Many CFOs are now challenging their procurement function with the difficult task of reducing costs while maintaining the same level of goods and services. As part of this bid to increase profitability, many organizations are turning to spend analysis.
In fact, according to The Deloitte Global Chief Procurement Officer Survey 2018, reducing costs ranks as the most important business strategy for organizations at the moment.
However, before diving straight into cutting unnecessary costs, it is important that a thorough analysis is conducted as to where exactly money is being spent. A detailed spend analysis report will answer questions such as What is being purchased? Who is purchasing? What is the purpose of the purchase? How much is being spent? Who are our suppliers? Are suppliers delivering as promised?
Once you know exactly where your money is going, you will be in a much better position to make decisions about how and where it should be spent and identify opportunities for reducing costs.
However, a problem that often arises out of spend analysis initiatives is a poor quality and lack of recorded data. This is where technology has an important role to play.
According to the same Deloitte report, spend analysis and reporting, will be the area of procurement most impacted by technology over the next five years.
By choosing a procurement solution that includes spend analysis as well as the likes of e-procurement, e-sourcing and supplier contract management, your organization will have all relevant data available in one place, ready to be analyzed.
However, once you have a solution in place, capable of providing the information required, there are some important steps to take in order to conduct an effective spend analysis initiative.
Steps for Conducting Spend Analysis in Procurement
Consolidate Spend Data
The larger your organization, the more departments that you will have. This means many separate budgets, accounting systems, and internal processes. It is vitally important that all data from these different areas is consolidated into one central database for effective spend analysis to take place.
However, even after consolidating all spend data into one database, the fact that it has been sourced from many different areas means that differing formats, currencies, and languages will be involved. Work with internal departments and suppliers to standardize the formats of invoices and purchase orders for easy viewing.
With a number of different departments in your organization comes a number of different suppliers. For accurate spend analysis, all suppliers should be tagged, in order to view them individually. From here, the likes of prices and turnaround times can be assessed and the best suppliers then tagged as ‘preferred’.
With individual suppliers grouped and categorized when preferred, the same should be done with expenses for the purpose of spend analysis. By breaking your expenses down into the likes of office supplies, marketing, travel, and legal spend, you will have a much better idea of where your money is going and be able to make informed decisions over spend.
Once you are following such steps within your spend analysis initiatives, you will begin to experience many benefits.
Benefits of Spend Analysis
Clear Visibility into Spend
This may seem like an obvious one, but for those in charge of managing budgets, it is their biggest priority to understand how much is being spent and where it is being spent. Through spend analysis, organizations gain a greater understanding of the costs of materials and services, expensive suppliers and those suppliers meeting/not meeting expectations and can adjust their procurement processes as necessary.
Maverick spending is also eliminated through the implementation of a more controlled, centralized procurement process, that often comes out of a detailed spend analysis report.
As mentioned, organizations are under pressure to both maximize profits and reduce costs. Through spend analysis, businesses gain insights into both their spending patterns and supplier profiles. Additionally, organizations will realize unexpected savings by switching to preferred suppliers, negotiating volume discounts and reducing waste from overbuying.
Through the monitoring of activities as part of a spend analysis initiative, your organization can avoid duplicate payments, resulting from suppliers issuing multiple invoices for the same order. Late payments, which often result in penalty fees and a loss of preferred status with suppliers, can also be avoided.
Regular monitoring of your suppliers’ actions and your dealings with suppliers will help improve your risk management. Through spend analysis you can monitor your dependency on certain suppliers through the level of dealings with them, while also keeping track of their annual revenue and credit score. If your dependency outweighs the strength of the supplier, you may need to adjust your procurement strategy.
Your organization may be required by industry or government law to comply with certain procedures and audits. With all relevant data, from supplier information to purchasing history, stored and readily available in your centralized database, you will ensure that your employees’ adhere to company policies and any audits will be relatively straightforward.
With cost reduction such a big priority for CFOs at the moment, organizations need to gain a greater understanding into where and how their money is being spent, before making any drastic changes. Technology has a major role to play, and through the implementation of a procurement solution that includes spend analysis, organizations can begin to assess their spend activity and start making changes to their procurement process. Taking this step will allow you to start realizing savings, manage your risks effectively, ensure compliance and ultimately increase profits.