Detailed spend analysis and review of spend data by product, vendors, and expenditure category is essential for procurement spend management.
This article defines spend analysis, gives a spend analysis example, lists and describes spend analysis steps, and explains why spend analysis is important.
What is Spend Analysis?
Spend analysis is the repetitive process of grouping and reviewing procurement data and processes, vendors in the supply chain, and purchases by category to find cost reduction and operational improvement. Spend analysis improves strategic sourcing, vendor selection, supplier management, contract pricing, payment terms, spend management, financial results, and cash flow.
Spend analysis includes identifying all sources of spend data within a company by business unit and the entire organization, cleaning the data for errors, applying standard formatting, centralizing the location of spend data, grouping spend data by supplier parent name and standardized spending categories, and analyzing results and methods to find actionable insights for potential savings.
What are Direct Spend and Indirect Spend in Spend Analysis?
Part of spend analysis is grouping expenditures into direct and indirect spend categories. Direct spend is for product inventory and supplies used directly in manufacturing products. Indirect spend includes categories for other types of expenditures.
Spend Analysis Example
As a spend analysis example, a multi-entity manufacturing company places inventory parts orders with vendors from different business units of a Fortune 500 company. In its spend analysis review, suppliers are grouped by their parent company and spending categories. These raw inventory purchases are considered direct spend by the manufacturer preparing a comprehensive spend analysis.
Through the spend analysis process, spend data is identified from all data sources to aggregate it, cleaned for errors and consistency, including standard formatting, and centralized. The data is analyzed with trends and outlier exceptions. Purchase order payment terms, prices, and quantities of inventory purchased from these vendors are compared to competing vendors in the system.
Results: The manufacturing company’s procurement teams may detect a savings opportunity to renegotiate with existing vendors to receive better pricing or quantity discounts or select different vendors. Procurement processes may be improved.
How Does a Business Implement Spend Analysis Efficiently?
Spend analysis software enables automation of processes, including spend data centralization and real-time dashboards with category and overall trends and KPI comparisons for business intelligence. With the centralization of spend data from all sources, cleaning and data format standardization may automatically occur using the software.
Procurement and payables automation software is a SaaS add-on app to your ERP or accounting software that includes an integrated centralized supplier portal with spend data. With Tipalti’s acquisition of Approve.com in 2021, scalable Tipalti AP automation software “automates the entire accounts payable cycle from procurement through to payment. The Approve.com platform streamlines requisitions, approvals, real-time budgets, and vendor onboarding, while delivering real-time spend controls and insights.”
How to Conduct Spend Analysis
7 Steps in conducting spend analysis on a repeatable cycle are:
Identify all sources of spend data.
Businesses may find spend data related to their accounts payable system, e-Procurement system, global mass payments, tail spend, and the ERP system. This information should flow to the general ledger for accounting. One problem of spend analysis is that spend data may be included in siloed systems that aren’t integrated company-wide. Spend data for all business units must be captured.
Clean spend data.
Cleaning data includes standardizing formats, eliminating errors, and handling any blank data fields. With disparate sources of spend data, standard formatting may not be used in the course of business. Data cleaning is a necessary step for data management and accurate analysis in data science.
Collect spend data in accessible, centralized storage.
Access and combine spend data into a centralized database for performing the spend analysis. This step ensures that all relevant spend data is analyzed for meaningful spend analysis.
Categorize and group spend data.
Determine specific standardized direct and indirect spend categories (taxonomy for classification) that your business wants to track. Group spend data by these spend categories, vendors, and their parent corporate entities. When the corporate parent of each vendor is identified as well as the direct vendor, your business may qualify for more quantity discounts or better pricing through negotiation.
Automate the analysis of spend data, including reports.
To automate analysis, use spend software as your spend analysis solution. With the right automation software, you’ll increase supplier and spend visibility and spending patterns, reduce errors, improve spend control and vendor management in a centralized system with standard formatting, and detect cost-saving opportunities.
Decide about savings opportunities and better procurement processes.
Base your decision-making on spend analysis visibility, reports, and recommendations. When making decisions about potential changes to purchasing for cost savings or procurement processes that may reduce procurement costs, apply a cost-benefit analysis filter.
For example, on a cost-benefit analysis basis, maverick purchases for low-cost repetitive purchases like office supplies may be best handled in a software-based tail spend management e-procurement system with preferred vendors outside the normal purchasing process.
Standard procurement spend uses workflows by procurement professionals like processing purchase requisitions and purchase orders. Instead, if this maverick spending is adequately controlled, employees can use p-cards, which are company purchasing cards or procurement cards, or other company-approved payment methods.
Is it best to split up the order to more than one approved vendor to reduce delivery and product sourcing risk and get better pricing for high-dollar purchase orders?
Is it beneficial to have single sources for lower-cost items to reduce the number of vendors in the system, lowering procurement costs?
These are the types of decisions that spend analysis can help your business make for strategic sourcing.
After you complete the spend analysis number crunching and graphical reporting for this procurement cycle, implement your decisions and make impactful changes to save money and improve procurement processes and controls. Remember that spend analysis is a repeatable process that should continue.
Why is Spend Analysis Important?
Spend analysis is important because lack of visibility into spend data, runaway costs, and poor strategic sourcing, vendor selection, and supply chain management in procurement results in wasted money that adds up over time. If spend analysis isn’t performed as part of the spend management process, a company may experience reduced profitability and fall short of achieving financial and business goals.
To further understand the importance of spend analysis and analytics, McKinsey & Company includes the following quote in its article, The role of spend analytics in the next normal:
“The most immediate task for spend analytics is to provide transparency and insight into where cash is spent. After all, a procurement organization’s primary objective is usually to optimize external spend with suppliers—commonly 40 to 80 percent of a company’s total cost—and realize a source of competitive advantage in terms of cost, quality, availability, and (increasingly) sustainability. This begins with achieving visibility into external spend, making it easier for the organization to identify opportunities to reduce spending across supply markets (even across multiple categories and subcategories), suppliers, and locations, as well as volumes and prices.”
With good decision-making and implementation from spend analysis, companies can significantly improve their cash flow, reduce spending, and increase the procurement team’s contribution to the company.
The spend analysis process is an essential method for gaining supply chain vendor and spend visibility with category management, a real-time spend analysis dashboard, reports for decision-making, and spend data insights from procurement history.
Businesses can use a spend analytics solution to achieve cost savings and improve contract management, prices, and payment terms by improving procurement operations, sourcing strategy, and controls.
For spend analysis to be effective, identify, clean, and group or categorize spend data from all software, including integrated automated payables, payments, and procurement add-ons, the ERP system (including the general ledger), and any siloed systems from all applicable business entities.
With spend analysis, businesses can lower procurement costs by reducing procurement cycle time. Procurement cycle time is the number of days between generating and using the approved purchase requisition to create a purchase order and receiving the ordered goods.
Companies can perform spend analysis best with automated software spend analysis tools.
Spend analysis for procurement yields cost savings optimization and helps businesses discover operational improvements for procurement.