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Procurement

Spend Analysis 101: Steps, Best Practices, KPIs & Benefits

23.08.2022

In the modern business world, a business’s success depends tremendously on managing operational spend and improving its procurement process. Enterprises expect their procurement teams to go beyond cost reductions. Procurement teams, in turn, require comprehensive information about the company’s transactions and the right analytical tools to drive value beyond savings. That can be achieved by conducting a thorough and complete spend analysis. We’ll help you understand what spend analysis, and guide you to perform a rigorous spend analysis for your company.

What is Spend Analysis?

Spend analysis is a process of collecting information about procurement spend and analyzing it through analytical tools to identify cost reduction opportunities, increase efficiency, and drive value beyond savings. Spend analysis helps to understand the spend structure and make meaningful changes.

Analyze organized data through spend analytics to obtain meaningful insights relevant to our objective. Spend analysis can be done for several purposes, which include:

Conventional spend analysis mechanisms are time-consuming and inefficient. Embrace digital transformation and use Spend analysis software for more thorough and efficient spend analysis. You can also centralize data management through a comprehensive eProcurement solution such as Kissflow. 

Perform Spend Analysis in 8 steps

We’ve identified 8 simple steps that can help you conduct a thorough and accurate spend analysis.

1. Identify Your Objective

Spend analysis is the most effective when you have a clear objective in mind. Identifying your objective before doing the analysis will help you locate relevant data patterns. We discuss some potential objectives of spend analysis in the previous sections. Other objectives can be:

  • Check accuracy of spending forecasts.
  • Gain higher value through supplier management.

2. Identify Data Sources

Identify data sources across all departments of your organization so that you don’t restrict yourself to data from your buying team only. Spend data can be sourced from anywhere from accounts payable and receivables to the general ledger. 

If you use an eProcurement solution, it’ll efficiently track spend data from all sources.

3. Consolidate Spend Data

Consolidating all your spend data can be a daunting task as the data is often spread in different languages and multiple languages. However, using a centralized platform makes this step much more manageable. 

4. Clean and Organize Data

If your data is not accurate, you can’t gain valuable insights from it or perhaps end up with misleading conclusions. Review your data thoroughly for any errors, and correct them. Organize your correct data and standardize it for a better yielding analysis.

5. Link Spend Data to Suppliers

If your objective for spend analysis is about the supply chain, this step is significant for you. Group all purchases made from suppliers belonging to the same parent company together. Once you link all spend data to relevant suppliers, you’ll have a better picture of your supply chain.

6. Develop a Category Strategy

Categorize your spend data using a standardized category system or using your company-specific categories. An effective category strategy provides spend-management visibility and helps you achieve sustainable cost reduction.

7. Analyze Spend Data

Use your spend analysis tools to analyze your data according to your objectives. Measure your spending data against key performance indicators to understand your performance. 

8. Repeat Regularly

Your spend data is continuously changing, and that’s why you need to perform regular spend analysis. Capitalizing on every savings opportunity and improve your procurement process by conducting a thorough spend analysis regularly.

Spend Analysis KPIs

Analyze the spend data you organize on the key performance indicators. Calculate key performance indicators for your spend data and compare them to the values you desire for meaningful insights.

Common KPIs for spend analysis include:

1. Process Efficiency Through Requisition-to-Order Time

Requisition-to-order time is the average period between submission of requisition and issuance of Purchase Order. Requisition-to-order time measures the process efficiency for your business. Longer requisition-to-order time results in unproductivity.

2. Compliance Through Pre-Approved Spend

Pre-approved spend is the percentage of spend that is approved before an order is made. Pre-approved spend measures the compliance of suppliers. Higher pre-approved spend results in more efficient book-keeping and financial processes.

3. Savings Through Realized Saving 

We can measure savings through the KPI of realized savings, which is the amount of savings realized through supplier contracts. A higher realized savings percentage allows the company to invest its savings more strategically.

Spend Analysis Benefits

If you’re still wondering if spend analysis would be worth the investment of time and money, here are 5 benefits of conducting spend analysis:

1. Reduce Maverick Purchasing

Maverick purchasing refers to purchases against your company’s procurement policy. It essentially means that you’re buying from other sources without taking advantage of discounts you negotiated with existing suppliers. 

Spend analysis helps you track maverick purchasing and identifies savings opportunities by minimizing maverick purchasing.

2. Supply Base Reduction

Supply Base Reduction, also known as supplier rationalization, minimizes the number of suppliers. Spend analysis helps you achieve this by identifying opportunities for driving more value from fewer suppliers.

3. Free Your Working Capital

A thorough spend analysis helps you optimize your working capital. Spend analysis will identify suppliers with lower-than-arrangement payment terms. 

Rearranging these terms will liberate working capital for your business needs.

4. Reduce Delivery Delays

Spend analysis will help you identify the reasons for delivery delays. If it is due to supplier performance, sharing this information with suppliers improves delivery performance significantly.

5. Minimize Supply Chain Disturbances

There is always a risk of unavailability of critical items due to disturbances in the supply chain. Identify single-sourced items through spend analysis and develop a multiple supplier base for these items.

Best Practices in Spend Analysis

Why Kissflow Procurement Cloud?

Spend analysis can be an arduous task, but it is well worth the effort when done right. You can identify savings opportunities, improve your procurement process, and maximize the value you gain from suppliers. 

Automate your data management, data cleansing, and spend analysis with a flexible eProcurement software like Kissflow Procurement Cloud. It helps you turn your spend data into actionable insights. By doing this, you can spot purchasing trends and then optimize them for maximum results. Some of the other benefits of using Kissflow are as follows:

  • Get smart spend insights
  • Track vendor performance 
  • Gain access to customizable reports
  • Visualize purchase data as charts and heatmaps
  • Make the most of intricate data with a simple, visual-rich interface