What is Spend Analysis in Procurement? A 4 Step Process

One of the major challenges with using BI tools for spend analysis is the longer time to value. Implementing and customizing BI tools to handle procurement-specific data often takes significant time and development resources. This delays the realization of cost savings and efficiency improvements, resulting in missed opportunities as organizations wait for full spend visibility and actionable insights. AI-driven spend analysis software goes beyond basic reporting by proactively identifying spending anomalies, cost-saving opportunities, and supplier risks.

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Do you have a clear picture of how money is moving out of your organization? Organizations with clear spend visibility drive better procurement performance and make more informed business decisions. Ultimately, spend analysis can offer baseline data to help you estimate spending more accurately and frame long-term plans. However, the complex process demands the utmost attention and dedication. The frequency of spend analysis varies according to the organization’s objectives and the characteristics of its expenditures. Typically, organizations conduct annual spend analyses as an integral component of their strategic planning.

Video Tutorial: Spend Analysis

The final step in the spend analysis process is to make sure that the cost of the product or service is appropriate for your goals and resources. It involves determining whether the price is worth it for what you are getting in return. Procurement is an essential business process, and it can be significantly improved with spend analysis. Spend analysis in procurement can help identify where money is being wasted and where it could be used more productively. Procurement professionals can also get a glimpse of their supplier's performance to encourage supplier development. What's more, they can also use the spend analysis data to weed out underperforming suppliers and boost their contract compliance through the continuous monitoring of pricing.

Spend Analysis and Supplier Relationship Management

Another discrepancy you may encounter is departments describing the same items differently or putting them into different categories. All this information should be standardized and entered in a unified manner across teams. Consolidating data is a complicated task, not just because of the massive amount of data that should be tracked and transferred but also because it may come in different formats. It also identifies unnecessary expenses that can be eliminated altogether. In order to properly conduct the analysis, it is necessary to match each item with its supplier and the department that ordered it.

Spend analysis can identify non-compliant spending by highlighting discrepancies between actual purchasing behavior and established procurement policies. By pinpointing areas where maverick spending occurs, organizations can implement tighter controls, reinforce compliance with preferred suppliers and contracts and, ultimately, reduce unnecessary costs. Category-level spend insights give your sourcing team the ability to segment spend by product or service type. They can optimize RFx timing, identify negotiation opportunities, benchmark supplier performance, and fine-tune strategies for high-impact categories. For example, a retailer might use category analysis to renegotiate key logistics contracts based on shifting volume trends to secure better pricing or service-level agreements. A spend cube is a multidimensional view of spend data that displays information by suppliers, business units, and item categories.

• Group critical suppliers handle essential items like sweeteners and packaging materials, which are vital for production, and Coca-Cola HBC spends a significant percentage of its budget on them.
• For example, you may discover that certain departments are consistently overspending, or that specific suppliers are charging more than others for similar products.
• Finance teams will want to examine several primary spending types as part of an overall spend analysis program.
• Maverick spend analysis is all about catching and controlling spending that happens outside of your company’s official procurement rules.
• Before collecting or studying any data, companies have to define their goals or questions they want to be answered.

Direct expenses are microscopes, pipettes, scales, hot plates, incubators, fume hoods, and chemicals. On the other hand, electricity, software subscriptions, advertising, and consultancies are examples of indirect spend. This KPI identifies the amount of money an organization will avoid spending thanks to current or ongoing measures such as proper tool maintenance, inventory management, and material tracking. Similar but slightly different, the cost reduction KPI applies to companies that choose to completely eliminate certain expenses, regardless of how it affects the quality of their own product.

Source documents include purchase orders, goods received and invoice documents, company credit cards and direct treasury payments. This information can also be used for forecasting cash Cash Flow Statement flows, setting budgets, and re-aligning spend categories. Collaborate with suppliers to gather detailed information about their products, services, payment terms, and pricing structures. A spending analysis can pinpoint the causes and help reduce such instances. Once you have the relevant data, use a centralised system to consolidate and store it.

The deeper the categorization, the automated spend analysis more granular and informative the spend analytics can be. Using Spend Analytics software with an AI-powered classification engine can speed that process to days and categorize 60-70% of the first pass data automatically. After human review and correction, the system learns and improves, classifying a higher percentage each time. The ROI on analysis solutions like these can be nearly immediate – the savings in time and resources alone are tremendous.

Spend analysis captures, categorizes, and analyzes the spend (or expense) data. The goal is to understand where the business is spending and whether it is doing so efficiently. Take full control over budgets so that money goes towards growing the organization, not to non-preferred suppliers or decentralized purchasing. Due to the complexity of the spend analysis process, the individuals carrying it out need a particular set of skills to tackle its multiple challenges. Without an established procurement process, extracting, consolidating, cleansing, and categorizing spend data is incredibly labor-intensive and nerve-racking. Key Performance Indicators (KPIs) are specific metrics that track a company's progress toward its goals and help assess the effectiveness of internal processes.

Before conducting spend analysis, it is essential to clearly set objectives for your analysis. You should have clarity contribution margin on what you plan to achieve from the analysis, what are good benchmark values to target, and where your company should be financially. Regular spending analysis also gives you complete visibility into your company’s spending data.