Sourcing and Procurement
How to reduce costs with procurement spend analysis
Every business strives to increase profits year after year. While exploring new avenues for revenue generation is crucial, minimising expenses should also be a top priority. After all, money saved is money gained.
Effectively managing expenditure requires asking key questions, particularly related to procurement. Are the quantities of goods and services legitimate? Are the rates justified? Are the suppliers genuinely cost-effective? Are we getting what was promised? Is there potential for further rate negotiations?
These questions lead to a better understanding of spending patterns and fund allocation, which are crucial for developing expense-control strategies. However, the answers to these questions need a comprehensive analysis of vast amounts of data. This is where procurement spend analysis tools play a crucial role.
How spend analysis works
Spend analysis follows a step-by-step procedure that includes these:
- Data identification: To obtain a comprehensive view of spend data, organisations must identify data sources across all business departments, rather than rely solely on information provided by the purchasing team. By accumulating data from various internal and external sources, such as payroll software and bank accounts, companies can gather a more holistic understanding of their expenditures. An eProcurement solution can monitor procurement spend data from diverse sources. This helps with the subsequent steps in spend analysis.
- Data consolidation: Spend analytics tools gather data from various departments, each with its own budget and accounting systems, into a central repository. This enables a comprehensive view of all spending activities across the organisation.
- Format standardisation: Different data sources translate to varied invoice and purchase order formats. For easy comparison and viewing spend analysis tools standardise these formats.
- Supplier evaluation: Classifying suppliers as preferred or non-preferred helps businesses identify their most cost-effective suppliers, evaluate supplier performance and pricing, and renegotiate rates with others.
- Expense categorisation: Spend analytics tools categorise expenses into categories such as office supplies, marketing, travel, legal spend, technology, etc. This allows a better understanding of the distribution of expenses and identifying areas for cost savings.
Supplier spend analysis for cost reduction
Here is how supplier spend analysis helps you save money:
- Identify costly suppliers: Evaluate the performance and pricing of suppliers. Identify suppliers who may be charging higher rates or failing to provide the expected value. Consider alternative suppliers or negotiate rates.
- Implement strategic sourcing: Enhance your sourcing process by considering cost-effective product alternatives and engaging with local suppliers. They yield long-term benefits.
- Spend distribution: Rather than employing a generic procurement strategy, consider a category management solution for your recurring expenses (marketing, sourcing, office supplies, travel, legal, etc.). This enables category-specific spend analytics and supplier consolidation that optimise procurement processes.
- Track and benchmark prices: Monitor the prices of goods and services over time. Identify significant price fluctuations. Benchmark prices with industry standards to ensure competitiveness.
- Optimise supplier relationships: Develop strong relationships with preferred suppliers who offer quality products/services at competitive prices. Leverage volume discounts or negotiate favourable terms.
- Address maverick spend: Maverick spending is the expense resulting from purchases outside of agreed-upon contracts. Whether done intentionally or accidentally, they result in substantial financial leakage. They can be controlled by centralising purchase-to-pay processes, which involves ensuring that all purchases adhere to existing supplier contracts and obtaining pre-approval of prices before making purchases. Supplier spend analysis identifies areas of unsupervised or maverick spending, enabling effective measures to address and prevent such leakage.
- Monitor contract compliance: Ensure suppliers are complying with agreed-upon terms and pricing outlined in contracts. Regularly review contracts to identify any discrepancies or potential renegotiation opportunities.
- Continuously review and improve: Regularly review supplier spend analysis reports to identify new cost-saving opportunities. Monitor spending patterns and adjust procurement strategies accordingly. Embrace technological advancements and tools to streamline procurement processes further.
Less is more. Amidst uncertainty, procurement has consistently achieved short-term savings and effectively managed risk to support growth. With the economy showing signs of improvement, procurement plays a crucial role in enhancing supply chain transparency and driving enterprise-wide cost reduction.
It is time to enhance the conventional cost-reduction approach by incorporating technology. Currently, only one-third of procurement leaders utilise analytics and other technologies. However, there is promising news on the horizon. According to MarketsandMarkets, the procurement spend analytics market is projected to reach 8 billion USD by 2026, at a CAGR of 25.3%.
Procurement leaders who invest in spend analytics can expect a positive ROI and help the organisation maintain a transparent and sustainable supply chain.
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