74% – This is the percentage of CPOs who is focusing on cost reduction as a strong business priority according to the Deloitte 2016 Global Chief Procurement Officer (CPO) study. Most organizations aim at optimizing cost and increasing profitability. Indeed, a cost-effective procurement process would help generate millions of dollars of savings every year. However, before getting involved into cutting unnecessary costs, one must analyze where the money is being spent. To bring more visibility into spend patterns; many organizations have turn to spend analysis for long-term savings without impacting the company’s productivity. Spend analysis is the process of assessing the ‘who, what, when, where, why and how’ of an organization’s expenditures.
APQC’s research indicates numerous areas in which organizations engaging in spend analysis perform better than organizations without spend analysis programs. The data from APQC’s Open Standards Benchmarking in procurement indicates that organizations with these programs perform better in the key areas of cost effectiveness, cycle time, process efficiency, and staff productivity. While the survey results do not provide direct causes for the performance differences, they give valuable insight into the more mature procurement processes and robust supplier relationships possessed by organizations that use spend analysis.
These findings emphasize on the crucial need to implement a spend analysis as part of an organization’s cost reduction strategy. A training and development program involving spend analysis can have major benefits for both the employees and the company as a whole. Such an initiative will allow staffs to have an in-depth understanding of what spend analysis consists of and how to implement it effectively. For instance, they will gain insights about topics such as: how to collect and segment spends on suppliers; why and how to do a spend analysis; the opportunity scan. Such training solutions can lead to an efficient spend analysis program which will support your organization to optimize costs. Here are some major advantages of this action:
- Greater Visibility on Suppliers and expenditures
Through the spend analysis, organizations gain valuable information and a greater visibility on the amount of money it spends. For instance: Expenses for purchasing materials/services, suppliers who incur large costs and also whether the suppliers meet the expectations of what is needed. Such information can be used to modify procurement processes and supplier list. At the end of the day, these changes allow the organization to adopt other more proficient procurement practices such as supplier relationship management and supplier category management.
2. Improve processes
Spend analysis data can be useful to make an informed decision about how processes can be improved within your organization. The implementation of such a program can help to identify opportunities for various improvements during implementation of new systems. For instance: initiating an eProcurement system or consolidating invoices with suppliers. Consequently, the spend analysis can help to identify ways to generate superior ROI.
3. Manage Risk
Working with the same supplier without an effective SRM strategy for many years can incur some risks. In such cases, your organization’s expenditure is likely to increase progressively above and beyond what was originally intended. In this way, an organization can become excessively dependent on a vendor for their operational supplies. This can involve two major risks:
Firstly, if the vendors are dependent on your spend and you make the business decision to change your supplier, they could potentially go out of business, causing a public relation issue. There will be individuals within your organization that should be made aware of this in anticipation for any negative feedback or publicity. Secondly if you are too dependent on one particular vendor and that vendor goes out of business for some reasons, your organization could be left without important goods or services that you need and that might be crucial for your production line. Enriching your spend data with information on your vendors’ annual revenue and credit scores will allow you to better assess your organizations overall supply chain failure risk.
4. Leaner Procurement functions
The lower costs among organizations with spend analysis programs could be related to leaner procurement functions resulting from these programs. Because spend analysis provides knowledge into an organization’s procurement activities and expenditures, it allows the organization to identify areas for cost reduction and process improvement. This, in turn, could result in a lower overall cost to procure goods and services.
5. Category Level analysis
One of the most important steps in spend analysis is to get down to category level analysis. If a category management approach is adopted, it becomes easier for a company to analyze spend data per category. In this way, it will help the organization to divide the categories into sub-categories for a more detailed analysis. This will allow them to have a 360 degree overview on overall spending, enabling a better cost control.
6. Effective supplier relationship management
According to the APQC’s research, Organizations with spend analysis also have fewer vendors in their master files per $1 million in purchases. These organizations have 4.3% fewer vendors per $1 million in purchases than organizations without spend analysis programs. The more streamlined procurement functions of organizations conducting spend analysis may have enabled deeper relationships with a smaller number of key suppliers and reduced the number of employees needed to source and purchase materials.
7. Preferred Supplier Spend
Most organizations may have their preferred supplier lists either managed in a procurement system or on a spreadsheet. Including this information in the spend analysis application will provide immediate visibility into two areas: 1) categories where preferred suppliers are in place but not in use and 2) categories where no preferred supplier exists, thus highlighting a potential sourcing opportunity with the best suppliers.
A training and development program involving spend analysis can significantly increase the competitive edge of your organization. Enhancing the knowledge and skills of employees in this field will impact positively on the overall productivity of the company. The procurement processes are more likely to run smoothly by optimizing costs, maintaining good supplier relationships and manage risks effectively. Since cost effectiveness is among the most prominent priorities of companies, implementing a spend analysis can result into major cost reductions which will boost the organization’s profitability.