What is Spend Analysis?
Spend analysis is a fundamental but little known process outside of the procurement world, in a nutshell, spend analysis is a procurement practice for reviewing the spend profile of a business with a view to reduce cost, increase efficiency or improve supplier dynamics.
Spend analysis involves collecting, cleansing, categorising and analysing a company’s spend data using well defined techniques i.e. spend cube analysis, risk analysis, profiling matrices. Working through dedicated software or more informal routes, spend analysis is a key tool in a procurement functions toolkit to proactively identify potential savings, risks, or opportunities to increase the company’s purchasing power.
Spend analysis begins with gathering data from different sources, both internal and external to provide an in depth understanding of how the organisation’s supply chain operates. Identifying opportunities for further development, cost savings, efficiencies, and potential risk.
How Does Spend Analysis Work?
Spend analysis is an integral part of an organisations cost management programme and goes hand in hand with cost visibility in providing a detailed understanding of the cost drivers for the organisation, highlighting opportunities to reduce cost and risk within the supply chain.
The type and timeframe for any spend analysis is dependent on the clarity of the data available and the complexity of the supply chain model in place with the organisation. SCB Procurement generally operate an 8 step process when conducting spend analysis to help focus on the key areas of importance for the client.
1. Identify
The first step in the process is to identify all relevant areas of the business to be included in the analysis. Understanding the purchasing process within the organisation allows for the scope of the analysis to be tailored to those areas where the spend is concentrated.
2. Extract
Once the data sources have been identified which provide sufficient data points for the scope of analysis required, it is time to gather the data and amalgamate it into a central data repository.
3. Cleanse
Cleansing the data begins by amalgamating the different data types or formats into one useable dataset which can later be interrogated, during this stage the data is also scrutinised for inaccuracies, erroneous or misleading information, and aligned with the scope of the analysis
4. Test and Refine
Once the data is cleansed it is time to begin refining the raw data to help provide meaningful results, processes at this stage include data standardisation, ensuring repeatability etc.
5. Categorise
Categorisation of the data allows for more defined and meaningful analysis, areas which can be categorised or classified can include:
- Suppliers - for greater supplier management
- Product types or groups - to better understand spend patterns
- Product sourcing locations - showing where products are purchased from
6. Analyse
Now the data has been cleansed, refined, and categorised, it can be analysed thoroughly to highlight potential areas of development, savings, or risk. It is also important to interrogate the data for patterns showing purchasing trends or maverick purchasing instances.
7. Strategise
Using the information gained from the analysis, it is now possible to look at the potential opportunities and risks highlighted and begin to develop strategies to best exploit the organisations position of strengths or mitigate against potential risks.
8. Review
Although spend analysis is seen as a stand alone task, it is important to periodically review the data and re-run the analysis to ensure the opportunities and risks are still valid and the strategies implemented are achieving the expected results.
Spend Analysis Tools
With the results of a spend analysis potentially defining strategy and the direction the purchasing function within an organisation, it is important to ensure the data in interrogated and utilised in a standardised and repeatable manner.
To help with this there are a wealth of different analytical tools and methodologies available which help to provide a best practise solution which can be repeated or assessed in similar ways time and again, a few of the most common and useful are outlined below.
Spend Cube
Using a spend cube method when performing a spend analysis helps to focus on the 3 key areas of spend and utilisation:
Where (supplier)
Suppliers can be categorised and classified according to the spend with them, their perceived risk, location, etc.
Who (purpose)
Understanding who or which area of the organisation makes the purchases can outline if there are efficient purchasing processes in place or if there are incidences of maverick or erroneous purchasing taking place.
What (Product or category)
Products should be categorised in a manner which best suits their purpose, this may not be the obvious ‘similar product groupings’ but may include purchase locations, similar production processes, similar materials etc. By looking outside of the simple categorisation, opportunities for standardisation and supplier consolidation may become visible.
Risk vs Value Matrix (Kraljic Matrix)
Named after Peter Kraljic who formulated a simple matrix model for identifying the risk of supply of goods into an organisations supply chain, by outlining the relationship each supplier has between the risk of supply and the value or profit impact. This matrix allows purchasing professionals to make better educated assessments about which suppliers to develop relationships with.
Segmenting suppliers into one of four categories based on the risk vs value profile can quickly highlight the type of relationship and the level of resource which should be allocated.
Strategic
Strategic suppliers provide critical items to the business with limited scope for alternative supply, the organisation should develop a close supply partner relationship with this type of supplier which should be managed closely
Bottleneck
Bottleneck suppliers provide low value, non-critical items which, if not managed effectively can cause supply bottlenecks, the long-term strategy for this type of supplier is to remove them (where possible) by either engineering an alternative solution to the product or developing a different route of supply.
Routine
Routine suppliers provide simple low value items to the business with numerous alternatives i.e. fixings, electrical connectors, labels etc. Limited resource should be allocated to this type of supplier and the products purchased should be commoditised and competitively tendered at regular intervals to ensure best price.
Leverage
Leverage suppliers are the best type of supplier for an organisation to maintain, the products they supply are relatively valuable with limited risk to the business, there will be many alternative supplier routes available. In general, the buying organisation will hold the power in this type of relationship and can leverage a beneficial position.
Pareto Analysis
Pareto principle named after Vilfredo Pareto (18 th century engineer), also known as the ‘80/20 rule’. When used in a supply chain environment the 80/20 rule can help focus resource and effort where it will have the greatest effect. The Pareto principle can be used to accurately describe different aspects of a supply chain:
80% of spend value will be distributed between 20% of the suppliers
This highlights the need for businesses to constantly address the number of suppliers they trade with, where possible demand should be migrated towards the 20% with fewer suppliers being traded with sporadically.
80% of an organisation’s time will be spent managing 20% of its suppliers.
Understanding which suppliers to develop and to allocate resources to can help maximise the benefits achieved whilst minimising effort. Using Pareto principle in an amalgamation of different aspects of supplier relationship management can highlight which suppliers to develop and which may not be performing effectively.
80% of the issues experienced by an organisation will be generated by 20% of the suppliers.
Highlighting these suppliers and investigating any underlying issues with the supplier or the relationship can make for a more effective supply chain process and dramatically reduce instances of failure.
80% of production demand will be accommodated by 20% of the available stock
Pareto principle in this instance forms the basis for ‘ABC’ analysis identifying critical or fast moving stock, allowing for greater focus to be placed on the 20% of stock which is seen as a potential risk.
Spend analysis Benefits
A thorough and effective spend analysis can offer a wealth of both operational and strategic benefits for a business. I have written an article previously looking in detail at the benefits of spend analysis, for the purposes of this article I will summarise the benefits and include a few more:
Categorisation of spend
The use of spend categorisation allows for greater visibility on purchasing spend, empowering more accurate tracking of actual purchase cost and areas of overspend.
Identification of areas of purchase risk
By understanding and recording areas of potential supply chain risk, the risk can either be removed or formal mitigation strategies can be developed ahead of time.
External Audit of Purchasing Function
If a spend analysis is performed by a third party i.e., a consultant, then the resulting data will not be tainted by internal perceptions and priorities.
Identify Areas of Potential Improvement
One of the main purposes of spend analysis is to identify areas of potential cost or efficiency savings or process improvement.
Identify Wasteful Processes
As part of the improvement process prompted by spend analysis, the removal of wasteful processes which add no value to the business can be phased out.
Promote Best Practice
The activities associated with or as an outcome of the spend analysis promote the use of best practise techniques. With increased efficiencies attributed to new practises and visible improvements, the use of best practice techniques within the business becomes an everyday occurrence.
Focus on Medium to Long Term Strategy.
Spend analysis promotes a shift in purchasing strategy from transactional to a more strategic function focusing on medium to long term growth promoting data driven opportunities.
More effective supplier performance management
By understanding the spend and performance dynamic of the suppliers you work with, opportunities are highlighted for supplier base rationalisation, working with fewer, more effective suppliers.
Baseline data for future benchmarking activities
Once performed, the data created and formalised through a spend analysis becomes a baseline for future strategic growth programmes to provide a benchmark for success.
Potential Pitfalls
Spend analysis activities can often fail to achieve the expected results due to a number of issues generally relating to the raw data or the process used. Below is a list of potential pitfalls to be mindful of when considering spend analysis:
Quality of the raw data
If the quality of the raw data used is poor, containing errors, erroneous or misleading information, the resulting analysis may be flawed and not provide accurate or useable information. Time spent at the start of the analysis cleansing the data is possibly the most important aspect of the exercise and should not be rushed.
Complex or labour intensive cleansing process
In opposition to the first point, data that is difficult to understand or requires extensive formatting and cleansing to become useable, can significantly extend the time and resource allocation for the spend analysis.
Ability and capability of the resource performing the analysis
To perform a spend analysis effectively requires a deep understanding of the process and the spend being analysed. Categorisation of the spend portfolio should not be attempted without knowledge of the internal processes and route to market.
Management buy in and support
The results of a spend analysis, if implemented can provide strong cost and efficiency savings, however, to achieve the required results may require a shift in company focus or strategy. If senior managers are not fully supportive of the process, proposed savings will become unachievable.Unclear or unrealistic goals
Spend analysis is a powerful tool for highlighting opportunities for cost and efficiency savings. However, if prior to performing the analysis, unrealistic or unclear goals are set for the outcome, any
achievement realised may not be in line with expectations.
Mis-use of tools
There are many different tools and techniques available when performing a spend analysis, it is quite easy to become distracted or entrenched with the sheer breadth of available options or in choosing the wrong type of tool for the purpose.
One time deal
Spend analysis is intended as a function which is re-run periodically as a method of checking progress and goal attainment. If an analysis is performed once only, it is easy to fall back into familiar ways and begin to experience cost encroachment.
How SCB Procurement Solutions Can Support.
At SCB procurement Solutions we have extensive experience of performing spend and supply chain analysis within a wide range of industries and sectors, offering an in depth understanding of how cost and supplier selection can affect the efficiency of different types of business and organisation.
We begin the process by listening to what is important to you the client, we then find an analysis solution which is completely tailored to your requirements. This approach provides you with the best fit for your business and maximises the potential savings and opportunities available for you.
To talk to one of our consultants about how we can best assist you with your cost saving requirements, please email or use the contact form on our website to arrange a suitable time when one of our consultants can call you to discuss your needs.
