The Value Of Spend Analysis
Spend mapping is used to gain an overview of companywide spending. It helps determine the percentage of company-wide spending in major cost categories.
It also gives an indication of the relative importance of cost categories by grouping them by size. It is a useful scoping exercise before beginning procurement activity.
Successful companies do not make it to the top simply because of luck or that they had an amazing product. Sure, that was a huge part of it but the true success is the way in which they manage their business. One of the biggest parts of managing a business properly is spend analysis.
Procurement Management
Simply defined – Procurement is the process by which a company purchases good and services to support and run their business. For some organisations simple process are in place which allows for the procurement. In more successful organisations however strategic sourcing and procurement disciplines are in place allowing for more measured and methodical approaches in the purchase of goods and services. These organisations are support by ideal operational process, technology and compliance and governance.
Organisationally, the more successful businesses have in place CPO (Chief Procurement Officer) who’s key responsibility is to put in place procurement strategy that supports the business strategy and its objectives.
There are two types of procurement that needs to be considered in any company:
Direct: Typically this is the procurement of Materials (and some services) that is directly correlated/ connected to the production of products sold to end customers. These are also referred to production expenditure goods and focus is on the purchase and supply chain of these goods. Materials are important because they allow the company to create products. It is also important that the materials obtained actually meet a set of standards. They need to be of high quality, and they must arrive on time in order to meet customer demands.
Indirect: As often referred as indirect as they are the purchase of goods and services to support the business. Typically it is Services that are required such as, temporary jobs, consultants, and corporate travel but to name a few.
Each of these is incredibly important, corporate travel for instance is a necessity to every growing business, and makes up a huge chunk of spending in any company. If managed correctly, substantial cost savings can be achieved.
There are many different areas in travel where money can be saved, one of them being the use of travel agencies instead of the company booking travel. That is a perfect example of spend analysis and procurement management. So how do you get started? If you are unsure as to what then here some simplified questions that are asked when spending is called into question:
* Historical spend, price movements and volume
* Future spend and volume
* End user and current buying practices
* Number of suppliers involved (who are we spending it with?)
* Number of items bought (what are we spending it on?)
* Supplier performance
* Current inventory investment
* Life expectancy of product
* Geographical spend (where are we spending it?)
Naturally it is a fairly complex process and an intricate knowledge spend categories is required. However, if the right method and process is carried out then one may be able to achieve successful results. The process can be much more complicated than this, but now you at least have a very basic idea. If you have ever read about spend analysis, then chances are you’ve heard how it affects companies, but do you know how the actual process works? If not then you are in luck, because we are going to answer all of your questions.
Use the spend-mapping tool early in your current process analysis, and then again as needed until you drill down to the required level of detail.
The Process
The key is to identify the relative significance of each of the major expense categories for the company:
Analysis of data
* Group similar types of spending into major categories using information from the general ledger.
* Provide a description for each major category using the businesses chart of accounts.
* Spending can be grouped by category, type or size.
* Supplier, item, site and department level of detail
* Harmonise data to a common format (when derived from multiple and different sources)
Process breakdown: The first and most obvious step in the process is to carry out historical analysis of past annual purchases to ascertain total spend item need to be examined individually, understand total contracted costs and if they are in line with that set in their respective arrangements.
Once the identity of the item or service has been ascertained, it is time to determine whether or not any measure of procurement competence was exercised in the purchase. Has it benefited the company at all? Answering this question will require looking at the company ledgers to see if the purchase of this product or service has been desirable in accordance to that expected.
Once it is determined who the service or product was purchased from and how it is benefiting the company, the next, most obvious step would be to determine whether or not it is required. The goal of this exercise of course, is to determine the level of procurement management that is being exercised. In other words, you are trying to find out exactly where all of the company money is going. If you can detect any leaks or unnecessary expenditures, then you will be executing what is known as cost avoidance. This is especially true if you are terminating a totally unneeded service.
These are the basics of spend analysis. As you can see, it is an incredibly important part of any company. Note that it does take quite a bit of time, and you need to have a trained eye in order to catch the mistakes or the triumphs that occur in everyday spending. Also keep in mind that many things related to companies third party expenditure provides an opportunity for savings. The idea behind the company expenses and procurement is to make certain that it is controlled and in line with expectations and contract arrangements and ensure that the company expenses are less than the amount of company profits. Prudent and outperforming make certain they manage their cost base and this is best achieved by examining and analysing the group’s expenditures.
In closing, if you are new to spend analytics then it is highly desirable to sort out assistance
Key Spend Analysis success factors:
* Ensure that new pipeline products are included
* Analyse data rigorously to ensure integrity
* Use templates to standardise data
* Don’t waste time collecting irrelevant data
* Don’t get analysis paralysis
Michael O’Brien is a Partner at Epago Group. He and his partners have a combined experience of over 20 years in the procurement solution and virtual employee management business. Visit today to learn more about procurement services Australia Epago provides.
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