What Is Spend Analysis?
Spend analysis is a process that involves analyzing historical and current spending to increase efficiency, minimize procurement costs, improve sourcing, and strengthen supplier relationships. It helps companies understand their spending structure and make necessary adjustments. Reports generated by organizations using this analysis offer suggestions based on facts instead of assumptions.
In spend analysis, organizations examine costs for equipment, ingredients, technology, etc. Usually, businesses have to gather data from different sources to conduct this type of analysis. Such sources generally include internal business applications. However, they may also cover external sources, for example, bank accounts. In addition, some types of spend analysis exist, for example, category, contract, and vendor.
Table of contents
- Spend analysis meaning refers to a process that involves accumulating details concerning procurement spend and analyzing them using certain tools to improve efficiency, spot cost reduction opportunities, and capitalize on the savings opportunities.
- Some common types of spend analysis are vendor, contract, tail, and category.
- There are various benefits of spend analysis. For example, it reduces maverick spending, helps build strong relationships with strategic vendors, and improves the productivity of procurement groups.
- Companies can gather spend data from multiple sources, such as bank accounts, procurement software, expense management systems, and more.
Spend Analysis Explained
Spend analysis meaning refers to a process of spotting, accumulating spending data, cleansing and categorizing the information, then analyzing the details to determine how the company is spending its funds and how it can manage the expenditures better. It helps companies visualize their procurement spend data for better supplier and sourcing decisions. Moreover, it can reveal maverick spend, reduce cycle times, and improve contract compliance.
The analysis procedure involves finding all the relevant sources of spend data. A few examples of the internal and external sources are as follows:
- Credit card and bank accounts
- Payroll software
- Procurement software
- Industry benchmarking information
- Expense management systems
- Accounting systems
The next stages of the process involve cleansing the collected data, applying standard formatting, grouping the data, etc. Finally, businesses analyze the spend data utilizing business intelligence tools to finish the process. The results obtained by organizations enable them to take strategic decisions that positively impact the business. For example, if businesses conduct the analysis efficiently, they can improve vendor selection, cash flow, contract pricing, financial results, and strategic sourcing.
Steps in Spend Analysis
Let us look at the steps involved in the spend analysis process in detail:
#1 – Identify The Objective
This analysis is most effective for organizations when the objective of the process is clear. Setting the goal before conducting the analysis can help organizations spot relevant data patterns. Two examples of the possible objectives are as follows checking the accuracy of the spending estimates and gaining higher value via supplier management.
#2 – Identify The Data Sources
The next step involves spotting data sources across every business department so that the organization doesn’t limit itself to the information received from the purchasing team only. Companies can accumulate the spend data from multiple internal and external sources, like payroll software and bank accounts. Organizations utilizing an eProcurement solution can efficiently monitor procurement spend data from every source.
#3 – Consolidate The Spend Data
Consolidating the spend data can be challenging for businesses as the information is spread across multiple languages. Nevertheless, utilizing a centralized platform simplifies this step.
#4 – Cleanse And Organize The Spend Data
If the data accumulated by the company is inaccurate, it cannot offer any valuable insight. Moreover, assessing incorrect data may lead to misleading conclusions. Hence, businesses must review the accumulated data thoroughly to spot errors and rectify them. Moreover, they must organize the correct data and standardize it. This will improve the analysis.
#5 – Connect The Spend Data With Suppliers
This step is crucial if a business’s objective for such an analysis is related to the supply chain. First, organizations must group every purchase made from suppliers having the same holding company. Then, after linking the spend data with relevant suppliers, businesses can better understand the supply chain.
#6 – Establish A Category Strategy
Businesses must use organization-specific categories or a standardized category system to categorize their spend data. The category strategy can offer sustainable cost reduction and spend-management visibility if the category strategy is effective.
#7 – Analyze The Data
Organizations must use analytical tools to analyze the spend data keeping their objectives in mind. Moreover, they must measure the data against KPIs or key performance indicators to comprehend the performance.
#8 – Repeat Regularly
A business’s spend data changes constantly. Hence, organizations must conduct this analysis regularly to take advantage of the savings opportunity and improve the procurement procedure.
Let us look at some of the different types of spend analysis.
- Tail: This involves analyzing infrequent, small purchases occurring outside a contract. Such purchases usually constitute roughly 20% of an organization’s overall spending.
- Category: Such an analysis involves dividing an organization’s spending into categories and prioritizing transactions. By utilizing this method, businesses can spot the aspects that are strategically valuable to their operations. Moreover, it helps businesses allocate resources and take high-level decisions judiciously.
- Contract: This analysis highlights an organization’s contracts with its vendors. It ensures that agreements have the best structure in terms of profitability.
- Vendor: Vendor spend analysis allows organizations to evaluate the funds paid to vendors. Moreover, it helps companies find the most important vendors that support their operations.
Let us look at this spend analysis example to understand the concept better.
Suppose Panther, a t-shirt manufacturing company, placed part orders with over a hundred vendors. Its spend analysis process aggregated the spend data from every source, cleansed the data for errors, and centralized it in a database.
The process grouped all purchases and categorized the suppliers by their holding companies. Then, the company analyzed the data to spot outliers and trends. The analysis involved comparing the purchase order terms, quantities, and prices of stock bought from competing vendors. By conducting the analysis, Panther’s procurement team found that most of the suppliers were subsidiaries of the same parent company. So, they realized there was an opportunity to renegotiate the payment terms with the holding company to get higher discounts based on the overall purchasing volume.
Nevertheless, the negotiations were unsuccessful. As a result, Panther chose other vendors identified during the analysis.
Let us look at the advantages of spend analysis:
- Supports Benchmarking: This analysis helps businesses get a clear idea of their costs. Additionally, this allows them to compare their performance with their peers to determine what they must improve.
- Better Forecasting: Spend analysis offers baseline data that allows businesses to project future expenditures more accurately. Moreover, the data helps organizations prepare better plans for the long term.
- Lowers Cost Of Procurement: It helps spot the areas for process improvement and cost reduction, allowing businesses to minimize the expenses associated with procuring goods.
- Increases Efficiency: The knowledge acquired from the analysis of spend data enables the procurement groups to become more efficient and productive.
- Minimizes Maverick Spending: This analysis can highlight the cases where employees purchase from unapproved suppliers. In many cases, maverick spending increases costs as negotiated contract pricing does not form the basis of such purchases.
Lastly, spend analysis improves supplier relationships, which allows companies to benefit from favorable payment terms and volume discounts.
Frequently Asked Questions (FAQs)
Ariba Spend Analysis categorizes and enriches an organization’s spend data using market intelligence. It offers advanced analytics to help businesses comprehend their spend by purchaser, part, supplier, and category to deliver strategic value and drive savings.
If companies conduct this type of analysis efficiently, it can improve savings and better spend visibility. In addition, an organization’s procurement team can utilize this tool to engage with its shareholders in a fact or data-based fashion.
The process has its limitations. The conventional approach to cleansing the spend data for errors is time-consuming and can lead to inconsistencies. Moreover, manual data may contain inconsistencies, currency variations, and typos, which could mislead procurement teams into making wrong decisions.
It offers insight into a company’s expenditures and procurement activities, revealing opportunities to reduce the cost of procuring goods and services.
This has been a guide to what is Spend Analysis. Here we explain the concept in detail and its examples, benefits, steps, and types. You can learn more about accounting from the following articles –