Going through the spend analysis steps is a very important part of the procurement management process. You can’t go through procurement and purchasing without spending money—but spend analysis involves analyzing how that money is spent to decrease costs, increase efficiency, and even improve relationships with your suppliers and build lasting business relationships.
Read on to learn why cost spend analysis is so important and what the general spend analysis steps are to reduce spend at your company.
Spend Analysis Steps: Asking Questions
There are specific steps you can categorize and group analyses. Still, before you begin a full analysis, it’s important to ask certain questions about spend in the procurement and purchasing department. Keep in mind these questions should be asked over time and shouldn’t pertain to one particular project, although you can go through spend analysis steps and break down each particular project for a full and comprehensive look at spending.
Think about these questions as part of your spend analysis tools:
- What is our total spend?
- How often do we buy?
- Who are we buying it from?
- Can we consolidate the spend with fewer suppliers?
- Which spend categories are we buying?
- Who is buying it (which departments or divisions)?
- When did we buy it?
- How much did we pay?
- How does data compare to previous purchases or from similar suppliers?
The above questions are a head start and give you a look at where money is going when it comes to purchasing directly from a supplier, but there is much more to spend analysis than how much you pay a supplier for goods and services. You also have to think about indirect vs. direct spending.
The questions and your answers are important to understand how your company spends today. Direct spend is related to purchases for materials that go into the product you sell. Indirect spending would include marketing costs, software costs, administrative costs, IT, fleet and transportation services, waste disposal, insurance and health services, etc.
Asking these questions can help you reduce spend in the long run.
Spend Analysis Steps: Breaking Down Costs
There are roughly seven steps you should take when it comes to general spend analysis.
- Identify all of your spending, including all of the data sources where spend occurs at your company. This will include direct and indirect costs as outlined above. Although, you must identify all of them, not just a few. This means all source systems, ERP, P-Card, travel, , including ones that are not at your physical location, if those exist.
- Next, you’ll need to take all the data and put the values into a database using a specific taxonomy. There are many different types of software beyond the regular spreadsheet, which may have a learning curve.
- Organize your data. If you perform work on an international level, you may have to convert currencies or have other formatting issues. You will need to group all instances of one supplier into one supplier “group” to ensure you know the total spend with each supplier.
- Make sure you have vendor management software that groups all suppliers together for easy reference. This is not only a vital part of the spend analysis steps but can help in other parts of procurement management also.
- Categorize spending. This is where it may be useful to refer to indirect and direct costs, which should have been organized in the first step and group spend in other creative ways. Things like on contract or not; with a preferred supplier or not, and so on. These are just some examples that can be done. It really comes down to what is important for you.
- Lastly, analyze the data. You should use software that does this for you.
- Update the spend monthly or at a minimum quarterly so you can monitor compliance, essentially confirming that your organization is buying from the right suppliers.
Make sure you run through the spend analysis steps continually and often to keep track of where your money is going and to find ways you can improve. For more information about spend analysis steps or software, contact EC Sourcing Group today by calling 973-936-9672 to see how we can help.