The 7 real benefits of Spend Analysis for your business
In the modern hyper competitive business environment, companies are constantly looking for a competitive edge to differentiate themselves from their competitors. Even if you are lucky enough to operate in a niche environment it is vitally important to ensure your business is as efficient as possible.
The supply chain is the heart of the business, supplying products and services to all aspects of the organisation and transporting finished products out to customers. As large organisations have come to understand, it is important to perform a health check on the supply chain periodically to maintain an efficient flow of goods and services.
Performing a Spend Analysis works to outline the current structure and highlight areas of risk and opportunity for development and cost saving. There are many benefits associated with this operation and the effects can be wide ranging, not only affecting the supply chain but permeating through the business holistically.
Spend Analysis is performed by interrogating the data available through the business relating to purchases made both direct (used in production) and indirect (used to maintain the wider business). The spend analysis generally utilises a spend cube (diagram below) to segment the data providing information relating to three key areas:
- What (products purchased)
- Where (supplier used)
- Who/How (Process used to purchase
All data is segmented, categorised and processed to provide a full overview of the companies purchasing function. Using this method, it becomes easy to see potential areas of opportunities for development and growth.
Below I have outlined seven of the most powerful benefits which can be seen through the effective use of Spend Analysis:
Categorisation of Spend
This is one of the most important tasks undertaken as part of an analysis, by segmenting the products and services a company purchases into similar groups a true picture of the health of the companies purchasing function.
By categorising the data in a methodical manner and removing erroneous or misleading information potential supply chain risks and areas for improvement become visible allowing for focused purchasing development.
Identification of areas of purchase risk
Through the normal business operation, areas of purchasing risk develop and can become embedded in the day to day operation, these risks may appear invisible until a risk event causes significant effect to the supply chain.
Risk areas could stem from placing business critical items with suppliers who consistently fail to achieve required delivery times or quality standards, financially unstable suppliers, inefficient internal processes.
Utilising spend analysis principles these risks can be highlighted and mitigated or managed, reducing the potential for damage to the business from a risk event.
External Audit of Purchasing Function
A strong purchasing team will, as a matter of course conduct elements of a spend analysis to assist with strategy creation and implementation, however as with any function the team can become blind to small details that to them have limited significance. An external expert viewing the data with fresh eyes may see different risks and opportunities which the internal team has missed.
Using an external team should not be seen as a negative reflection of the success of the internal team, instead they should be used to support the ongoing purchasing function and strategy development.
Spend Analysis when used in conjunction with other business development processes can offer signification development potential allowing the business to increase their overall competitiveness while maintaining a relatively low level of supply chain risk.
The costs of engaging an external entity to conduct the analysis may vary dramatically depending on the business chosen and the complexity of the supply chain, however this cost needs to be weighed against the potential benefit to the business and the realised return on investment (ROI).
Identify Areas of Potential Improvement
The main aim of any Spend Analysis is to identify areas in which the purchasing function can make tangible improvements and possibly leverage greater cost savings. This is accomplished by interrogating the data provided to highlight any areas of possible supplier rationalisation or spend grouping allowing for greater buying power and economies of scale.
Opportunities can arise through this process outside of the normal cost saving arena simply by embracing new supply routes, new technologies or process change.
Identify Wasteful Processes
One part of the Spend Cube analysis (highlighted above) is to interrogate how the purchasing function operates from point of requirement through to invoice payment. This helps to highlight any areas or processes currently conducted which add no tangible value to the business. With this information it is then possible to re-structure the function to operate more efficiently increasing output and reducing cost.
Promote Best Practice
By conducting a Spend Analysis the company is starting to implement best practice methodology, if managed effectively the analysis will provide a number of opportunities for development as highlighted in the first five benefits. Leading by example and instilling the most effective and sustainable processes and procedures help to elevate the organisations status within the given market sector. Promoting complimenting behaviours with the suppliers helps to build robust, mutually beneficial relationships which assist in drive cost efficiencies through collaboration.
Focus on Medium to Long Term Strategy.
It is very easy within an organisational purchasing team to only manage the day to day operational requirements in the absence of an overarching guiding strategy. Procurement strategy is the process which defines a purchasing functions growth and potential for cost efficiency.
Performing periodical spend analysis helps to define and push a more strategic focus within the team, this allows for a more holistic approach to purchasing, potentially increasing efficiencies, reducing workload and building a strong cost management process.
Further information on spend analysis
For more information on spend analysis and how spend analysis can benefit your business, please read our next article.