Spend analysis is, quite simply, exactly what it sounds like—analyzing how much you’re spending and what you’re spending it on. Spend analysis and procurement roughly means the same things, but there is a much deeper methodology behind the analytics.
Analyzing the spending habits of an entire purchasing and procurement department is quite different than balancing the monthly budget. Spend analysis methods in procurement take a more comprehensive look at spend, but also have the ultimate goal of improving efficiency and reducing costs.
Read on to learn more about spend analysis tools and methods, and how to apply them with respect to procurement management.
Spend Analysis Methods: Spend Analysis Tools
While some of your best spend analysis tools will be the software you use, there are three main areas of spend analysis to consider, and three concepts that are important to grasp. Essentially, you want to know how much you are spending, who you are paying the money to, and what your bottom-line ROI is on the finished product when all is said and done.
To be more technical, you would label this as spend visibility, spend analysis, and improvements on the procurement process. However, every concept is an integral part of spend analysis.
One of the most important spend analysis methods is visibility. To completely see what you are spending and what it is allocated toward, you need to perform a deep, thorough seven-step spend analysis. Once everything is clear, you can organize your data into a sourcing taxonomy so you can look for trends. Once you can identify trends, you can then make improvements to the procurement process.
Spend Analysis Methods: Spend Analysis Reports
You’ll be using spend analysis software to do the hardcore, comparative analytics for you. However, that doesn’t mean you can’t ask some questions as you begin to make your way through each procurement process or through this analytics phase.
Ask questions such as:
- What are we buying?
- How often do we buy it?
- How much did we pay?
- Who are we buying it from?
- Are we getting what is promised?
- Are there alternative sources of supply to consider?
Depending on what you need goods or services for, you may want to ask deeper questions. You also want to think about direct and indirect spend. Different types of spend analysis methods will look at where spend is allocated.
Of course, not all spend is going toward the direct payment of goods and services. There will be indirect spend, such as marketing services, maintenance costs, transportation and fleet costs, and other fees. When you run analytics software, these can all be accounted for to understand the total spend of the organization and the related procurement ROI.
Spend Analysis Methods: The Spend Analysis Process
The crux of all spend analysis methods is the process itself, which is a six- or seven-step process, depending on how you run analytics.
In order, what you want to do is:
- Identify costs. This is where you need to separate indirect from direct and any other associated costs in the procurement process or supply chain.
- Gather data. Hopefully, you have a database and software capable of running reports and analytics and data storage.
- Clean data. Before running analytics, go through the data, organize it, and make sure there were no transcription errors.
- Group suppliers. This is also a part of vendor management, but you group sub-suppliers together for better management and better leverage and understanding of spend.
- Categorize spending. You may have organized data at the outset, but this is the time to categorize the spend, not just the data itself. This is an important step since most ERP systems do not provide reports on sourcing categories in which procurement needs to source any category properly.
- Analyze the data. Using the tools at your disposal, analyze everything to identify which categories to source next and monitor the categories you sourced previously to ensure that all buying groups have switched to the newly selected suppliers.
At this point, it’s a good idea for each category manager to review updated reports to stay on top of their specific category so they have a consistent update on spending.
For more information about spend analysis methods, or to learn how we can help streamline your procurement process, contact EC Sourcing Group today at 973-936-9672.