Spend Analysis: Analyzing Expenses in Procurement

Spend analysis is an advanced technique of analyzing data related to procurement spend and finding patterns or trends to identify cost-saving opportunities and improve the efficiency of the procurement processes. Analyzing spend is a practice that helps your organization find ways to reduce costs, optimize the procurement process, and enhance supplier relationships. In simple words, spend analysis enables businesses to enhance financial efficiency. In addition, it involves sincerely evaluating information or data regarding the expenditure and reviewing performance data of the entire organization. The process also allows organizations to understand the pattern of the spend, cut costs, and find ways to promote value in a category.

Importance of Spend Analysis and its Working

Spend analysis provides crucial information about spending patterns and the performance of the supplier by enabling your organization to evaluate products or goods, prices, suppliers, quantities, business units, and terms of payment. It works by gathering, classifying, and reviewing expenditure data to understand expenses from various sources to gain insights. The objective of spend analysis is to analyze spending data to make informed procurement decisions and identify ways to reduce costs to promote efficiency ultimately. Moreover, spend analysis not only provides important information regarding the historical spending pattern but also helps your business to predict future trends in spending and accordingly execute procurement decisions.

Categories of Procurement Spend

Spend analysis helps your business to perform efficient financial planning, identify risks, and manage the expenses of the organization. There are two categories in which spending can be divided:

1. Direct Spend: Direct spend comprises all the materials, goods and services that are directly involved in making products within an organization. It includes all the raw materials used in the production of products, labor charges, services for production, equipment, and devices, and the charges involved in shipping.
2. Indirect Spend: Indirect spend is all about goods and services that are not directly involved in the production but allow the organization to execute, manage, and establish its business activities. Indirect spend includes human resources, legal services related to accounting, travel and accommodation, maintenance charges, and utilities for the office.

However, it depends on the organization how they manage these two categories but the primary objective of managing it is to save money and promote higher profits. In addition, it is quite complex to manage expenditure for direct procurement, as it comprises major categories that directly influence profitability and revenue. Let’s take an example: an organization that chooses to use high-quality raw materials for manufacturing its products will end up gaining the trust of the consumers and generating higher revenue due to the good quality of the manufactured end products. As higher-quality raw materials cost more, it also enables the organization to produce high-quality products while enhancing customer loyalty and contributing to the business.

Advantages of Spend Analysis

By performing regular spend analysis organizations can avail benefits in various areas, which include supplier relationships, cost savings, mitigated risks, and efficient procurement.

• Reduced Costs: Spend analysis helps your organization identify opportunities for cutting down or lower procurement costs and saving money. It focuses on eliminating unnecessary expenses within the organization to meet your cost savings objective.
• Better Visibility: Spend analysis provides a better understanding of the purchase pattern based on the gathered data that promotes financial efficiency, saves costs, and improves supply-chain performance. It provides access to actual data that allows us to identify areas that need optimization to generate profit.
• Reduced Risk: By analyzing spend data, companies can identify potential risks and can take necessary action to prevent any downfall. Analyzing spend data also helps your business to make sure that your organization's procurement processes comply with procurement policies and guidelines. It also enables you to monitor additional expenditures and recognize any non-contracted suppliers. Spend data, including ESG data and credit scores of the vendors, allows your organization to analyze risks associated with the organization's overall supply chain more effectively.
• Strategic Decisions: Regularly analyzing expenditure data enables you to get insights based on actual metrics that helps you have a better approach to making strategic decisions that align with the objectives of the organization. It also ensures that the decision made can be expected to the best possible results. It would have been extremely difficult without timely data and information of the supply chain performance to make decisions that results in the best for your business.
• Enhanced Supplier Performance: Spend data analysis helps your organization to track and evaluate supplier performance with reference to certain factors, which include quality of the products or services, delivery time, and adherence to the rules and regulations with the contract. It allows you to recognize suppliers that stand out and those that require improvement. It helps you to promote top-performing suppliers and, maintain better supplier relationships, and incorporate consistent improvement.
• Effective Sourcing: Spend analytics allows your business to identify market patterns, trends, weak performance, collaborating opportunities, and sourcing ability. It can be used for finding new categories of suppliers that align with the company’s financial goal.
• Clear Predictions: By analyzing spend, you get a basic information about the market trends and purchase patterns that will help your organization to predict future expenses more precisely and create long-term plans. It helps you get an idea of the impact that increasing costs and new businesses will have on your business.

Therefore, spend analysis can help your business cut costs in the procurement processes and allow you to identify the best suppliers that offer great value. It helps your organization to recognize areas that need optimization in their procurement strategies in order to save money and make more profit. Moreover, it also serves as the method that is utilized by businesses to improve the efficiency of their procurement processes and make effective decisions based on real data.

At Procurement Resource, you get services that will help your business improve financial efficiency, understand purchasing trends, and identify ways to reduce costs. Our wide range of services, including market intelligence, spend analysis, spending management, cost modeling, market trends analysis, supply chain intelligence, effective sourcing strategies, and data analysis, will help your business to enhance efficiency, optimize and execute effective procurement techniques, make better-informed decisions, and contribute to focused analysis and management. Get in touch with us now to develop a plan of action that will enable your company to manage expenses, analyze procurement techniques, and perform efficient optimizations in your procurement process. Let’s plan a strategy for your organization to analyze spending and improve efficiency.

Author

Ayushi Raj Prabhakar (Associate Business Analyst in Procurement Resource)