- Written in collaboration with our parent company Procurato by Tina Bokhua (October 2023)
In the complex world of modern procurement, the power of insight cannot be underestimated. There are essential insights hidden within layers of invoices, receipts, and purchase orders, waiting to be uncovered by those with the vision and the tools to unearth them. Comprehensive and insightful spend cube analysis is key. Especially now that technological advancements allow procurement leaders to fully leverage the power of data. In this article, we have combined the knowledge of top procurement leaders regarding effective approaches to spend analysis with a step-by-step guide on how to obtain insightful procurement analytics.
Organisations are constantly subject to market fluctuations, supplier volatility, and economic shifts. Without a clear line of sight on where your financial resources are going, you risk the profitability, efficiency, and successful execution of your business strategy. Spend analysis gives companies visibility of their spend and optimisation opportunities, providing procurement leaders with critical insights:
- Cost breakdowns: these insights lay bare the anatomy of your expenses, categorizing them into segments, such as direct and indirect spend, enabling a granular view of where your money is flowing
- Supplier performance: casts a spotlight on supplier performance, illuminating who your most reliable partners are and where relationships need mending
- Contract compliance: ensures adherence to negotiated contracts and terms, preventing costly leaks from unfulfilled agreements
- Risk mitigation: identifies potential and actual risks in the supplier ecosystem, alerting you to vulnerabilities before they become critical threats
- Opportunity identification: uncovers commercial opportunities for consolidation, standardization, and strategic sourcing, enabling you to optimize your procurement processes
Procurement spend analysis is, essentially, a tactical lever that enables organisations to enhance their strategic procurement processes, reduce costs through strategic spend management, and maintain compliance. To navigate this critical aspect of procurement, we will draw upon the expertise of procurement leaders who have shared with us their insights. We will then turn these practical tips into a structured and methodical approach to mastering the art of spend analysis, facilitating informed decision-making and strategic procurement management.
Top 10 tips on spend analysis from procurement leaders
Procurato and SpendQube have conducted a survey among FTSE 100 and Fortune 500 companies’ global procurement directors across a wide range of industries, from oil and gas to healthcare, to discover their top tips and lessons learned for analysing their spend.
Tip 1: Develop a comprehensive spend categorization
Classify your supplier spend into meaningful categories to gain a better understanding of where your money is going. This allows you to identify areas of potential cost savings and negotiate better deals with suppliers.
Tip 2: Implement robust supplier segmentation
Segment suppliers within each category based on their strategic importance, performance, and risk factors. This segmentation allows you to prioritize resources and tailor supplier management strategies accordingly. Allocate more attention and resources to high-value or critical suppliers (e.g., develop targeted strategies for cost reduction and negotiations) while adopting a more streamlined approach for lower-value suppliers.
Tip 3: Conduct supplier consolidation analysis
Analyse your supplier base to identify opportunities for consolidation. Consolidating suppliers can lead to economies of scale, improved pricing, and streamlined supplier management. Look for areas where multiple suppliers are providing similar products or services and consider consolidating them into strategic partnerships.
Tip 4: Consolidate and cleanse data
By gathering supplier spend data from various sources and consolidating it into a single database, you can eliminate redundancies and inconsistencies in the data. This ensures accuracy and consistency, enabling reliable analysis and decision-making based on reliable information.
Tip 5: Use data visualization tools
Data visualization tools help transform complex supplier spend data into intuitive and visually appealing formats, such as charts, graphs, and dashboards. This makes it easier to identify patterns, trends, and outliers, facilitating quicker interpretation and analysis of the data.
Tip 6: Evaluate contract compliance
Reviewing contract terms, pricing agreements, and performance metrics helps ensure that suppliers are adhering to the agreed-upon terms and conditions. Identifying areas of non-compliance allows you to take corrective actions, such as renegotiating contracts or addressing performance issues, to optimize supplier relationships and mitigate financial risks.
Tip 7: Monitor market trends and benchmarking data
Stay updated on market trends and leverage benchmarking data to compare your supplier spend and performance against industry standards. This information can help you identify areas for improvement, negotiate better pricing, and gain a competitive advantage. Continuously evaluate and optimize supplier portfolios within each category. Regularly conduct supplier performance reviews, benchmarking exercises, and market assessments to identify potential cost savings opportunities, risks, and new supplier options.
Tip 8: Assess supplier risks
Evaluating supplier risks is crucial for mitigating potential disruptions to your supply chain and ensuring business continuity. Assessing factors such as financial stability, capacity, geographical considerations, and other risks allows you to proactively address vulnerabilities. Moreover, it will help you develop contingency plans to minimize the impact of any supplier-related risks.
Tip 9: Implement supplier scorecards
Develop scorecards to evaluate and rate your suppliers based on key criteria such as quality, delivery, responsiveness, and innovation. Regularly assessing supplier performance enables you to focus your efforts on high-performing suppliers and address any issues with low-performing ones.
Tip 10: Collaborate with stakeholders
Engaging cross-functional teams, including procurement, finance, and operations, brings together diverse perspectives and expertise. Collaborating with stakeholders enables comprehensive supplier spend analysis by considering different viewpoints, identifying synergies, and aligning strategies across departments.
To make full use of these tips, it is of paramount importance to have a structured understanding of how spend analysis is conducted from scratch. Let us deep dive into this.
A step-by-step guide to procurement spend analysis
Step 1: Spend analysis objectives and data collection
Clarify your objectives: clearly outline what you aim to achieve through the spend analysis – identification of cost-saving opportunities, streamlining supplier relationships, gaining broader visibility into procurement, etc. Defining your goals is crucial for determining the data you need to collect.
Insight: Align your goals with your organisation’s overarching objectives to ensure the analysis drives strategic value.
Step 2: Data cleaning and normalization
Gather and clean data: collect data from various sources, including procurement systems, financial records, and supplier databases. Your data should include critical details like the annual expenditure with each supplier, transaction volumes, the quality of goods or services received, and any other relevant metrics.
While cleansing the data, pay special attention to data formats, supplier codes (especially if different systems were inherited through mergers or acquisitions), supplier names, parent-child relationships (tagging to understand corporate hierarchies), and product codes (for item-level analysis).
Any analysis starts with data – its accuracy and integrity are key for conducting spend analysis. Often, the most challenging part of the analysis is preparing the data for it – cleaning, coding, and categorizing. It is of paramount importance to ensure that the data is of high quality and will provide stakeholders with reliable analysis.
Insight: Data cleanliness is paramount. Accurate, well-structured data is the foundation of any successful spend analysis.
Step 3: Spend and supplier categorization
Create a comprehensive taxonomy: develop a robust classification system to categorize suppliers and purchased items. This tagging process enhances the granularity of your analysis, enabling deeper insights into spending patterns.
As an example, consider a Level 1 spend analysis conducted for a manufacturing company, revealing that their expenditure on packaging significantly exceeds industry benchmarks. Consequently, optimizing packaging spend becomes a paramount objective. However, this category is often broad, making it challenging to execute a cost reduction initiative effectively. It necessitates an exhaustive examination of cost drivers, which can be a time-intensive endeavor.
Nevertheless, introducing a taxonomy that classifies packaging into multiple levels, such as Level 2 to Level 4, can substantially enhance the efficiency of this initiative. By drilling down into specific subcategories within packaging, the analysis can pinpoint the driving factors behind the high costs more precisely. For instance, at Level 4, it might become apparent that the elevated costs are attributable to the uniqueness of the packaging materials or stringent customer requirements.
In such cases, within a matter of minutes, one can discern that pursuing cost reduction measures in this particular subcategory may not be a worthwhile endeavour, saving valuable time and resources.
Insight: A well-designed taxonomy is a powerful tool. It facilitates meaningful segmentation, making it easier to identify strategic opportunities.
Step 4: Data visualization
Leverage data visualization: translate your data into user-friendly, interactive dashboards. Visualization tools allow stakeholders to grasp complex spending patterns at a glance.
- Excel spreadsheets
Excel spreadsheets are the most popular tool to track and analyse spend. Excel is readily available and inexpensive, and many people know how to use it, so organisations do not have to invest in training. However, spreadsheets are not the most efficient tool in the modern world of technology:
- Spreadsheets are prone to manual errors. It’s easy to make a critical mistake in one of hundreds of rows and columns of data, and identifying the source of the error can be challenging. A single mistake can result in substantial financial losses.
- Keeping data updated in Excel can be challenging, especially when it comes to real-time synchronization, particularly if the software being used changes or is updated. Data integrity and consistency is hard to maintain in Excel, leading to potential errors.
- Excel is not well-suited for handling large and complex datasets, limiting its scalability for detailed spend analysis.
- Creating well-visualized dashboards is time-consuming in Excel, and its functionality cannot be compared to the interactive, multifaceted functions offered by advanced spend analytics tools.
- Excel is not the ideal tool for collaboration. Spreadsheets cannot be concurrently edited in real time by multiple departments unless they are placed on SharePoint. However, in such cases, there is a risk of compromising the integrity of the entire dataset due to simultaneous editing and potential manual errors.
- Business Intelligence (BI) tools
BI tools are designed to visualize complex dashboards with multiple indicators and are hence well-equipped to give a quick visual overview of spend, allowing to identify trends and insights. Dashboards and reports can be tailored to specific needs, allowing for personalized insights. Moreover, some BI tools offer real-time reporting, enabling quicker decision-making.
However, BI tools can be quite costly to implement and require training and expertise to be used effectively. Also, ensuring data quality and seamless integration with BI tools can be challenging and may require significant IT resources.
- Specific spend analytics applications
A dedicated spend analytics tool is an ideal solution for procurement because it breaks down spending in a way that is highly insightful for procurement decision-makers. They are purpose-built for procurement analysis, ensuring they offer comprehensive features and tools tailored to the task. Specific procurement analytics solutions are also designed to handle large datasets and provide better data integration opportunities, allowing for a more accurate view and analysis of spending.
Many of such tools allow automated data cleansing, categorization and analysis, reducing manual efforts and error risks. Some spend tool providers offer the option of creating customized dashboards that align with a company’s specific needs. For instance, manufacturing companies that purchase raw materials whose prices are closely tied to market indices can benefit from a dashboard that compares their suppliers’ prices with the trends of these market indices. An example of such spend cube analysis tool that allows customization is SpendQube.
The disadvantages of dedicated spend analytics solutions might be high initial costs and possible necessity to train employees on how to use them. However, both software costs and training investments pay off with time saved and accurate insights leading to optimal strategic decisions. In simple terms, the quality and value of your output is proportionate to the effort at the input stage.
Insight: Visualization enhances data comprehension. Choose tools that facilitate clear communication and actionable insights are better than basic spreadsheets.
Step 5: In-depth analysis
Dig into the data: with a clean dataset and a taxonomy in place, start an in-depth analysis. Look for trends, anomalies, and outliers in your spending data. Identify top suppliers, scrutinize contract compliance, and explore opportunities for consolidation.
Here are spend analysis tips that will enable organisations to get a holistic view of their spending:
- Pareto analysis
Conduct a Pareto analysis – it is likely to show that 20% of your suppliers account for 80% of your spend. These top 20% of suppliers play a pivotal role in driving your spending, making them the primary targets for a deeper, more thorough analysis.
Dig deeper into your key suppliers’ performance across various dimensions, including product quality, adherence to delivery schedules, reliability, and potential opportunities for cost savings through negotiations.
It’s also crucial to evaluate the risk associated with these key suppliers. Determine whether your organisation has become overly dependent on a single supplier or a small group of suppliers. Consider the potential impact if any of these suppliers were to experience disruptions or issues.
Simultaneously, explore avenues for consolidating your spending and negotiating more favorable contract terms with these key suppliers. Consolidation efforts often lead to cost savings and more advantageous procurement agreements.
On the flip side, don’t neglect the analysis of the remaining 20% of suppliers, which contribute to the tail end of your spending. Here, the goal is to identify opportunities for consolidation or optimization. This could involve reducing the number of suppliers or streamlining procurement processes.
- Contract compliance
Conducting a spend analysis enables the identification of shared or similar suppliers and substitutable products among departments and business units. These valuable insights should be integrated with data regarding the number of contracted suppliers and volume of contracted spend. Armed with this information, you can enter negotiations well-prepared, equipped with data that can potentially result in volume-based discounts, improved payment conditions, and an increase in contracted spending. This comprehensive view of suppliers opens the door to a wider array of strategic sourcing possibilities.
Having a comprehensive taxonomy and well-organized categorized data streamlines the process of evaluating procurement performance by facilitating easy comparisons. These comparisons can be conducted internally, allowing you to pinpoint and address instances of excessive spending within various business units or locations. However, for further enhancement, consider incorporating third-party benchmarks into your data analysis. This enriches your dataset and enables comparisons with businesses in your industry or of similar size. Some consultancies, like Procurato, offer such benchmarking data. Regardless of the benchmarking approach you select, it can yield significant benefits. They include cost reduction through price negotiations and overall operational cost savings achieved through increased efficiency.
- Total Cost of Ownership (TCO) analysis
Conduct a Total Cost of Ownership analysis. Evaluate all direct and indirect costs associated with buying, operating, and maintaining a product or service over its entire lifecycle. This analysis goes beyond the purchase price and considers the total financial impact of a supplier relationship. It is hence a crucial tool in procurement. It helps organisations assess their suppliers from different cost-related perspectives and optimize their cost management strategies. TCO includes a number of components:
- Acquisition costs: the initial purchase price of the product or service, which is usually the smallest part of the TCO.
- Operating costs: all expenses related to the day-to-day operation of the product or service, e.g., energy consumption, maintenance, repairs.
- Ownership costs: costs associated with owning and maintaining the asset over its useful life, e.g., depreciation, taxes, insurance, financing costs if the purchase is funded through loans or leases.
- End-of-life costs: costs related to retiring the product or service at the end of its lifecycle, e.g., disposal or recycling.
- Downtime and productivity costs: costs of lost productivity and their impact on revenue due to downtime related to maintenance, repairs, or suboptimal performance.
- Supplier and relationship costs: negotiation costs, supplier management costs, and costs associated with supplier quality issues or disruptions.
- Sustainability and environmental costs: carbon emissions, resource consumption, and adherence to sustainability standards.
- Risks and mitigation costs: costs associated with mitigating supplier-related risks.
A TCO analysis helps to make well-informed decisions that consider the long-term financial implications of their purchases. It enables organisations to select products or services that not only have a lower initial cost but also provide the best overall value and align with strategic objectives, sustainability goals, and risk management.
- Sustainability assessment:
Couple the spend analysis with a sustainability assessment of suppliers’ environmental practices to align your procurement activity to your corporate ESG requirements. Many businesses are embracing sustainable procurement practices to reduce the environmental impact of their supply chains. Assess the carbon footprint of your procurement, their recycling and reusing practices, and sustainability initiatives. Also, pay attention to Scope 3 emissions. Greenhouse gas emissions that are indirect, occurring as a result of an organisation’s activities but from sources not owned or directly controlled by the organisation. They are often linked to supply chain. Assessing and addressing them can help identify areas for improvement and contribute to a more sustainable business model.
Insight: Spend analysis isn’t just about data; it’s about the story it tells. Deep dives reveal hidden opportunities and areas for improvement. The insight can also explain or reassure where suppliers are already performing or outperforming your requirements.
Step 6: Continuous improvement
Implement continuous monitoring: as spend analysis is an ongoing process, organisations should regularly review supplier relationships, category performance, and cost-saving initiatives. Use the insights gained to drive continuous improvement in your procurement strategy.
Insight: The value of spend analysis compounds over time. Routinely revisit and refine your approach to maximize its impact.
The true value of spend analysis lies not just in the data it provides but in the insights it unlocks. It’s a transformative process that allows businesses to convert superficial aspects of their finances into procurement strategies, identifying trends that may have otherwise gone unnoticed. Spend analysis isn’t just about crunching numbers. It’s about uncovering patterns, exposing inefficiencies, and revealing opportunities that may have been obscured by the fog of day-to-day operations. This is why it is of paramount importance to conduct spend analysis with the right tools and in the right way, enabling organisations to harness its power to the maximum.