Spend analysis 101: how to manage procurement spend
How can spend analysis help you streamline your procurement software? Find out with this comprehensive guide.
Spend analysis helps you control your costs so you can focus on the growth of your organization. With the right tools, businesses can ensure they’re mining the most value from their purchasing data to reduce cost and optimize vendor management.
In this guide, we’ll walk you through the basics of spend analysis: the process, benefits, and why it’s vital for a healthy procurement workflow.
What is spend analysis?
Spend analysis is the process of collecting information about procurement spending and studying it through analytical tools. The goal of spend analysis is to figure out cost-saving opportunities, increase efficiency, and provide value beyond savings. Spend analysis helps you understand spending culture to make meaningful changes accordingly.
Analyzing collected data through spend analytics reveals meaningful insights relevant to your objective. Spend analysis can be used to—
- Solve different procurement process inefficiencies
- Improve the structure of supply chains
- Identify cost-saving opportunities
Why is spend analysis important?
Procurement spend analysis is important because it gives visibility into runaway costs, spend data, vendor selection, strategic sourcing, and supply chain management. That visibility informs a business’s spending strategy, ultimately leading to greater cost reductions.
By strategically performing spend analyses and making good decisions, companies can improve their cash flow, reduce spending, and achieve their procurement goals. If spend analysis isn’t performed, a business’s profit margins and procurement timeline suffer.
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What are the benefits of spend analysis?
Some of the benefits of spend analysis are—
Minimizing supply chain disturbances: Items going out of stock can cause disturbances in the supply chain. Spend analysis can help to identify single-sourced items and create a multiple-supplier base for these items.
Reducing delivery delays: Spend analysis helps you determine the reasons for delivery delays. Sharing the information with suppliers can help remove the obstacles.
Freeing up working capital: A thorough spend analysis can help optimize your working capital. Identifying suppliers with lower payment arrangements frees up working capital for other business needs.
Supply base reduction: Supply base reduction or supplier rationalization minimizes the number of suppliers based on criteria like price or reliability. Spend analysis can help you to find opportunities to get more value from fewer suppliers.
Reducing maverick purchasing: Maverick purchasing is purchasing made against company procurement policies. Spend analysis initiatives can track maverick purchases and identify savings opportunities by reducing the number of unapproved purchases.
Types of spend analysis
There’s a world of actionable insights hiding within procurement data. However, different types of spend analyses require different types of data. Before executing a spend analysis, review which type listed below will give your company the insights it needs.
Contract spend analysis: Contract spend analysis, sometimes referred to as item spend analysis, works with key data at the item or SKU level. By reorganizing purchases and matching them to their corresponding departments, teams can identify trends like recurring purchases or purchases of the same items at different price points. With this information on hand, it’s easier for procurement teams to negotiate bulk purchases of the same item at a better price point, eliminate maverick spending, and streamline contract management.
Payment terms spend analysis: Are there recurring payment practices that can be fine-tuned? With payment terms spend analysis, teams can use data to find vendor discounts of which they aren’t taking advantage. For example, if a specific supplier offers early payment discounts, procurement teams can schedule early payments for future contracts to capture as many discount savings as possible. Teams can also opt to negotiate better payment terms.
Tail spend analysis: This type of analysis refers to uncovering potential savings opportunities within the pool of insignificant purchases a company makes (think office supplies), which is generally a smaller part of the overall spending pie. It’s one of the areas where companies often leave money on the table by experiencing spend leakage on vendor contracts that aren’t optimized. The key is looking at specific small item purchases to see what can be consolidated or negotiated.
Category spend analysis: This type of analysis uses aggregate categorization to find instances of overspending. It’s a way to find inefficiencies, including whether you’re buying the same goods across multiple suppliers and if those purchases can be reallocated to preferred suppliers. With category management and analysis, procurement teams are able to find a company’s biggest expenses, improve sourcing strategies, and forecast any savings opportunities.
Supplier spend analysis: How much are you spending on your biggest vendors, and how can you get the most value from each partnership? Answering these questions is essentially what a supplier spend analysis is designed to do. Teams can create a list of their top suppliers and carefully run through historical purchase data to find savings opportunities or instances of maverick spending.
What is the spend analysis process?
There are eight aspects to conducting a thorough and accurate spend analysis.
1. Identify your objective
First, determine your spend analysis goal so that it’s easier to spot patterns in your data that get you there.
A few examples of spend analysis goals include—
- Evaluating the accuracy of spending forecasts
- Getting more value through supplier management
- Streamlining vendor negotiations
- Improving supply chain logistics
2. Find data sources
Identify different data sources across all departments in your company to get an accurate view of your current spending. Spend data can be sourced from accounts payable or the general ledger. E-procurement solutions help you to track spending data from all sources.
3. Consolidate spend data
Consolidating spend data can be a daunting task as the data you’re working with — whether it’s first or third-party data — can be highly unorganized. However, consolidating spend data is an important step of the analysis process.
Consolidating the data into one centralized platform through integrations or APIs ensures you’re getting the most visibility across your company’s expenses.
4. Clean and organize data
You need accurate data to get meaningful insights; otherwise, you end up with misleading conclusions. To draw thorough and accurate conclusions, review all data carefully to uncover errors and correct mistakes.
Errors can range from—
- Unstandardized data that needs standardization
- Inaccurate invoice details
- Inaccurately matched supplier purchase data
5. Link spend data to suppliers
If your end goal pertains to the supply chain, this is an especially important step. Grouping all purchases made from suppliers in one category and then linking all related data to relevant suppliers will allow you to analyze supplier performance more granularly.
6. Develop a category strategy
Categorize your spending data using company-specific taxonomies or a standardized category system like the UN Standard Product and Services Code (UNSPSC). This provides spend-management visibility and helps you achieve sustainable cost reduction as teams can get visibility into what categories can be consolidated or which ones can be negotiated for.
7. Analyze spend data
Study your organized data using spend analysis tools. Solutions like Vendr ensure you’re getting visibility into key data that’ll help determine how well your business is hitting its KPIs.
With software in place to make this process easier, measure the data you’ve gathered against key performance indicators to help understand where you’re falling short in terms of spend strategy. Spend data can be analyzed in a variety of ways to help uncover a variety of insights.
Procurement teams can run—
- Tail spend analysis: Learn which smaller purchases are the most cost-intensive so you can consolidate the buying process for discounted transactions.
- Contract analysis: Draw insights from individual purchases and company spending patterns to learn where you can further cut costs.
- Payment terms spend analysis: See how you can quicken invoice processing to take advantage of early payment vendor discounts.
- Supplier spend analysis: Learn which supplier provides the best ROI and prioritize accordingly.
- Category spend analysis: Optimize your category spend by seeing which categories have the most instances of overpayment.
8. Repeat regularly
Spending data changes constantly. Hence you should do a spend analysis regularly. Focus on every saving opportunity and improve your procurement process along the way.
Vendr uses spend analysis to help you save money on SaaS
SaaS buying and management solutions help you achieve all the benefits of spend analysis without extra time or effort. With a ton of benchmark vendor data and a best-in-class purchasing process within a single source of truth, Vendr’s software procurement professionals will help your company buy software in less time and for less money.
Find out how much you can save this year with Vendr’s free saving analysis tool.