Spend Analysis - An Introduction
It is a process of collecting, classifying and analyzing expenditure of any company by using their ledgers.We can reduce procurement cost by monitoring the expenditure of any organization.
Also we can analyze their spend by commodities, products, services and suppliers.
Features of Spend Analysis:
1. Procurement data visibility
2. Data Quality
3. Supplier Ranking
We can achieve saving or analyze expenditures of an organization by considering following points:
1. Identifying opportunities to aggregate spend and negotiate superior contracts.
2. Identifying and reducing non-compliant or “maverick” spend.
3. Improving procurement operations and supplier performance.
4. Access all spend-data sources within and outside the organization.
5. Audit existing spend data management capabilities.
6. Classify spending at a detailed level.
Procedure of Spend analysis:
We can analyze data by following steps:
1. Classify your suppliers: A simple yet effective method is to classify your suppliers into “Good”, “Okay” and “Poor”. It will give you your idea to sourcing.
2. Classify your supplier spend: This can be done using two categories; “Contract spend” and “Open for sourcing”. The suppliers with which you have long term contracts must be omitted when you’re doing the sourcing planning.
3. Calculate your supply base consolidation: For each sourcing group, count the number of suppliers that account for 80 percent of your spend. A low number means that you’re doing just fine and if it is a higher number then it indicates sourcing potential.
4. Classify your sourcing groups according to market segments: Try to use simple and clear categorization; “Commodities”, “High competition” and “Low Competition” works just fine. This allows you to further see where you have sourcing potential, commodities such as raw material often have open markets which publish spot prices hence the sourcing potential is limited. What you should be looking for in this stage is sourcing groups that are not commodities but still have highly competitive markets, this is where you can find the highest savings potentials. It’s also important to have a look at the length of your supplier relationships.
5. Decide on appropriate call-off methods to ensure spend capture: Finally, classify your sourcing groups into “goods” and “services”, by adding this parameter to the spend analysis containing transaction volume and total spend, this enables you to assign appropriate call-off methods to the sourcing groups, raising the potential spend capture.
Above simple yet effective steps allows you to perform a spend analysis.