Analyzing spend data from each buying resource, cleaning that data, analyzing that data, and categorizing that data is essential to understanding spending patterns and identifying savings opportunities. An analysis of spending may include data from purchases, payments, payments with P-cards, and credit cards. It is the responsibility of procurement/strategy sourcing experts to analyze expenditures within the organization. Budget owners and managers can also gain insight from the data besides sourcing experts.
As you have probably experienced, if you do not have the right tools and technologies set up, performing spend analysis can be overwhelming.
You can use the spend analysis tool to conduct your analysis using their fundamental features. You don’t need these tools to conduct spend analysis; we’ll discuss how to do it without them as well.
Here are some basics about spend analysis.
Visibility, analysis, and process are the three main components of spend analysis. In influencing these three zones, you can see where you spend your money, with whom you spend it, and how effective the results are.
Visibility of spending:
By analyzing your spending in six steps, you will gain an overall view. It doesn’t matter whether it’s your first or thirty-first spend analysis. It needs to be successful. But how? The use of key performance indicators (KPIs) helps you track your success. To successfully analyze your spending, you need visibility. Visibility is key to improving savings.
Analysis of the spending:
As soon as your data has been cleaned up and categorized, it is ready for analysis. Use supplier data to identify trends and ensure your pricing is competitive. You can use this pool of aggregated spend data to understand where and with whom your money is being spent. A CPO or CFO can analyze the resulting data to identify trends in spending that occur within your company. In addition to inventory management, budgeting, and planning, strategic sourcing can be achieved using this information.
Improving the procurement process:
The planning stage here enables you to implement a course correction if necessary or start setting out your process guide. Your spend analysis provides the credibility that you need to start improving your processes. Your procurement process can be transformed from technical to strategic by using this data. Here’s how. Because it is fact-based, these data can be used to improve decision-making and behavior changes. If, for instance, you create a category-by-category report, you can then review how processes and behaviors have changed after your next analysis of how you spend your money.
An organization’s expenses are analyzed by gathering historical data to answer questions about who, what, when, where, and why.
● We are buying what?
● What are the buyers?
● How are we going to buy it?
● What is the frequency of our purchases?
● Was it purchased recently?
● Do you know how much we paid?
● What was the delivery address? Where was it located?
● Were we promised what we got?
● In comparison with previous years, what is the data like?
Spend Analysis Benefits
A spend analysis program has many advantages; according to APQC, best-in-class organizations have lowered their procurement costs due to shortened cycle times after implementing this program.
Your team and senior management should define use cases in advance to establish an information structure and clear data upfront.
Let’s look first at some benefits of spend analysis and its use cases before we get into how to conduct it.
● Identifying opportunities for saving
○ Identifying opportunities for cost reduction or savings is a common use case. Purchasing experts are tasked with reducing costs, and they require information on online items to develop a savings pipeline.
○ The correct use of spend analysis can help procurement professionals reach their savings goals and better forecast their future savings for the next quarter, month, or year.
● Reporting diversity
○ Spending with multiple vendors is the key metric organizations track. Corporate social responsibility or a desire to serve their key clients drive that need. Most customers demanded a specific amount of spending with various vendors.
○ In addition to improving understanding and spending with diverse vendors, having data in one place provides opportunities for greater engagement with diverse vendors in specific categories.
○ A sales team is required to answer RFPs with diversity reports, so having this information handy enables them to respond more quickly to RFP responses.
● Measure your spend’s visibility
○ They want better visibility into their organization’s or departments’ spending, regardless of whether they are CFOs or department budget owners. Understanding how much they spend, as well as where they spend it, is the objective.
● Predicting spending
○ A major advantage of spend analysis is the ability to forecast expenditures. It is possible to determine future expenses by utilizing the spend data in multiple teams of the organization.
○ The cost data can be used by finance and planning to understand recurring vendor expenditures alongside long-term contracts to forecast the next few years’ expenditure budgets.
○ As well as using similar data, sourcing teams can work with department owners and share their financial forecasts to help forecast vendor and category spending.
Understanding your spend management is essential for contracting and product development, as well as every financial aspect of your business strategy.
Having an understanding of where and how your money is spent enables you to make more informed decisions about it.