Below is a complete guide to procurement spend analysis for those wanting to get familiar with important aspects of spend analysis. Read through the article to find out everything about spend analysis from it’s meaning, definition, advantages to examples and many more.
In this guide you’ll get answers to following questions.
- What is spend analysis?
- Why do you need procurement Spend analysis?
- Benefits of spend analysis.
- Steps to do spend analysis.
- Different types of spend analysis.
Without further ado, let’s begin.
What Is Spend Analysis?
Spend analysis refers to the process of analyzing procurement spends of both current and historical spending in order to increase efficiency of the organization by cutting down on cost and improving relationship with supplier. In other words procurement spend analysis is the process of collecting, cleansing, classifying and then analyzing this data with the help of either a software or by using off spend cubes.
Difference between spend analysis and spend analytics
While both the terms are extensively used by people interchangeable but there’s a key difference to it if we go by their definitions. Spend analytics refers to the art of performing spend data management, which includes steps like collection, classifying and then merging and storing these spend data to do analysis. Whereas spend analysis is a specific action carried out for examining a particular section of data that you need. To perform spend analysis you need spend analytics.
Need For Spend Analysis
Spend analysis is the foundation of sourcing. While doing spend analysis can help you with many things like cost reduction, improved client relationship, but one of the key benefits of this process is that it increases the visibility of the business by performing certain specific activities. The data from spend analysis helps the organization identify it’s needs and take actions accordingly. With the help to data retrieved, the company can proactively asses its financial position and make plans to increase saving opportunities.
Which Type Of Data Is Most Effective?
It’s very important to collect the right data which meets the standard criteria in order to perform spend analysis effectively and efficiently. Here’s a list of criteria that the collected data should match to giveout the best results.
- Data should be retrieved from all procurements and financial records.
- The collected data should be arranged in hierarchical order and one should ensure that all required criteria are fulfilled.
- Collected data should be examined by an AI software and a human spend analyst.
By following these conditions, the accuracy and reliability of collected data will increase significantly.
Benefits Of Spend Analysis
Spend analysis is by far the most efficient analysis in all procurement but still people have doubts whether its worth investing in or not. Here are a few key benefits of spend analysis to help you understand it better.
- Significantly improves the data quality: Spend analytics is based on the data collected by companies. With the help of this data, it tells you how much and where the expenditure is done so that you can analysis and make plans to save on money. But not all companies have systematic records of data. Spend analysis helps such companies improve their data collection which will eventually make it easier for them to manage their expenses.
- Increases saving opportunities : Every company desires to increase their profits by putting their money in valuable spend opportunities. Unfortunately, not every company is capable of doing so. Primarily the obstruction faced by these companies is lack of savings. With the help of spend analysis, you can identify the areas where you’re wasting your money. In this way, by cutting down on such expenses you become capable of managing your investments with freedom and you can also start spending in profitable opportunities.
- Reduces Potential Risks: The problem that many companies face is disturbance in supply chain. This disturbance can lead to huge losses and affect both the reputation and profitability of business. To manage these risks, the use of spend analytics dashboard is done. With the help of this dashboard and analytic software, organizations can reduce the risks and effectively manage their supply chain.
- Centralizes procurement process: It’s proven that spend analysis improves driving cost and increases the efficiency of organization. Not only this, it also helps in improving financial reports and budget preparation of organizations. You will also witness a significant reduction in labor cost. Also the reports and ad-hoc can be prepared quickly.
- Improves Relationship With Supplier: The key to better supplier relationship is information. Spend analysis does the work of providing these valuable information and insights so that an organization can identify which supplier offer the highest value. Once the company identifies it’s target supplier, it can work to evolve procurement process.
Steps To Do Spend Analysis
Following are the steps to perform step analysis:
- The first step towards starting a spend analysis is identifying the data sources. Instead of going through thousands of records, go for records that include purchases like finance, marketing and procurement. Once you’re done narrowing down the data, consolidate it into a central database.
- The second most important step is known as data cleansing. Basically it refers to the process of filtering out errors and eliminating corrupt files. This process is carried out to increase the accuracy of the collected data. With clearing all the irrelevant contact are removed, typos are eliminated, codes are checked and corrected to ensure accurate information.
- The next step in this process involves customizing the data to make it presentable. This is known as data enrichment. With data enrichment spend data is made presentable by adding on missing abbreviation, giving header and correcting spellings.
- The fourth step in step analysis is specific to improving the supplier relationship. In this step, the data is grouped in a way that suppliers that offer high value can be identified and prioritized. This classification of data helps the organization improve its spend by harmonizing all transactions into a single taxonomy, making the organization gain visibility.
- After the completion of all these steps involving cleansing, enriching and then classifying the data, you now have to analyze it to identify potential saving opportunities. For example if you want to check whether you’ve negotiated the best contract with supplier or not, have a look at your data and you’ll get answers. This will also help you in negotiating better with the suppliers and knowing the best possible way of cost reduction.
Different Types Of Spend Analysis.
- Tail Spend Analysis : Basically these are the expenses a company makes on purchases that go unnoticed in procurement due to being very small in amount. In most cases this is where the companies often struggle to utilize their resources efficiently. This negligence can cause companies to loose millions of dollars annually. Spend analysis will help identify maverick spends.
- Vendor spend analysis: Doing vendor spend analysis means identifying the amount of spend that comes from critical vendors. This helps in getting the best value from these vendors and establish a good relationship.
- Category Spend Analysis: This includes understanding the breadth of category. If you’re buying same type good from different vendors and with the help of category spend analysis you can identify any leakage and ultimately fix it.
Spend analysis is the foundation of sourcing. Therefore spend analysis is a specific action carried out for examining a particular section of data that you need.