Is your procurement function spread across departments and geographical locations? Without procurement teams having access to data insights and a strategic plan with annual targets, your business may be leaking funds and missing out on opportunities to optimize.
According to a survey, procurement managers believe that tail spend comprises 80% of transactions and can save 7% of expenses. Typical KPIs for spend analysis in supply chain management are cost savings, supplier performance, spending under management, employee performance, and operations.
What is Spend Analytics?
The spend analytics in supply chain management builds a report of spending data that a business can analyze to eliminate unnecessary expenses, identify inefficiencies, and reduce costs. Spend analytics answers the following questions –
- What are we buying?
- On what terms are we buying?
- How much have we paid for the products or services?
- Is our buying matching the demand?
- Whom are we buying from?
- Does the procurement department have the necessary tools to optimize spending?
Spend analytics fits into the first step, where your procurement department tracks its spending across suppliers. The two methods for spend analysis are –
- Should-cost analysis- It compares the cost estimate of a product or service against the amount you are paying. This analysis depends on material cost, profit margins, labor rates, and overhead expenses. The report gives you an estimate of the amount you are overspending, using which you can prepare for further negotiations with suppliers.
- Cost versus mass analysis- This is an analysis of current versus potential suppliers based on items that have a higher cost per mass. Using this data, you can identify opportunities for redesigning or finding better suppliers while maintaining product quality.
Spend Analytics for Efficient Supply Chain Management
Businesses can run reports for in-depth analysis and improvements. Common areas where you can improve supply chain management are below.
- Centralized procurement process to reduce maverick spending
- Using Vendor Management Inventory (VMI) to reduce overspending
- Switching to more efficient suppliers with better pricing
- Consolidating the orders and eradicating duplicate ones
- Analyzing international suppliers for currency conversion and monetary savings
- Choosing suppliers that provide volume discounts on orders
This helps businesses deal with overspending, incorrect pricing, and duplicate orders through the same or new suppliers.
Building a Resilient Supply Chain with Spend Analytics
The Covid-19 pandemic reiterated the need for building a resilient supply chain using spend analytics. Spend analytics plays a key role in the following aspects.
- The transparency lets you get complete insights into 40 to 80 per cent of your spending. You can meet your primary objective of optimising the costs by choosing the right external suppliers.
- You get optimized cost, quality, availability, and sustainability in procurement, which helps you achieve a competitive advantage. With 360-degree visibility, you can identify opportunities to reduce spending across the supply chain.
- Achieve high data integrity by creating a single source of truth that both finance and procurement functions can track. Spend analytics system integrates purchase orders, invoices, general ledger, and accounts payable accounts.
- Extensive and customizable dashboards provide relevant supplier data and spending patterns. Using this information, your procurement department can initiate meaningful discussions with the suppliers to enhance supply chain resilience.
- Unlock greater business value with the help of spending patterns, variances, external demand, and commercial levers. Use digital tools to get real-time visibility, contract terms, and the impact of possible scenarios.
Steps of Spend Analysis
The procurement team can follow these steps to identify overpayments, unfulfilled contracts and turnaround times, compliance issues, and penalties.
Step 1 – Data Collection
The centralized procurement system should collect data from all departments, ERP systems, business units, accounts payable, general ledger, eProcurement systems, and finance software.
Supplier invoice formats, currencies, and transaction systems could differ among business units. Your system should assimilate different data formats, currencies, and languages and translate everything as per the language it understands.
Step 2 – Data Cleansing
This step removes data inaccuracies, redundancies, and corrupt records. It also identifies irrelevant data as part of standardizing the data from different sources. The system matches invoice payments with inventory and purchase orders to check for double payments.
Step 3 – Data Classification
Classify the data into pre-defined categories specific to your business. These spending categories include suppliers, marketing, software licenses, office supplies, inventory, travel, IT services, legal fee, and outsourced services.
Divide the categories further into sub-categories. For example, supplier expenses should have transport costs, contracts, parts, and more.
Step 4 – Data Analysis
Evaluate the spending points and create aggregates and percentages. Focus on the pain points and areas where you want to improve. This data will help you understand maverick spending, redundancies, and overpayments.
A spend analysis software can quickly organize and analyze the data, as procurement analysts may take more time. The supply chain optimization solution will digest the data and show opportunities and strategies for improvement.
Step 5 – Strategy Implementation
Improve your procurement strategy by establishing goals and identifying opportunities. It is best to implement the strategies in phases and test the outcomes. The strategies should include both short-term and long-term savings.
- Change the suppliers
- Negotiate discounts based on higher volumes
- Consolidate the order placement
- Eliminate duplicate orders
- Forecast the demand and reduce over or underbuying
- Resolve currency conversion issues
- Implement centralized and controlled procurement
Build Long-Term Procurement Capability
Discover significant opportunities for improvement by benchmarking different areas of the organization together. Set up crisis nerve centers and spend control towers, and manage spending in both direct and indirect categories.
This data helps companies build long-term procurement capability and resilience, whether in business as usual or during a crisis. You can give feedback to the suppliers using which they can design and develop products for delivering better value.
AI-powered spend analytics services offer 360-degree solutions for holistic digital transformation in an organization. Using intelligent systems, your business can easily ingest the data, cleanse, remove duplication, and classify for newer opportunities in the supply chains.