What is Spend Analysis: Examples, Benefits, Best Practices & KPIs

Keeping a close eye on every dollar going out the door is worthwhile in every business. It is even more essential for growing businesses and startups. Losing money to irregular or inefficient spending can make reaching even your quarterly targets challenging.

A detailed and informative dive into your spending can shed light on the patterns and trends you might overlook otherwise. Simply, managing your enterprise spending can make all the difference for your business.

That is where spend analysis comes in! So, what is spend analysis? And how can it benefit your business? Please read the article to learn all about the importance of spend analysis and its basics.

What is Spend Analysis?

Spend analysis is the process of gathering data about spending for procurement to reduce expenses, improve supplier relationships, or boost productivity. The analysis reports offer suggestions and recommendations based on facts. It answers crucial financial questions:

• What are you spending money on?
• Are you receiving the value of your money?
• What are the other procurement options?
• Is there a way to optimise supplier relationships?

Why is Spend Analysis Important?

Spend analysis unveils strategies to consolidate purchases, streamline procurement processes, and source better materials, products, and services. Now that you know the spend analysis meaning, it is time to find out why it is important.

• Spend analysis can convert raw data into usable information.
• It offers in-depth insights into the procurement process and helps -
  • Determine cost-savings opportunities
  • Handle and boost supplier performance and risk
  • Elevate procurement workflows
  • Identify problems and pitfalls in the process
  • Forecast and budget spending

Spend Analysis Example

Here is a spend analysis example to understand its function better. A manufacturing company orders materials from about a hundred vendors. The company gathers spending data from all sources, edits and enriches it, and stores the clean data in a database. The spend analysis process classifies all purchases and categorises suppliers by their parent company.

The company can use the data to compare quantities purchased, payment terms, and prices from several vendors in a single system. Thus, the spend analysis will reveal various possibilities for capitalising on the procurement process and negotiating with suppliers.

Sources of Spend Analysis Data

The accuracy and value of your spend analysis reports entirely depend on data. It implies you must collect the data from sources available to your business. Let’s look at the possible sources:

1. ERP Systems

An Enterprise Resource Planning (ERP) System enables integrated management of critical business functions through technology and software. It can be an excellent repository of data relevant for spend analysis.

2. Accounting Books

You can count on accounting records or books for reliable sources of spending analysis. The balance sheet, profit and loss accounts, and cash flow statements can be dependable sources and provide accurate facts.

3. External Data

External data refers to the information received from vendors, lenders, creditors, or investors. Gathering external data, such as bank accounts and benchmarking data, can validate the accuracy of estimated numbers and enhance the value of analysis results.

4. Purchase Orders

Another source for preparing spend analysis reports is purchase orders. Using the invoices, you can gain much information about the purchase and sales, including price, payment date, and contractual obligations.

How to Conduct a Spend Analysis in Procurement?

Firstly, it is essential to understand that you do not have to rush or analyse too much when it is your first time conducting a spend analysis. The procedure includes many aspects and steps, so you must start small and focus on the objective. So, how to perform a spend analysis?

Here are the curated steps for a thorough spend analysis.

1. Identify Your Objective

Spend analysis is only effective when you know your goal. Learning your objective before you start the analysis will help you identify data patterns. Some common purposes are:

• Improving the efficiency of business procedures.
• Capitalising on saving opportunities.
• Evaluating the accuracy of spending forecasts.

2. Determine Data Sources

Data is often scattered across many business units, facilities, and departments. Locate the sources in your company to identify where you can get the required data.

3. Extract and Consolidate Spend Data

Once you have the relevant data, use a centralised system to consolidate and store it. It can be a dedicated tool or a manual spreadsheet. The database should contain your spending with crucial information, such as supplier names, departments that placed orders, and prices.

4. Clean and Organise the Data

Inaccurate data can lead to misleading conclusions. Hence, review your data to make it error-free and standardise it for a better analysis.

5. Classify the Data

Categorise your data using your specific categories or a standardised category system. You must link and group each purchase to associated sources. It helps break down the massive spending data and shows how you spend on specific purchase groups.

6. Analyse Spend Data

Leverage spend analysis tools and metrics to analyse your data based on your goals. Measure the spending data to evaluate the performance. Lastly, display the analysis results clearly and concisely.

7. Repeat and Refine

After following all the above steps, you will have successfully conducted your first spend analysis. However, it is not a one-and-done process. Your spending is always changing; hence, regular analysis is necessary to monitor progress.

Consistently update the data to ensure everyone follows contract terms, collaborates with preferred suppliers, and spots opportunities for savings. Regularly analyse spending and identify new best practices for the business each time you examine the data.

Benefits and Challenges in Conducting Spend Analysis

Spend analysis presents various advantages, for example, procurement efficiency, cost savings, and operational transparency. Other notable benefits of conducting spend analysis are:

1. Reduced Supply Base

Supplier rationalisation allows you to minimise the associated suppliers. Spend analysis can assist you in identifying opportunities to seek more value from fewer suppliers.

2. Decrease in Delivery Delays

Deliveries can be late due to various reasons. A spending analysis can pinpoint the causes and help reduce such instances.

3. Free your Working Capital

Precise spend analysis can optimise your working capital. You can use it to connect with suppliers with lower payment terms.

4. Minimise Supply Chain Disruptions

A minor disturbance in the supply chain can lead to the unavailability of essential materials. Spend analysis enables you to identify single-sourced items and create multiple supplier bases.

Ultimately, spend analysis can offer baseline data to help you estimate spending more accurately and frame long-term plans. However, the complex process demands the utmost attention and dedication. It often discourages companies from implementing this practice.

You do not have to worry! Listed below are common pitfalls you must address:

• Each interaction and transaction brings substantial data sets and can be overwhelming to process.
• Extracting, reviewing, and classifying decentralised data can be labour-intensive.
• Shortage of skills may result in low-quality data and errors.

Spend Analysis KPIs

You have performed your spend analysis in procurement. Now what? Consider measuring the effectiveness of implemented practices. Key Performance Indicators (KPIs) help track the progress towards set goals and evaluate the current processes to make informed decisions in the future. Here are some spend analysis KPIs:

1. Savings Through Realised Saving

The ‘realised saving’ KPI can help companies that use less expensive options for purchases or reduce costs through discounts. It is the amount of savings realised via supplier contracts.

2. Cost Reduction

Companies that decide to eliminate certain expenses can use the cost reduction KPI. It involves a comparison of spending between periods before and after elimination to see whether cutting expenses was effective.

3. Contribution to Total Spending

The contribution to total spending shows the number of funds each department and location takes in your business. It determines how much funds you are using on specific items, suppliers, or categories.

4. Contract Compliance

Contract compliance is a group of KPIs used to assess the performance of suppliers. A few such metrics include:

• Supplier Lead Time: The average period between requested orders and delivery.
• Order Accuracy: Determines how frequently a wrong order is received.
• Service or Product Defect Rate: It measures how often services are unstable or goods are unusable.

Best Practices in Spend Analysis

Since you know how to measure and track spending, here are some best practices in spend analysis you can follow for effective results.

1. Regular Data Updates

Spending patterns change over time and years. Remember to update and feed your latest data to capture the variations.

2. Supplier Engagement

Collaborate with suppliers to gather detailed information about their products, services, payment terms, and pricing structures.

3. Cross-Functional Collaboration

Communicate with departmental stakeholders to ensure a holistic approach. It will help gain precise insights for a comprehensive analysis.

4. Benchmarking

Assess and compare your spending patterns and trends with industry benchmarks to uncover areas of overspending.

5. Technology Adoption

Employ cutting-edge technology and advanced software to accelerate data processing, discover information, and maximise accuracy.

Spend analysis in procurement is significant for businesses, especially growing companies. It includes analysing expenditure data to identify ways to cut costs, establish reasonable budgets, improve forecasting accuracy, determine weaknesses of internal processes, and more. Spend analysis forms a foundation for making sound decisions and transparency. While there are challenges in spend analysis, a well-planned and executed process can optimise your spending.