In this article, we’ll discuss procurement spend analysis, why it is important, KPIs you need to track, and best practices to implement a spend analysis strategy effectively. Tracking cost savings tells you how much money your procurement strategies and practices are saving. This ensures you have all key information available for your analysis, from spend history, suppliers, budgeting, payment terms, inventory, supply chain data, and more. To illustrate this further, if both companies have $5 billion in revenue, the company that doesn’t engage in spend analysis pays an additional $11 million in procurement costs.
- A Sourcing Performance Dashboard shows from which regions your business units are sourcing and whether materials are sourced internationally or domestically.
- Data is often scattered across many business units, facilities, and departments.
- Direct spend areas often include raw materials, manufacturing costs, and labor.
- A systematic approach to spending data analysis delivers measurable cost savings while improving operational efficiency and strategic decision-making capabilities.
Phase I: Identify Outliers — Spend and Sourcing Analysis
By offering a clear, up-to-the-minute view of financial transactions and spending patterns, dashboards enable more strategic planning and informed decision-making. Many organizations struggle with data stored in isolated systems across different departments. This fragmentation hampers the comprehensive analysis necessary for effective spend management.
Can spend cubes be used for long-term strategic planning in addition to tactical procurement decisions?
Procurement Spend Analysis often involves multiple teams, such as finance, procurement, and operations. If stakeholders are not aligned or engaged, the analysis can lose focus or fail to gain buy-in for changes. One of the biggest challenges in Procurement Spend Analysis is that data is often spread across multiple systems, departments, or formats. For example, purchase orders might be in one tool, while invoices are stored in another. Raw data often has errors like duplicates, spelling mistakes, or inconsistent formats. For instance, if one supplier’s name appears in multiple formats, consolidate it into one.
Generate Reports and Monitor Trends
Leaders can develop KPIs to address these issues to optimize the procurement process. Spend data Retained Earnings on Balance Sheet sources include general ledgers and financial statements, and documents. When you identify data sources before you start your analysis, you’ll help create a more structured setting to gather the data, ensuring your ability to see the whole picture. It categorizes spending into direct (production-related) and indirect (business operations) to optimize purchasing decisions.
- For procurement executives, spend analysis provides the data foundation needed for evidence-based sourcing strategies, supplier relationship optimization, and risk management.
- This includes costs such as office supplies, utilities, travel, and professional services.
- Focuses on optimizing low-value or infrequent transactions, often overlooked in traditional procurement reviews.
- That’s exactly the point of Diego De La Garza, a former Senior Director at procurement solutions company Corcentric.
- This analysis is most effective for organizations when the objective of the process is clear.
Spend Analysis KPIs You Should Track
Its spend analysis process aggregated the spend data from every source, cleansed the data for errors, and centralized it in a database. Hence, organizations must conduct this analysis regularly to automated spend analysis take advantage of the savings opportunity and improve the procurement procedure. This analysis is most effective for organizations when the objective of the process is clear. Setting the goal before conducting the analysis can help organizations spot relevant data patterns. Two examples of the possible objectives are as follows checking the accuracy of the spending estimates and gaining higher value via supplier management. While BI tools offer broad data analysis capabilities, they lack the procurement-specific functionalities found in dedicated spend analytics platforms.
These cost savings can also apply to office supplies, temporary staffing, contractors, consultants, and other indirect items. Organizations achieve this by implementing data validation and cleansing processes during data integration. Regular data quality checks and audits help identify and rectify errors or inconsistencies within the spend cube. Additionally, clear data governance policies and responsibilities ensure ongoing data accuracy. Spend Cube Analysis is a tool that collects and reviews the company’s spending data to get gross vs net insights that can improve the performance and profit of the company. The companies collect, clean, and categorize the data through this process for further analysis using sophisticated analytics software.