How to Conduct a Spend Analysis to Reduce Supply Chain Costs

Supply chain management is a delicate task and changes to one function will ultimately affect the entire process. However, in order to reduce spend, improvements will need to be made. Get started by conducting a spend analysis. Here’s a breakdown of how to conduct a spend analysis and what to look for in the data to improve your operations and reduce your costs.

What is Spend Analysis?

A spend analysis is the process of cataloging business spend data and reviewing it in order to identify inefficiencies, root out unnecessary costs, remove waste and redundancies, and find gaps within the supply chain to make changes that will ultimately reduce costs. This can either be done through spend analysis software or with spend cubes.

A spend cube is a multidimensional cube with dimensions that represent data that is typically reviewed in the analysis (a sample is shown below). Sections usually include sub-categories/ variants purchased, stakeholders buying the category, and spend with other suppliers.

Benefits of Spend Analysis

Aside from identifying inefficiencies, a spend analysis offers many other benefits. Perhaps the most important benefit beyond cost reduction is improved visibility of your supply chain and corporate spending. By having greater visibility into the core of your spend, your spending patterns, and areas for potential savings, you will be better informed and prepared for more strategic and confident spending decisions.

Streamline Administrative Functions

The act of conducting a spend analysis promotes the overall efficiency of an organization, particularly in areas of procurement and documentation. A more efficient system reduces cycle time for report building and improves your relationships with vendors and clients by giving you more time to focus on other aspects of your business.

Mitigate Risk

A spend analysis should include an examination of your vendors. When you partner with a vendor, it is important to establish key performance indicators that need to be met in order to maintain that relationship. These KPIs can be quantitative or qualitative, measuring factors such as business credit scores (measured from 1 to 100, with 80 representing the baseline for a “Good” score), financial stability, on time delivery record, complaint history, or ease of issue resolution. Adherence to these performance indicators can help you reduce your costs and mitigate the risk of a late delivery or lost sale by avoiding disruptions to your supply chain.

Improving Internal Systems

Using the results of your analysis, you’ll be able to focus on improving areas of your company that can improve your business across the board. For example, you may find that your payment processing is repeatedly faulty or slow and decide that an eProcurement System will better equip your business with a more streamlined and speedier process.

Improving Relationships

Better relationships with suppliers are established when you identify the suppliers with the best value and work with them to improve the procurement process. Non-performing suppliers can be rooted out and replaced or negotiated with for better contract compliance. Begin using scorecards to continually evaluate the performance of your suppliers.

Process for Conducting a Spend Analysis

A spend analysis is essential for identifying the areas in which your company overspends, or in which cost or spend can be reduced. The analysis can identify things such as contracts not being fulfilled, turnaround times not meeting expectations, overpayments due to duplicate invoices, compliance issues, costs incurred from late fees or penalties, and so much more. To identify the issues within your supply chain, your procurement practitioner or supply chain practitioner should follow these steps:

1. Collect Spend Data

You’ll need to collect invoices and payments from all of your departments, as well as associated plants and business units, accounts payable, eProcurement Systems, the general ledger, and financial software.

The data collected must represent a specific time period – quarter, year, or several years of records – to get an accurate picture of your spending and recurring expenses.

Some of the most common procurement spend analysis data sources include:

• Enterprise Resource Planning (ERP) tools
• General ledger
• Purchase orders
• Data from suppliers
• Internal systems

Once collected, your data needs to be placed in a single database. There are a wide range of programs designed to decrypt and assimilate all of the different formats, languages, and currencies. These software solutions can be created in-house or licensed from an existing provider such as?Procurify?or?SMART by GEP.

2. Cleanse Data

Cleaning the data you’ve collected is about removing inaccuracies, standardizing the information from its different sources, removing redundancies and corrupt records, and identifying incomplete or irrelevant contacts. All the data will need to be validated by tallying receipts, inventory, etc. Duplicate entries should be checked for double payments.

As mentioned in the previous section, there are a number of spend analysis tools to help with standardized formatting and consolidation, though fields such as order origination or purpose may need to be established.

3. Spend Data Classification

To better understand the data, it must be classified or categorized into areas of similar expenses such as:

• Suppliers
• Software
• Marketing expenses
• Office supplies
• Inventory
• IT services
• Travel
• Outsourced services
• Legal

Once the data is categorized, it can be further broken down by each section. Supplier information, for example, should include subcategories for parts, transport costs, contracts, etc.

After dividing the data, you’re able to do a more thorough examination of each section.

4. Analyzing the Data

Once all the data is collected and categorized, you can evaluate the spend points individually, create aggregates, percentages, and source strategies for resolving pain points and areas where you can improve.

You will be able to determine whether or not your buyers are purchasing from preferred suppliers, identify opportunities to reduce suppliers and negotiate better rates. You’ll also find redundancies, overpayments, maverick spending, and more.

While procurement specialists handling the analysis can go through and identify these pain points themselves, it will likely take more time. The spend analysis software that you use to organize and cleanse the data should also be able to help you sort through the data and visualize any issues an opportunities with an easily digestible dashboard. Some systems will even deliver strategies for correcting these issues.

5. Implement Strategies

After identifying all the areas you can improve, establish goals and identify strategies for reaching them. Those strategies can be implemented in phases or department-wide changes can be made at once.

Use the data to your advantage. If you are trying to negotiate better rates with your supplier, don’t ask them for suggestions on doing so. Instead, talk about specific parts, contract details, etc.

Strategies for Reducing Costs to Supply Chain

After the spend analysis is complete and data is analyzed, strategies can be formulated for both long- and short-term savings. The data from the analysis can then be used as a baseline, or control, to measure improvements after the implementation of those strategies. Some of the most common cost-reduction strategies include:

• Switching suppliers
• Negotiating volume discounts
• Eliminating duplicate orders
• Consolidating orders
• Reduce overbuying by using VMI services
• Resolve currency conversion issues by identifying whether or not you’re really saving money by sourcing from your current location
• Implement more centralized, controlled procurement to reduce maverick spending

What to Look for in a Spend Analysis

There are two common methods for analyzing your data and identifying the areas of opportunity for reducing cost and improving your business:

• Should-cost analysis:?a comparison of the estimate of what something should cost to how much is actually being paid based on material cost, labor rates, overhead, and profit margin. Determining this data is a labor-intensive process, with engineering teams producing the necessary labor amount, procurement dictating the material cost, and supply chain estimating the labor rates and expected profit margin. The results provided by a should-cost analysis can provide an extremely accurate total amount that you are overspending and help guide future negotiations with vendors or suppliers.
• Cost versus mass analysis:?helps to compare current versus potential suppliers by providing a closer look at the parts that have a higher cost per mass – such as fasteners and other hardware items – and identifying opportunities for redesign or of finding a more cost-efficient supplier while still retaining quality.

There are also indicators you can use to pinpoint the areas that need change. These indicators include:

• A large amount of spend where contracts do not exist
• Significant Purchase Price Variant (PPV) - which shows that you are either paying too much or standard costs aren’t accurate
• Too many suppliers - the more you buy from one supplier the more you save
• Annually inflating prices - you might not be “minding the store”
• Contract violations often resulting in spend leakage from back orders or inventory surplus that raises the costs of your operation

Spending Forecast

Identifying top spend categories and recurring payments, manufacturing and distribution companies are better able to prioritize and negotiate key contracts and pricing and make better spending decisions.

Data collected will also enable you to track and notice trends, which will allow you to plan for the ebbs and flows that will affect your supply chain and your bottom line. Automated systems such as a Purchase Control System can help with budget forecasting to make sure all future spending is as efficient as it should be.

Reducing Supply Chain Costs

One of the most common methods of reducing supply chain and procurement costs is to negotiate with your vendors or consolidate suppliers. This is especially true in the case of inventory with a higher cost per mass, such as hardware items like fasteners.

Huyett is a leader in providing non-threaded fasteners such as washers, pins, retaining rings, grease fittings, key stock, and more. We have on-site manufacturing capabilities for parts that are hard to procure and also source from industry-leading and low-cost producers. We either have what you need or we can make it, helping you reduce your supply chain costs and improve your business relationships.