In today’s increasingly competitive business environment, spend analysis is emerging as an effective practice to deliver savings and improve profitability. Simply put, spend analysis involves the collection and categorization of spend data. This categorization can then be used to identify opportunities for improvement and help impact the bottom line across all industries. In short, in order to remain competitive and continuously improve practices, spend analysis is essential. With companies vying for every single order, making use of spend analysis for your benefit is a no brainer.
Step 1: Gathering Vital Information
Before you can go ahead in the decision making process, you need to be well informed. For spend analysis this starts with the data from your suppliers, accounting department, sales teams, and management. Some of the figures you need to get down include:
Step 2: Cleaning Up the Data
Understandably, you will end up with a lot of information after going through the first step. All of this info needs to be cleaned up in order to obtain an objective picture of the ground realities. After all, this data has a major impact on the entire supply chain and effects your entire organization’s reliability and ability to deliver. Therefore, it is vital to get accurate data on items including:
Step 3: Classification of Data
Spend data classification allows sorting entire inventories into categories. This allows easier identification of opportunities for improvement. Standard classification of products can be completed based on:
Step 4: Identifying Opportunities Through Spend Data
The data you obtain needs to be carefully analyzed in order to identify actionable prospects. It is important to discount any necessary expenses and label them as non-addressable costs. This will help narrow down to items that actually can benefit from implementing changes.
Before you can go ahead in the decision making process, you need to be well informed. For spend analysis this starts with the data from your suppliers, accounting department, sales teams, and management. Some of the figures you need to get down include:
- product descriptions
- quantities ordered and consumed
- purchase price
- supplier details
Step 2: Cleaning Up the Data
Understandably, you will end up with a lot of information after going through the first step. All of this info needs to be cleaned up in order to obtain an objective picture of the ground realities. After all, this data has a major impact on the entire supply chain and effects your entire organization’s reliability and ability to deliver. Therefore, it is vital to get accurate data on items including:
- amount and types of product being moved
- pricing agreements and contracts
- value analysis
- supply base optimization
Step 3: Classification of Data
Spend data classification allows sorting entire inventories into categories. This allows easier identification of opportunities for improvement. Standard classification of products can be completed based on:
- In house company classification (based on product type, manufacturer, etc.)
- NAICS: North American Industry Classification System
- UNSPSC: United Nations Standard Products and Services Code
Step 4: Identifying Opportunities Through Spend Data
The data you obtain needs to be carefully analyzed in order to identify actionable prospects. It is important to discount any necessary expenses and label them as non-addressable costs. This will help narrow down to items that actually can benefit from implementing changes.
Step 5: Sorting Data into Categories
Now that you have a large amount of data on your hands, it is time to sort it all into meaningful categories. These categories should be built on a supply market basis in order to directly link related areas of spend with the market.
Step 6: Setting Minimum Limits
When sorting spend data into categories care must be taken to set a minimum monetary value. This value is later on used to select the highest impact spend sector where changes can be implemented first.
Step 7: Selecting a Category for Action
The process of identifying categories for action can be done by using ABC analysis. This technique sorts the categories into 3 further groups; A, B, and C.
Step 8: The Opportunity Scan
The opportunity scan involves the use of a special matrix that details:
Now that you have a large amount of data on your hands, it is time to sort it all into meaningful categories. These categories should be built on a supply market basis in order to directly link related areas of spend with the market.
Step 6: Setting Minimum Limits
When sorting spend data into categories care must be taken to set a minimum monetary value. This value is later on used to select the highest impact spend sector where changes can be implemented first.
Step 7: Selecting a Category for Action
The process of identifying categories for action can be done by using ABC analysis. This technique sorts the categories into 3 further groups; A, B, and C.
- Group A is where 80 percent of the spend occurs
- Group B is where the remaining 15 percent of the categories are assigned
- Finally, Group C includes the remaining 5 percent of spend.
Step 8: The Opportunity Scan
The opportunity scan involves the use of a special matrix that details:
- Potential benefits such as cost savings, efficiency gains, reduced risk, and increased value
- Ease of implementation with a focus on organizational change and estimated benefits
