Organizations need goods and services to run their operations and they procure them from suppliers. The first task of the procurement team of an organization is for it to initiate strategic sourcing program to identify potential suppliers, evaluate them, and select those that meet the organization’s expectations relating to cost, quality, timely supply, proven track record, flexibility, and such others. Based on the conclusions of the sourcing program, procurement actions are initiated. The success of the sourcing program largely depends on the information generated through spend analysis, which leverages the power of the information technology to store, process, and analyze vast amount of data.
Spend analysis or spend analytics is the process of collecting, cleansing, classifying, and analyzing the spend data and generating actionable information for improving, in particular, the sourcing effectiveness and, in general, helping procurement management, inventory management, supplier management, budgeting, and such others. Spend data is the information pertaining to an organization’s expenditures on goods and services purchased from external suppliers,
Spend analysis is the data driven approach that improves the decision making process and enhances the effectiveness of the sourcing process. Spend analysis is the corner stone on which rests the ultimate success of an organization’s strategic sourcing program. It empowers informed decision making.
Purpose of the spend analysis
The aim of the spend analysis is to make available to the sourcing team, through a cost-effective and transparent process, the following important information so that the organization can find suppliers of goods and services that meet its requirements at the lowest cost on a long-term basis at minimal risks and build and sustain partner relationship them.
- What is being purchased?
- For whom the goods and services are being purchased?
- Who are the suppliers and what each supplier is providing and at what cost?
- What is the total amount spent on procurement and its breakup?
- Is the organization satisfied with the performance of the each of the supplier?
- Historical information about the purchases
Spend analysis process
The spend analysis involves the following process:
- Identification of source
The first task is to identify the sources of the organization’s spend-data, which typically remains scattered. It may have to be obtained not only from the procurement department but also from finance, sales and marketing, etc. Spend-data may come from other software solutions, such as the organization’s enterprise resource planning systems (ERP), Supply chain management systems (SCM), purchase-to pay suites etc.
- Extract and collate data
Extract data from all available sources, create a common database and organize the spend data
- Clean the data and ensure accuracy of the same
To extract meaningful information, the data used for analysis must be error-free and accurate. All the data in the database must be checked to ensure that they are correct, complete, & current and not erroneous, obsolete & irrelevant.
- Classify / categorize data
In order to analyze the data, it is necessary to categorize the same into meaningful sets. It may be product-wise, supplier wise, value wise, category wise etc.
- Analyze spend data
The spend data, thus generated, may be analyzed to obtain insights that can be acted upon to improve the procurement process e and benefit from it. The analysis of the procurement spend provides a baseline to measure improvements
Benefits of the spend analysis software
Spend analysis helps the team running the strategic sourcing program understand the data and draw meaningful conclusions from it so that decisions can be made. Some of the benefits of the spend analysis are the following:
- More informed decisions
With the help of the insights generated by the spend analysis, organizations get empowered to take more informed decisions
- Higher profitability
The spend analysis, by facilitating the organization to gain a detailed understanding of its spending and negotiate better terms, helps it to lower the total cost of ownership of the goods and services purchased. As a consequence, the spend analysis helps enhance profitability
- Minimizes maverick spending and ensures compliance
- Manage risks
By analyzing the spend data in conjunction with suppliers’ credit scores and their revenue and other information, organizations will be able to better assess the failure risks and take remedial actions
- Ensures organizational & regulatory compliance
With the help of spend information generated by the software, the organization gets a chance to ensure organizational & regulatory compliance and identify & eliminate unauthorized spending
- Empowers supplier-performance benchmarking and supplier management
With the help of the vast amount of supplier data captured and analyzed by the spend analysis software, organizations can benchmark their suppliers’ performance. They can also leverage the insight generated by the software to improve control over suppliers
Spend analysis software transforms the spend data into actionable information, which helps an organization make its key business decisions relating to sourcing/procurement of goods and services. The software helps the organization identify and select the most appropriate supplier partners and makes the organization’s sourcing/procurement process more effective and efficient. It also helps the organizations to identify opportunities in procurement activities that will help increase profitability for the organizations. The use of spend analysis software contributes to improving procurement-process efficiency, cost-effectiveness, and throughput.
Rajabahadur V. Arcot is a Senior Advisor, Quadrant Knowledge Solutions