- 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, categorising them into segments such as direct and indirect spend to enable a granular view of where money is flowing.
- Supplier performance: Casts a spotlight on supplier performance, identifying reliable partners and areas needing improvement.
- Contract compliance: Ensures adherence to negotiated contracts and terms, preventing costly leaks from unfulfilled agreements.
- Risk mitigation: Identifies actual and potential risks in the supplier ecosystem, alerting you to vulnerabilities before they become critical.
- Opportunity identification: Uncovers commercial opportunities for consolidation, standardisation and strategic sourcing.
Procurement spend analysis is a tactical lever that enables organisations to enhance their strategic procurement processes, reduce costs through strategic spend management, and maintain compliance. Below are the top tips from procurement leaders followed by a step-by-step practical guide.
Top 10 tips on spend analysis from procurement leaders
Procurato and SpendQube surveyed global procurement directors at FTSE 100 and Fortune 500 firms to identify the leading practices for spend analysis.
Tip 1: Develop a comprehensive spend categorisation
Classify supplier spend into meaningful categories to identify cost-saving opportunities and negotiate better deals.
Tip 2: Implement robust supplier segmentation
Segment suppliers by strategic importance, performance and risk to prioritise resources and customise management approaches.
Tip 3: Conduct supplier consolidation analysis
Find overlap and duplicate suppliers across the organisation and consolidate where it creates scale, better pricing and simplified management.
Tip 4: Consolidate and cleanse data
Aggregate spend data from all systems into a single source of truth, remove duplicates and standardise names and codes for reliable analysis.
Tip 5: Use data visualisation tools
Present complex spend data as dashboards and charts to speed interpretation and empower stakeholders to act.
Tip 6: Evaluate contract compliance
Compare actual spend to contracted terms to catch leakage, improve compliance and strengthen negotiation positions.
Tip 7: Monitor market trends and benchmarking data
Use external benchmarks and market indicators to challenge supplier prices and spot new sourcing opportunities.
Tip 8: Assess supplier risks
Score suppliers for financial stability, capacity, geographic exposure and other risk factors; build contingency plans for critical suppliers.
Tip 9: Implement supplier scorecards
Create scorecards to measure quality, delivery, responsiveness and innovation; use them to drive supplier performance improvements.
Tip 10: Collaborate with stakeholders
Engage procurement, finance, operations and business units to align objectives, validate data and secure buy-in for sourcing initiatives.
A step-by-step guide to procurement spend analysis
Step 1: Spend analysis objectives and data collection
Define clear objectives (cost savings, contract compliance, visibility). Collect data from procurement systems, finance, AP and supplier records.
Insight: Align objectives with organisational goals so analysis drives strategic value.
Step 2: Data cleaning and normalisation
Standardise formats, normalise supplier names and codes, resolve parent-child relationships and product codes. Clean data prevents misleading conclusions.
Insight: Clean, high-quality data is the foundation of reliable spend analysis.
Step 3: Spend and supplier categorisation
Build a multi-level taxonomy (e.g., category → subcategory → SKU) to enable granular analysis and rapid identification of cost drivers.
Insight: A robust taxonomy accelerates meaningful segmentation and targeted action.
Step 4: Data visualisation
Use Excel for quick checks, BI tools for dashboards and dedicated spend analytics (e.g., SpendQube) for automation and scale.
Insight: Visualisation converts data into stories stakeholders can act on.
Step 5: In-depth analysis
Run Pareto (20/80) analysis, benchmark pricing, evaluate contract compliance and perform TCO studies to expose hidden costs and opportunities.
Insight: Deep dives reveal high-impact opportunities and inform negotiation strategy.
Step 6: Continuous improvement
Embed monitoring, review outcomes, update taxonomies and iterate processes. Use results to prioritise further initiatives.
Insight: The value of spend analysis compounds with continuous refinement.
Conclusion
Spend analysis is more than number-crunching: it turns transactional data into strategic advantage. With clean data, the right taxonomy, appropriate tools and cross-functional engagement, organisations can reduce cost, mitigate risk and capture strategic value.