAQs
What is procurement spend analysis?
Spend analysis involves a thorough analysis of company expenditure. Understanding spend analysis in procurement is vital for any business, which includes gathering all the relevant data and making sense of it so that the company is aware of its expenditure. Spend analysis reports capture spend data that includes information like where the company is buying from. The report also addresses the how, when, and what. However, many companies often fall short to make the most of procurement spend analysis because of insufficient spend data, lack of training, and a lack of standardization.
Why spend analysis is important for organizations?
Spend analysis unlocks a plethora of opportunities for organizations, enabling their supply chain and subsequent business growth. It helps them minimize maverick buying, boost delivery performance, benchmark performance, identify price arbitrages, manage risks, and make the most of working capital. These are only a few direct ways how procurement spend analysis can help an organization. There are plenty more reasons why many organizations treat spend analysis as a priority.
How to do spend analysis?
Based on their unique needs and factors, different companies can adopt different approaches with spend analysis. Broadly put though, doing spend analysis involves identifying the source of expenditure, gathering and centralizing the relevant data, cleaning that data to eliminate errors, grouping your suppliers, categorizing your spend, analyzing the spend data, and repeating this all over again every time you do spend analysis.
How to reduce cost through procurement spend analysis?
Spend analysis is one of the key strategies for procurement teams to reduce cost. It helps identify where your money is going. Once you're aware of it, you can take definite measures to cut back on irrelevant, less important expenditures. The key here is recording high-quality data, failing at which can result in poor spend analysis. Following the analysis, once you have clear visibility into the spend, the procurement team can then identify direct saving opportunities and outline more robust risk management and compliance strategy.
What are important spend analysis KPIs and metrics?
Which spend analysis KPI a company should prioritize depends on their objectives and goals. However, there are a few KPIs that procurement teams should closely monitor. It includes savings, cost reduction and avoidance, contribution to total spend, purchase price variance, contract pricing, supplier performance, supplier management, and maverick spending.
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A thriving sourcing process depends on the ability of organizations to comprehensively understand their spending. Tap on procurement intelligence and ace spend analysis. Check out Beroe LiVE.Ai™
Actionable spend analysis intelligence on 1200+ categories
Optimize your sourcing process and discover cost-saving opportunities. With procurement spend analysis, unlock the limitless potential of your business. Beroe brings actionable intelligence on 550+ categories to enable effective spend analysis in procurement. Now, leverage advanced supplier spend analysis to reduce spend cost and boost your company's bottom line. Add to your arsenal and achieve the desired business performance.