The Complete Guide to Procurement Spend Analysis
The Complete Guide to Procurement Spend Analysis
Controlling indirect spending is one of the most significant activities a business can undertake. While managing this spend category can be difficult, proper methods and processes can help businesses resolve cash flow issues and improve financial health.
Spend analysis is the cornerstone of this aspect of budgetary control. It provides finance teams with enhanced visibility to make helpful changes and increased flexibility to drive growth. By understanding how to plan for and conduct vendor spend analysis and implementing best practices for reporting, your company can make better decisions and optimize spend.
Download the free tool: Variance Report Template
What is spend analysis?
Spend analysis is the process of organizing, verifying, examining, and reporting on corporate spending to improve decision-making. It is sometimes referred to as vendor spend analysis or supplies spend analysis.
The spend analysis process allows you to prepare and use data effectively. It includes the following steps:
- Consolidating all data into a single source of truth
- Classifying and organizing expenditures into categories
- Analyzing spending patterns using analytics tools
- Optimizing spending by applying data-driven insights that reduce waste and improve efficiency
Benefits of vendor spend analysis
Data drives better decision-making, and spend data provides a wealth of insights to help organizations operate more efficiently. While spend analysis is often associated with cost cutting, its true value lies in optimizing spend to ensure strategic allocation of resources rather than merely reduced expenses.
Additional benefits of spend analysis include:
Increased visibility: Lack of spend visibility can quickly drain capital, especially in a young or rapidly growing business where expenses and investments scale rapidly. Spend analysis increases visibility, helping businesses maintain adequate cash flow and optimize expenses. It also allows organizations to allocate budgets more effectively, enabling growth and long-term stability.
Improved cost management: Indirect spend is challenging to optimize but crucial to control. Spend analysis and price benchmarking establish clear cost expectations so teams can more accurately allocate budgets and choose suppliers that offer strong pricing and reliable support.
Greater process efficiency: By requiring businesses to track data, spend analysis naturally improves organizational processes. Creating a centralized location for purchasing, spend controls, and reporting strengthens vendor spend analysis, enhancing its benefits.
Enhanced productivity: Increased purchasing visibility provided by data analysis reduces the time team members spend navigating approvals and seeking help to meet their needs. When buyers understand how spending affects the overall budget, they can make more informed purchasing decisions, including streamlining the number of suppliers to minimize delays in securing necessary supplies. This allows employees to focus on high-value activities that lead to more positive outcomes.
Stronger negotiations: Spend analysis helps companies better understand their purchasing habits and trends, giving them more leverage in negotiations. Using spend analysis tools, companies can more easily identify quality suppliers to pursue potential savings through better discounts and improved payment terms.
Better budget allocation: Spend analysis helps finance teams and procurement professionals use data for more strategic budgeting. By examining detailed spend patterns and budget utilization, companies can better allocate resources, identify opportunities for reinvestment, and improve financial forecasting. A data-driven approach also fosters a cooperative business culture around company spending in which leaders optimize new initiatives and activities.
How to perform spend analysis
Creating a repeatable spend analysis process helps ensure improved supplier performance and more accurate and insightful reporting.
1. Define the goal
When setting an analytics goal, start by determining the data that’s needed, how it influences spending, and how you can improve spending efficiency. Include relevant KPIs (key performance indicators) to track your progress and create a clear definition of success.
2. List data sources
Identify all relevant data sources for analysis, asking stakeholders to participate to ensure you gather data from all departments and systems, such as enterprise resource management, marketing, the finance team, and customer relationship management.
3. Consolidate and cleanse
Collect data in a centralized procurement or vendor spend analysis software platform. Be sure to scan and digitize all non-digital data (for instance, paper invoices or contracts) as part of this process. Cleanse the data of duplicates and fill in gaps to ensure integrity. Creating an accurate record of spend analytics data increases confidence in the numbers across all business units.
4. Organize data
Arrange all data according to an accepted scheme or taxonomy. Classifying data enables a more detailed examination of financial information, which can help inform future projects.
5. Link and categorize
Connect expenses to associated sources, such as vendor accounts, projects, and categories. Populating these fields as part of initial data management allows you to conduct a more thorough analysis later.
6. Analyze and iterate
Prepare analysis and reporting relevant to your goal. Establish a workflow to verify and report on the data, conducting regular analysis to improve spend optimization over time.
7. Track performance
Track financial performance KPIs over time, using metrics like cost per unit, spend-to-budget variance, and projected cash flow. This ensures that changes made to the spending process have the intended outcomes and highlights areas needing further refinement. It also provides data for vendor lifecycle analysis, ensuring effective supplier management.
Variance Report Template
A variance report is a valuable tool to understand your spend and keep budget and actuals aligned. Use our template to track production and purchasing costs.
Types of spend analysis
Depending on your spend analysis goals, you may need to explore different categories of data to reveal actionable insights. Finance teams will want to examine several primary spending types as part of an overall spend analysis program.
Tail spend analysis
For most companies, the most common form of uncontrolled spending is indirect procurement expenditures, informally called tail spend. Tail spend typically includes small, inexpensive purchases, ad hoc orders, corporate card buys, manager-approved spot expenses, office supplies, and petty cash.
Tail spend often follows the Pareto Principle (also known as the 80/20 rule), where a small percentage of low-dollar purchases add up to a significant portion of expenses. Analyzing tail spend reveals opportunities to reduce unnecessary expenses to free up cash that powers growth.
Supplier spend analysis
Supplier spend is the money your organization spends with vendors. Supplier spend analysis provides insights into the number of providers you use, how much you spend with each, and the contract terms that influence those purchases. By analyzing supplier spend, you may be able to consolidate your vendor list, negotiate better terms, and save money through volume pricing. This data can also help strengthen supplier relationships by fostering collaboration.
Category spend analysis
Category spend analysis evaluates the different categories of products and services you spend money on, such as supplies, products, fixed assets, debt, wages, or other cost centers. Analyzing this category can highlight spending inefficiencies, inform budget allocations, and act as a guide for streamlining expenses. Effective category management helps control procurement costs for high-ticket categories and ensure purchasing aligns with business needs.
Item spend analysis
In item-level spend analysis, you examine each line item to determine what your business truly needs to operate effectively. While this type of analysis can help reveal opportunities to cut costs, negotiating for items individually may be more time-consuming than productive. Focusing efforts on broader category spend helps procurement teams address needs while also uncovering potential cost-saving opportunities.
Payment and contract terms
Companies may be able to improve cash flow by adjusting payment net terms and supplier contract conditions. Enhanced contract management practices not only reveal opportunities to negotiate improved terms—they may also reduce periodic liabilities and enhance capital efficiency. Additionally, comparing contract pricing and terms against industry benchmarks can help you assess current contract performance.
Variance Report Template
A variance report is a valuable tool to understand your spend and keep budget and actuals aligned. Use our template to track production and purchasing costs.
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Example of a vendor spend analysis project
As an example of a spend analysis application, consider a parent company with multiple locations, such as a gym chain. In this business model, individual locations may be responsible for ordering their own supplies, leading to inefficiencies, reduced visibility, and lost financial leverage for the business. Standardizing and optimizing supply chain processes can improve financial and operational performance.
A vendor spend analysis project using this type of organizational format could proceed as follows:
1. Data discovery
The finance team gathers data from all locations for a set period (e.g., last year or quarter) and organizes it to review the entire procurement process.
2. Location comparison
Finance then compares performance and spending at each location by examining spending for major categories (rent, supplies, labor, marketing, etc.) and analyzing unique factors like membership size and location-specific differences. They also assess vendor contracts for common supplies to identify possible consolidation opportunities.
3. Process comparison
In this step, the finance team looks at the order process for each location to see if they follow the same requisition and approval steps. Finance also evaluates whether streamlining these processes would improve the purchasing experience and reduce maverick spending.
4. Logistics comparison
The team now analyzes each location's receiving process to identify opportunities to centralize distribution for geographically close locations, optimizing supply chain systems in these areas.
5. Contract consolidation
Based on spend analysis insights, Finance can seek procurement optimization possibilities like consolidating vendors to secure improved volume pricing for considerable long-term savings.
The above steps allow Finance to make better decisions about budget allocation, vendor relationships, and process improvements that improve operational efficiency. This type of spend analysis can also help organizations balance the profitability of successful locations with the needs of lower-performing ones.
3 Best practices for better spend analysis
A few simple best practices can help refine your company's procurement spend analysis program.
1. Start with a strong supplies spend analysis process
Vendor spend analysis is foundational to an organization's success. Establish a repeatable, transparent process for data collection and reporting that begins with a strong approval workflow. By ensuring all purchases meet requisition standards, businesses help eliminate downstream issues regarding improper total spend.
2. Enlist a champion
Since spend analysis is an in-depth, multi-departmental effort, create a point of contact or a project owner to ensure project completion. This person is responsible for compiling data sources, collaborating with vendors and internal stakeholders to gather information, and acting as quality control for incoming data.
3. Use category spend analysis to strategize solutions
You now have the power to make changes that curb unnecessary spend. Examine real-time data to determine spending priorities, budget allocations, and strategies for streamlining supports to realize volume discounts. Create a plan for building stronger category spend analysis routines as part of the larger spend analysis process.
Why supplies spend analysis projects fail
Spend analysis relies on consistency and accuracy to be beneficial, and ineffective spend management strategies often falter due to a few common issues.
Lack of process: Without a reliable process, maverick spending and data gaps can undermine analysis integrity. Establish a consistent procurement process with standardized purchase requisitions, approval workflows, and reporting processes to ensure adherence.
Inconsistent data collection: Without centralized data, spend analysis will likely fail. Eliminate siloed data storage by integrating information into a single platform.
Manual administration: Manual data entry and spreadsheet-based tracking lead to errors and inconsistencies. Most organizations are moving toward intelligent automation to avoid manual analysis, enhance accuracy, and eliminate delays.
How Order.co improves vendor spend analysis
With a procurement software solution, you can track spend while enhancing procurement visibility and control. Order.co automates manual processes, creates effective purchasing guardrails, and ensures data integrity for reporting and analysis.
With Order.co, you can:
- Create a well-documented, easy-to-follow process for approvals and purchasing
- Automate purchase order creation, catalog curation, strategic sourcing, invoice processing, payments, and analysis
- Integrate data sources into all major financial systems to facilitate improved budgeting and forecasting
- Use dashboards and visualizations to reveal clear, actionable insights
If your organization is ready to create a modern spend analysis program to streamline purchases and increase savings, request a demo of Order.co.
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