Spent analysis is the examination of how money is spent. It consists of direct (goods and services that go into final products) and indirect spent (goods and services that do not go into final products). The analysis occurs in three dimensions: contractors or suppliers, customers, and commodities or services.
Spend analysis provides metrics to monitor organizational spending and is a first step in transitioning from a tactical to a strategic procurement perspective.
What did the company spend its money on?
What suppliers received the majority of the business? Did they charge an accurate price in the purchase?
Which department spent their money that was correctly budgeted for?
Are there opportunities to combine volumes of, and standardize product and service requirements, reduce the number of suppliers, or exploit market conditions to receive better pricing?
Companies perform spend analysis for several reasons. The core business driver for most organizations is profitability. In addition to improving compliance and reducing cycle times, performing detailed spend analysis helps companies find new areas of savings that previously went untapped, and hold onto past areas of savings that they have already negotiated.
The following steps must be taken n order to conduct goods spend analysis for my organization:
Step 1: Obtain Management Approval
The very first step is to obtain management’s approval on doing the spend analysis by developing briefings to educate them, informing the senior manages about what spend analysis is, how It can benefit the company, and how they can contribute to success. If the boss wants spend analysis, it is easier to convince others.
Step 2: Staffing
Spend analysis cannot be performed well without adequate staffing. A designated team should be formed and responsibilities should be assigned. Team members must give this project a serious consideration and should be professional and experienced.
Step 3: Generate Data
Obtain spend data from the financial and purchasing management system. Good data is needed for good spend analysis. Bad data can lead to inaccurate spend analysis or require significant manual fixing. Data should include all invoices and POs that have passed through the system within the specified time period.
- Spend and number of transactions
- Number of suppliers
- Purchase order value
- Transaction distribution by dollar range
- Spend and number of transactions
Step 4: Summarize and Classify my Data
Along with data quality, another key challenge is determining the proper commodity and service schema. I am going to summarize spend by supplier, including dollar value and number of transactions and place them into commodity groups.
The geographical location of suppliers
How the goods, service and works are purchased
Who the goods, services and work are purchased from
Step 5: Setup Realistic Goals
Set targets for improvement that are realistic and achievable. The team needs to measure total saving and other financial and non-financial benefits, to set realistic goals for purchasing improvement.
Step 6: Analyze Data with Reports
When I have classified my data, the team will be able to report, visualization and analysis the report. Meaningful reports therefore will be submitted to the senior management within the organization by highlighting important information on spending who in turn will make strategic sourcing decisions which will lead to new contracts awards and monitor compliance.
As been discussed with Heath’s article for Spend Analysis