Is your business struggling to reduce operational procurement costs and improve overall efficiency? Spend analysis is important for procurement management as it helps evaluate organizational spending. Analyzing how money is spent on procurement provides insight into reliable and high-quality suppliers, who will be one of the biggest assets for the organization.
Typically, spend analytics focus on spending on supplies, raw materials, inventory, equipment, employee labor, technology, and consultations. Wherever money is spent, it needs to be evaluated and analyzed. It is especially important in the supply chain because organizations spend most of their money on procurement.
Top Reasons Why Spend Analysis Is Important
Spend analytics give a detailed insight into every dollar spent for procurement, and it helps identify saving opportunities. Cost reduction is possible only when spending patterns are analyzed. The enterprise procurement solution should contain a spend analysis module for integrated procurement management.
Improved Visibility on Spending and Suppliers – Procurement leaders can gain insight into materials, inventory, and ingredients purchased to run business processes by focusing on spending analysis. Your procurement team will have more visibility of the biggest suppliers and the quality of their products.
Transparent Procurement Process - Spend analytics data from the e-procurement software helps optimize business processes. By understanding the procurement process in a better way, new procurement practices can be implemented to improve profitability.
Better Risk Management – Spend analysis can help mitigate supplier and procurement risks. With better risk management policies, you can change suppliers or vendors without causing a major effect on the overall production process. It removes supplier dependency and improves vendor efficiency.
Exposure to Category-Level Analysis – Procurement processes monitor high-value purchases, but the low-value purchases needed for smoother running of production can result in financial leaks in the organization. Spend analysis focusing on individual categories will help overall spend management.
Better Supplier Relationship Management – Understanding your organization’s biggest suppliers will help you establish better relationships beneficial for all the stakeholders. Spend analysis on the supply chain sheds light on the value of each supplier so that organizations can strengthen supplier relationships. Suppliers will be happy if their invoices are paid on time, and organizations can find cost-saving opportunities by consolidating suppliers.
More Control on Tail Spend – Low-cost transactions often go unnoticed by procurement leaders, who are busy focusing on high-value procurement. The e-procurement platform you use should give you detailed information on all types of purchases so that you can devise policies for controlling tail spend.
Organizational Benefits With Spend Analysis
Procurement in businesses is highly competitive. This competition among the suppliers can be used to benefit the organization by finding high-quality global suppliers at an affordable price. Such business decisions should not be taken lightly, and procurement leaders should analyze spend data thoroughly before making core procurement decisions.
Following are the benefits for an organization that has initiated a spend analysis program using procurement solutions:
Reduced Overall Cost – According to APQC research, with lean procurement operations, organizational spending goes down. The procurement cost reduction is achieved by analyzing procurement expenditures and associated activities.
Quicker Response From Suppliers – As a result of spend analysis, organizations can improve supplier response times. Organizations can establish a custom solution to remove underperforming suppliers by strengthening supplier relationships. With fewer suppliers, organizations can reduce procurement time.
Streamlined Procurement Management - Streamlined procurement management results in lean functions, requiring a few strong suppliers and fewer employees to carry out the essential activities.
Optimized Procurement Team - Spend analysis from e-procurement software will help the procurement team be more productive. The procurement team has all the details about suppliers and vendors, and the procurement software helps establish strong supplier relationships. As a result, the procurement team can work efficiently without having to follow up with suppliers through many emails.
How To Implement Spend Analysis?
Spend analytics can help improve different procurement metrics such as total cost per purchase order, percentage of electronic purchase orders, and systems cost of the ordering process. With mature procurement policies, vendor-managed inventory solutions can be implemented.
The three questions that every organization should ask about its supply chain function are:
- How much money is being spent?
- Who are the suppliers?
- Are we getting what we are promised?
To find the answers to these questions, your organization needs to utilize spend analytics. Implementing spend analysis for your organization will involve the following steps:
1. Identify Spend Data Sources
Data is inevitably scattered across multiple silos in an organization, and procurement team data alone is insufficient for complete spend analysis. You should look through financial ledgers, account payables, procurement systems, and other departments that store information on your organization’s spending.
2. Consolidate Spend Data
Once data location is identified, all the spend data must be consolidated into a single location with the same format. This data may be spread across multiple formats and currencies if you don’t use integrated procurement solutions.
3. Clean Data
Errors and inconsistencies are common when data is sourced from multiple data silos. Consolidated data must be cleansed and standardized for evaluation. An E-procurement system can simplify this step.
4. Categorize Spend Data
Categorizing data is the next step for spend analytics. You can group data based on suppliers, purchasing power, or other metrics important to your organization. Grouping based on suppliers will shed light on big suppliers and how much they cost your organization.
5. Analyze The Data
This is a crucial step for data analytics, where the classified and grouped data is analyzed based on key performance indicators (KPIs) important to your organization. You can use cost reduction, savings opportunities, supplier performance, etc., as metrics to analyze spending.
The spend analysis is not a one-time optimization process. Implementation steps have to be repeated periodically to collect valuable spend analytics. This will help your procurement leaders to make important data-driven business decisions.
Procol is the highest-rated procurement software that can be deployed in just seven days to optimize the overall procurement process in your organization. Contact us for a demo to learn how our spend analytics provided by Procol help you take strategic business decisions to realize immediate cost savings of as much as 8.5% in supplier sourcing.