A Guide to Conducting Effective Spend Analysis
Many businesses employ some sort of strategic sourcing program that can move beyond cost-cutting and make a significant impact on a company’s budget and growth. This has become a crucial factor as much spending goes unchallenged as long it is within the company’s radar.
However, as the business grows and there are multiple investors involved, spending can become a maverick that affects procurement altogether. To avoid this, you need to implement procurement intelligence by conducting spend analysis regularly. Now understand the basics of spend analysis and invest intelligently to navigate your company in the right direction using Cflow.
Table of Contents
What is Spend Analysis?
Spend analysis can be defined as collecting, reviewing, and analyzing expenditure data to decrease procurement costs. Spend analysis is the foundational concept of organizational procurement that helps teams figure out how to source the best resources, identify saving opportunities, mitigate risks, and optimize organizational buying power.
Reports from spend analysis will provide useful insights on measuring improvement and devise strategies for realizing short and long-term savings. As procurement becomes more strategic, spend analysis becomes the fundamental approach that guides organizational leaders in maximizing value for their company’s dollar.
Data for spend analysis includes the entire purchase history and it should help answer who, what, when, how, and why of your organization’s expenditure.
- What are you buying?
- From whom you are buying?
- Which department is buying?
- How often do you buy?
- When do you buy it?
- How much are you paying?
- Are you satisfied with the purchase?
- Where are the items delivered?
- How do the price and spending data compare to previous years?
There are two types of spend – direct and indirect.
The direct spend in procurement includes the direct cost, direct spend sources, the raw materials, and the supplies needed for manufacturing the product to be sold to your customers. D2C (direct-to-consumer) companies and brands usually have high volumes of direct spending. For instance, the direct spend of a car manufacturer would account for the spend on steel for the car’s body, electronic parts inside the card, plastic for interiors and dials, and rubber for the tires.
Meanwhile, the indirect spending or the indirect cost happens behind the scenes. This includes costs to support daily operations, internal workflows, team processes, and internal resources like office supplies, equipment, wages, and other costs.
In addition to this, there are two more types of spend – maverick spending and tail spending.
Maverick spending happens when purchases are more outside the organization that doesn’t come under the organization’s purchasing guidelines. Maverick spending doesn’t include buying decisions, lost opportunities, and increased compliance risks.
Tail spending can be defined by the 80/20 rule – that is 80% transactions but only 20% spend volume. Tail spends oversee and categorizes expenses related to non-strategic suppliers. Some common examples of tail spend include signage and display, gifts, premiums, office products, facilities, uniforms and apparel, and temporary labor.
Importance of Spend Analysis
In the context of procurement, spending analysis forms the backbone of your procurement activities. It is an invaluable tool that provides companies with the necessary insights for making strategic decisions for significant cost reduction. It empowers the procurement team to turn data into strategic action to identify inefficiencies, remove bottlenecks, improve supplier relationships, and make better negotiations.
Spend Analysis KPIs
The procurement data can be sliced and diced to form different key performance indicators (KPIs). These KPIs can be set to suit your organization’s procurement strategy. Here are some of the common spend analytics KPIs and metrics:
- Spending is based on procurement function and the number of people involved per commodity or service
- Number of transactions and distribution of transactions based on currency
- Spending and payment terms and conditions
- Total expenditure by supplier
- Material prices and their fluctuations
- Spending distribution of the key customers
- Average purchase order value
- Key figures and reports regarding compliance (eg. maverick buying quote)
- Number of transactions by commodity or category
- Spend by commodity or category
- Cost avoidance
- Cost reduction
- Contract Compliance
- Savings
How To Conduct Spend Analysis?
Conducting spend analysis is an essential cost-saving component for any business. Unless you have full visibility over your product development you cannot do an effective analysis.
Experienced procurement professionals and sourcing managers typically achieve a 3% to 5% cost reduction on procurement spending using spend analysis. Some common data sources for your spend analysis include data from the general ledger, ERP tools, company credit cards, payroll tools, purchase orders, transaction data, data from suppliers, and other internal systems. You simply have to investigate and put in the effort to get a clearer picture of the spending data.
After collecting all the relevant data you can start analyzing it. These are the steps that you can follow to do an effective spend analysis:
Goals and objectives
This is the first step where you clearly define the goals and objectives for the questions that need to be answered. Identify which type of data sources you will be using for spending analysis.
Setting up goals and objectives helps you get the complete picture of what type of spending that company should focus on and how to optimize the spending. You need to be able to visibly see who’s spending on what and why. The effectiveness of your analysis depends on your goals and objectives.
Consolidate data
You’ve set goals and identified which data to use for analysis, now you need to consolidate all the spending data in a centralized location. Since the data can be accessed by different teams for doing the analysis, it is important to convert it to a common format.
If your data is in different formats, different languages, dates, and currencies it will be difficult to consolidate. Use a specialized tool to convert into a common format before starting the analysis. If you are using a single platform like Cflow for consolidating your spend data, then this step would be much easier.
Data cleansing
This is a crucial step in spend analysis – cleaning your data. This includes correcting errors, eliminating outliers, getting rid of duplicate data, and correcting formats and calculations. You need to standardize your spend data for easy viewing. You need to be thorough at cleaning your data as the more accurate your data, the more effective your spend analysis report will be.
Enrich
You need to establish clear guidelines for maintaining consistency throughout your database. Enriching your data means refining and improving the raw data and standardizing it for easy analysis.
Make sure the supplier names are standardized throughout all the databases and group subsidiaries of the same parent company to clearly understand how your company deals with each supplier. Ensure there are no redundancies or inconsistencies in your spend data to avoid confusion.
Grouping
Now the data is cleaned, standardized, and verified you can group it according to the categorization. You can group them by
- UNSPSC – United Nations Standard Products and Services Code
- ECLASS
- Company’s custom-made taxonomy – based on the business team, vendor name, spend category, frequency, etc.
This will help see where the company’s dollars are spent as you can categorize each transaction under its appropriate category. This enhances spend visibility and makes a great impact on decision-making.
Analysis
Analyze your spend data. This is the step where you will be measuring your data against spend analysis KPIs. This will give you a better insight into how you are performing. You can also use procurement software like Cflow to “slice and dice” your goals and metrics from step one.
For instance, if your goal is to optimize your supply chain, then you should see how much is spent on underperforming suppliers. You could then shift that spend towards better suppliers who are more reliable and less riskier.
If your goal is to enhance contract management, then you could make improvements in spending on efficient contracting by identifying redundant subscriptions, identifying potential contracts, and revising contract terms with shared initiatives.
Visualization
- OLAP reports – Online analytical processing (OLAP) analyzes huge amounts of data at high speeds. The analysis is generally multi-dimensional and the data is stored in centralized data warehouses. This is a powerful interactive type of report that includes a multi-dimensional conceptual view of the spending data that can be compared in many different ways to make informed decisions.
- Pivot tables – these are convenient and flexible ways to visualize data in summary tables. You can be able to see the same information in different ways which is useful when analyzing large amounts of data.
- Cross-tabular reports – these reports are a little advanced to pivot tables that can be used when you start nesting data into more dimensions. The data will be segregated into rows and columns for each dimension.
- Graphical reports – this type of report enables different types of visualizations such as 3d bar, 2d bar, line, area, pie, box, plot, error bar charts, etc.
- Waterfall chart – these are standard charts but are very useful in visualizing data in a very simplified manner that is easy to understand.
- Pareto chart – these charts are extremely useful in identifying opportunities that clearly show the 80/20 rule – 80% accounts for the spend and 20% accounts for top suppliers or commodities.
- Treemap – this is a visualization method where the hierarchical data is proportionally divided into sized squares. The relative spending size is shown by the size of the block. Treemaps are sophisticated and interactive reports and are particularly helpful in understanding spending patterns on a single dimension such as supplier, contract, etc.
- Map report – these are more of a geographical map that helps identify spending patterns by location. You can click a particular country and a specific chart will show the spend data.
Refine and repeat
Now that you have done the spending analysis, you should continuously update your data to ensure that everyone adheres to the standards and identifies potential saving opportunities. Keep detailed records of each analysis that helps you forecast risks and avoid maverick spending. It also gives a better understanding of how to optimally spend on the needed resources.
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Benefits of Spend Analysis
Cost reduction is the main focus for many organizations and therefore they spend more time doing spend analysis. From enhancing operational efficiency to forecasting risks, spend analysis has several benefits.
- Spend analysis can streamline your process for optimal efficiency contributing to cost effectiveness.
- By automating procurement analysis you can see a significant reduction in cycle time for creating reports, and ad-hoc analyses, reducing labor costs that give your team more time to focus on high-value strategic activities.
- If your business is growing rapidly it is easy to lose capital when there is poor visibility.
- Using a procurement system like Cflow can provide you with end-to-end visibility that can provide you with a real-time overview of spend across your organization.
- Spend analytics reports help organizations prioritize resources that have huge potential and are crucial for business growth thereby avoiding uncontrolled expenses.
- Spend data analyses can help you improve internal benchmarking where you can streamline your internal processes for maximum efficiency.
- Finally, you can spend better when you identify saving opportunities and categorize them based on your spend analysis report.
Setbacks to Spend Analysis
Though there are several benefits to procurement spend analysis there are some setbacks that organizations oversee leading to failure and affecting spend visibility. Your spend analysis may fail due to the following reasons:
- Poor data quality
- Labor-intensive data gathering and cleansing process
- Poor leadership without a growth mindset
- Setting unrealistic expectations, unclear goals, and misplaced priorities due to improper planning
- Choosing the wrong tools or having too many tools
- Lack of skilled employees, managers, and leaders
- Limiting control over data
- Failing to update spend analysis data and poor documentation
How Cflow is an effective tool for Spend Analysis
Cflow is a powerful business process automation platform that ensures a 360-degree transformation for all your procurement processes.
Cflow is a procurement solution that provides a consolidated view of all your procurement spend including invoice data, purchase orders, and other financial records. The spending data may be collected from different sources and enables users with insights to make better spending decisions.
Cflow offers exceptional functionalities to optimize your purchase orders, strategic sourcing, contract management, vendor management, invoice processing, compliance and risk management, approval workflows, auditing, and much more.
Conclusion
In summary, in the digital transformation journey being agile is the only way to respond strongly to the ever-changing business landscape. You need to have a robust growth mindset to take your business to the next level but that begins with optimizing your spending. That said, you need to have a contemporary tool like Cflow to optimize your business spend. Visit Cflow to know more and sign up for a free demo today!
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