Spend Analysis

In an increasingly complex world of global supply chains, procuring organisations are exerting pressure on their procurement functions to reduce costs and expenses. In the health sector, for example, this drive for better use of financial resources may result in wider distribution of drugs and medicines at more affordable prices. The need to analyse procurement expenditure is becoming increasingly recognised as an important tool in developing appropriate procurement strategies.

What is it

A tool that provides information on the volume and value of procurement transactions that an entity makes. It is the process of aggregating, classifying and leveraging spend data for the purpose of reducing costs, improving operational performance and ensuring compliance.                                                        

Examples of the range of data that can be extracted from financial systems are:

• how much money is expended per annum
• the number of contracts placed per annum
• total number of suppliers used per annum
• the number of contracts placed for the same/similar commodity per annum
• how many contracts are placed with each supplier per annum
• the number of contracts of high value versus the number of contracts of low value are placed

Many procuring entities lack sufficient accurate and timely information on procurement expenditure. This data is vital for the procurement function to enhance its performance and facilitate achievement of the organisation’s goals. Accordingly, the purpose of spend analysis is to gather and analyse statistical information on what an organisation procures, from whom it procures and the value and volume of its transactions

How is a spend analysis undertaken?

Successful spend analysis efforts depend on gaining a full understanding of all of the spend data sources.  The principal source of data for carrying out an historic spend analysis exercise is the financial management system of an organisation. Where an analysis of future projected expenditure is required the data must come either from the commitment schedule or from contracts and orders placed

Extracting all relevant data in a timely manner is an essential part of the spend analysis process. Two broad approaches to using this information may be adopted:

• segmentation of the spend portfolio by supplier by total value.
• creating a commodity structure so that all spend data is captured into relevant spend categories.

The following provides an overview of the methodology used in capturing and utilising spend data:

However, there may be a significant number of challenges to overcome in carrying out the process e.g.

• aggregating data is time consuming and may be costly
• risk of inaccurate or incomplete data
• single suppliers may have different names but are part of the same group
• the same goods/services may have different names 
• limited analytical skills

How to use the data

The creation of categories of commodities will facilitate the development of specific procurement strategies e.g.

• highlighting categories of similar goods may allow for aggregating demand to gain more leverage in the supply market;
• identifying critical items will stimulate a strategy designed to protect supplies;
• pinpointing similar or duplicate supplies will allow for rationalisation;

all designed to produce greater value for the procuring organisation.

The collation of expenditure per supplier will quickly reveal which are the principal suppliers in financial terms and will drive the development of appropriate supplier management strategies. Additionally, it may highlight the need to look for additional suppliers to safeguard supplies of critical items or reduce a procuring entity’s heavy reliance on one particular supplier    

Although the majority of these strategies will be for sourcing, it will also provide the opportunity for developing negotiation and contracting strategies. The principal requirements addressed by a sourcing strategy are likely to be: a) price reduction, b) continuity of supply c) sustainability and d) supplier development.

Frequently, when the data is analysed into commodity categories or a supplier spend portfolio, it is used to populate strategic tools such as Pareto’s Analysis and Kraljics Matrix[1] and these are used in the development of a cohesive range of sourcing strategies.   

What are the expected outcomes?

The twin headline outcomes for an organisation, that a comprehensive spend analysis is expected to produce, are:

• to provide the procuring organisation with detailed knowledge of all procurement expenditure and therefore facilitate more effective management of the procurement function,
• to develop effective procurement strategies that allow it to drive increased competitiveness in its supply market and deliver benefits to the organisation.

What are the potential benefits?

Cost savings, improved quality standards, more efficient use of financial resources, better delivery service and enhanced value for money. It will also result in better delivery of public services and the achievement of higher- level organisational objectives. Some specific benefits will be to:

• reduce material and service costs
• rationalise the organisation’s supplier base
• improve contract compliance
• reduce expediting costs
• introduce framework contracts to create savings
• lower inventory costs
• facilitate supplier integration

[1] - See The Kraljic’s Matrix in the Sourcing section of the Learn Library