Spend analysis is a foundational business process that helps procurement teams determine the next best steps in the sourcing process. It also shows how to prioritize sourcing resources and where the largest savings opportunities exist. Spend analysis involves collecting spend data from multiple sources and systems like AP/accounting, ERP, eProcurement, etc. and aggregating, integrating, analysing and distilling into usable information, to derive insightful outputs.
Spend analysis helps sourcing teams better understand the spending habits of the entire enterprise, with information such as:
- The total spend
- Spend - by category, commodity, service, etc.
- Locating external spend
- Who internally owned the spend (business unit, cost center, region)
- Supplier-wise spend
- If early payment discounts or favourable credit terms were leveraged
- Direct vs. indirect spend
- Line item pricing and pricing variances
- And numerous other ways that a sourcing team can slice and dice its’ spend
The intelligence gained from spend analysis is truly phenomenal, as sourcing teams that utilize automated spend analysis are now also pulling in third-party data about their suppliers and categories to improve their overall understanding of different supply markets. Other supplier information like performance can also be brought into a spend analysis tool.
Spend analysis – the automated tool
An automated and repeatable spend analysis process can help sourcing teams save time and money, and can transform mere data management into data analysis. When sourcing teams automate their spend analysis, they can easily consolidate multiple data streams into one system that categorizes, cleans, collates, and delivers regular reporting that is legible and actionable.
Of course, intelligence collection and analysis may be interesting but the outputs are meaningless if decision makers aren’t “connecting the dots” and leveraging that intelligence to make more informed, and ultimately, better business decisions. Sourcing professionals then have to take this intelligence several steps further and ask themselves
- Is our supply base right-sized to the spend?
- Are we working with the right suppliers?
- Are they providing the value that was promised?
- Do we have the right service-level agreements (SLAs) in place with them?
- Do we need to hold as much inventory; or, can our suppliers hold some of it for us?
- How else can we cut our inventory costs?
Spend analysis in itself may not guarantee that sourcing teams save money and add more value, but it is the logical place for procurement professionals to start.
The future of Spend Analysis
It is predicted that advanced / next-gen spend analysis tools will analyze historical enterprise spend data, supplier data, and third-party data to discern when it is advantageous for an organization to make future buys, along with the quantity and quality of goods and services purchased. For example, if there is a commodity glut in a particular region, advanced spend analysis will take a holistic, big-picture view of the market; they will understand past / present commodity prices to know that now is the time to take advantage of high supply, low demand, and low prices for that commodity.
Thus in the future, spend analysis tools will be an agile, intelligent solution that can save the enterprise a lot of money. They will be similar to how Wall Street traders entrust buying decisions to their computers. Advanced / next-gen spend analysis will allow CPOs and practitioners to relegate routine commodity purchases to systems enabled by a combination of advanced algorithms, artificial intelligence (AI), large, multi-source datasets, and machine learning – a new process that some solution providers and industry analysts have dubbed “cognitive procurement.”