Spend analysis is frequently identified as a critical procurement capability. Yet surprisingly, few organizations actually conduct this activity on a thorough or regular basis.
Many organizations think of spend analysis as necessary only when they are about to embark upon strategic sourcing events, or when they need spend data totals to use in preparing RFPs in the marketplace. Even then, the analysis often is conducted only at a high level. However, a correctly structured analysis of properly categorized spend data can provide critical information that can be used to deliver insights, reduce risk and inform decision-making outside of these events.
For most organizations, half (or more) of every dollar they receive in revenue will go out to vendors for materials and services. Managing how and when those dollars go out the door is important at any time, but even more so now, as organizations deal with the unexpected turmoil that COVID-19 has created across the globe. Understanding spend at a detailed level is a key component and critical tool in creating and managing a business resilience plan.
Below are six areas where spend analysis can deliver critical inputs to reduce risk and increase resilience as the corporate world transitions to the so-called “new normal.”
- Vendor Analysis: Spend analysis provides data to develop a much richer understanding of vendors and the related risks and opportunities that may exist among them. Right now, many of an organization’s vendors may be stressed from the impact of COVID-19-related disruptions. Spend data can be used to conduct vendor analysis to identify alternative suppliers (in the event of bankruptcies, shortages and other disruptions), concentration risks (sole sourcing) and criticality. The vendor analysis can be used to identify those vendors with whom the organization may want to form stronger partnerships, as well as to identify vendors where it may be appropriate to decrease reliance.
- Market Analysis: Spend analysis data can provide deeper understanding of an organization’s usage, costs and relative strength within the context of the overall marketplace. Market analysis also helps organizations understand marketplace trends, risks and opportunities. In the new normal, organizations can expect vendor marketplaces to shift more abruptly and more unevenly. Additionally, certain markets may be impacted by government rules and regulations enacted in response to the global pandemic. Spend analysis data, when combined with market data, can provide valuable insight into how the organization’s costs and supply availability may be impacted in the future and where there may be new opportunities emerging for innovation, replacement and capitalization in conjunction with the overall marketplace movements.
- Business Unit Analysis: Spend data is most commonly examined when identifying total spend among an organization’s business units to discover opportunities to leverage spend and drive purchase prices down. However, the spend data details can also be utilized to understand how proliferation of materials and services can be reduced through specification standardization and substitution management. In addition to increasing spend leverage through SKU consolidation, this can help reduce catalog maintenance costs, inventory holding costs and working capital requirements.
- Location Analysis – Spend analysis data can easily be analyzed to understand where purchases originate and where they go. Most often, this information is used to determine potential shipping/logistics costs when developing total landed costs. However, this data is also critical for business resilience planning. As an example, location analysis can help organizations understand and identify the potential impact to the business from a city or regional shutdown. Besides helping the procurement organization identify new places to solicit vendors, the location information can help the logistics organization plan for potential shipping disruptions in their scenario modeling and resilience planning.
- Usage Analysis – Spend analysis data can be utilized to understand how materials and services are being consumed by the organization. Typically, this information is examined when conducting strategic sourcing events to quantify potential future product/service requirements and demand. In the new normal, this information can highlight changes in customer behavior and reveal where customer markets are growing, shrinking or changing. Understanding the usage can help avoid unnecessary inventory builds and potential write-offs that may arise from market or governmental regulation changes.
- Compliance Analysis – Spend analysis data can be a vital input into understanding the compliance of employees and vendors with organizational policies and procedures, as well as with any contractual commitments. In both the current environment and the evolving new normal, organizations will need to react very quickly to vendor disruptions. Your organization may have already faced the situation where employees have switched to purchasing goods and services “off-contract” or have purchased from unauthorized vendors because the approved vendor has disappeared as a result of the pandemic situation. Analyzing this data can help the procurement organization to understand where new vendors need to be authorized, what terms and service levels need to be amended, whether processes need to be adjusted and/or whether additional employee training may be needed to ensure business resilience.
In summary, spend analysis data helps unlock insights into the critical areas above, which in turn contributes to the building of more robust scenarios in an organization’s resilience planning process. It gives the business a vehicle to monitor vendor behavior and quickly identify vendors at risk of survival. More importantly, the spend analysis provides hard data that quantifies that risk and helps the business understand the cost/margin implications when evaluating alternative scenarios. Spend analysis can help identify opportunities to reduce working capital requirements through better inventory management and reduced holding costs. And finally, conducting regular spend analyses allows businesses to not only identify regular spend reduction opportunities, but also cut down on rogue, maverick and non-compliant spend that can put the organization at risk while supporting the organization’s business resilience plan.