Procurement Spend Analysis: Importance, Challenges, and best Practices.

By?Rafael Vela?/ March 05, 2023

Procurement spend analysis, or simply spend analysis, is the process of analyzing and reviewing a company's spending to identify opportunities for cost-saving, supplier consolidation, and improving procurement practices in general.

This process involves gathering and analyzing data on all procurement activities, including supplier selection, purchase orders, invoices, and payment history.

Spend analysis helps you look back at past performance and helps you perform an assessment of future performance as well as trends. Some of the questions answered when performing a spend analysis are:

• What are we buying?
• How much have we paid?
• How much have we bought?
• Who are we buying from?
• Who is buying?
• On what terms did we buy?
• How often do we buy?
• When did we buy it?
• Are we getting what had been promised?
• Where were the items delivered to (geographical location)?
• How does the data compare to previous years?
• How many suppliers do we have and how much do we buy from each one?
• more.

BENEFITS OF SPEND ANALYSIS.

The following are some of the key benefits of spend analysis:

• Cost Reduction: Helps to identify the areas where the company can reduce costs, negotiate better deals with suppliers, and consolidate suppliers. By reducing costs via procurement organizations can enhance profitability, which is a crucial factor in today's highly competitive business environment.
• Improved Supplier Management: Spend analysis helps organizations identify the best suppliers in terms of quality, price, and delivery. It also helps to identify the suppliers that are not meeting the company's requirements, enabling the organization to take corrective actions.
• Enhanced Decision Making: The process provides organizations with valuable insights into their procurement process. By analyzing data on procurement spend, organizations can make informed decisions about supplier selection, inventory management, and contract negotiation.
• Mitigate Supply Chain Risks: It is possible to identify and mitigate supply chain risks, such as supplier disruptions, quality issues, and compliance failures. By proactively managing these risks, organizations can minimize the impact on their customers, ensure product quality and safety, and maintain their reputation.
• Faster Delivery Times: Spend analysis helps identify supply chain performance issues (bottlenecks and other inefficiencies), and areas where they can streamline their supply chain processes. This can lead to faster delivery times, reduced lead times, and improved overall supply chain performance, which can positively impact customer service.

THE PROCESS.

Performing a spend analysis involves several steps:

• Step 1: Define the Scope of the Analysis. The first step is to define the scope of the analysis, including the period covered, the categories of spend, and the level of detail required. This will help to ensure that the analysis is focused and aligned with the organization's objectives.
• Step 2: Collect Data. The next step is to collect data on all procurement activities, including supplier selection, purchase orders, invoices, and payment history. This data should be collected from various sources, such as procurement systems, financial systems, and supplier portals.
• Step 3: Cleanse and Normalize Data. Once the data is collected, it should be cleansed and normalized to ensure that it is accurate and consistent. This involves identifying and correcting errors, standardizing data formats, and removing duplicates.
• Step 4: Categorize Spend. The next step is to categorize spend into relevant categories, such as direct and indirect spend, and further subcategories, such as travel and office supplies. This will help to identify the areas where the company can reduce costs and negotiate better deals with suppliers.
• Step 5: Analyze Spend Data. Once the spend is categorized, the data should be analyzed to identify patterns and trends in the spend. This includes identifying the top suppliers, the frequency of purchases, and the cost per unit. This analysis will help to identify the areas where the company can improve procurement practices and reduce costs.
• Step 6: Identify Opportunities for Cost Reduction. Based on the analysis, opportunities for cost reduction should be identified. This includes identifying suppliers with higher prices and negotiating better deals with them, consolidating suppliers to reduce administrative costs, identifying areas where the company can reduce spend, leaning out the supplier base, etc.
• Step 7: Develop an Action Plan. Once the opportunities for cost reduction have been identified, an action plan should be developed to implement the changes. This plan should include specific actions, timelines, targets, and responsible parties.
• Step 8: Monitor and Track Progress. Finally, the progress of the action plan should be monitored and tracked to ensure that the desired outcomes are achieved. This includes monitoring supplier performance, tracking savings, and identifying areas for further improvement.

Performing a spend analysis requires a structured approach and a focus on data quality. By following the above steps, organizations can identify areas for cost reduction, improve supplier management, and enhance decision-making.

THE CHALLENGES.

As in everything else regarding procurement and SCM there are challenges that show up when executing a Spend Analysis. These are some of the major challenges I have encountered in my +30 years of experience in procurement:

• Poor Data Quality: Data may be incomplete, inconsistent, or inaccurate, leading to incorrect conclusions and suboptimal decisions.
• Complex Data: The analysis involves analyzing large amounts of data from various sources. The complexity of the data can make it difficult to analyze, leading to delayed results.
• Data Integration: Spend analysis requires data from various sources, such as purchase orders, invoices, and payment history. Integrating data from different sources and usually different systems can be a complex process, requiring significant time and resources.

As you can also imagine there are some Best Practices that have passed the test of time and have proven quite effective.

BEST PRACTICES.

The following are some of the best practices recommended for effective spend analysis:

• Data Quality: It is essential to ensure that data quality is maintained throughout the analysis process. Organizations should establish data quality standards, implement data validation checks, and clean data regularly.
• Data Integration: Organizations should invest in technology solutions that integrate data from various sources to ensure accurate and timely analysis. Data integration solutions can automate the process, saving time and resources.
• Data Visualization: Data visualization tools help to present data in a meaningful way, making it easier to understand and analyze. Organizations should invest in data visualization tools to improve the effectiveness of procurement spend analysis.
• Cross-functional team involvement: To ensure the accuracy and completeness of the analysis, it is recommended to involve cross-functional teams, including procurement, finance, and IT. This collaboration can help ensure that the analysis captures all relevant data and insights from various perspectives.
• Use specialized technology: The use of specialized procurement spend analysis software can help streamline the process and provide more advanced analytical capabilities, such as data visualization and predictive analytics. (Spreadsheets are out of the question!)

The result of a successfully completed spend analysis is a comprehensive understanding of the organization's spending patterns and behaviors. The organization gets insights into its procurement practices, supplier performance, cost structures, areas for cost reduction, and procurement improvement. On top of that the company ends up being better equipped to manage its procurement activities, make informed decisions, and achieve its strategic objectives.

Spend analysis can have a significant impact on the organization and this enables giving customers better services and products with greater speed, quality, and reliability.

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