Spend analysis is a practice that should be done monthly or quarterly, to analyze where you are spending your money.
For companies that never do it, there is usually a 5-20% cost savings (thats margin direct to the bottom line) available. Doing it repeatedly ensures you don’t have bloat creep up, and margins can stay higher.
Spend Analysis starts with proper setup of your vendors and items. Although there is a shortcut way you can do this if your data is bad, it is not nearly as effective. Get your data set up right.
You want all vendors to have a “category” or “commodity” associated with them. More detailed setups will include geography, associated branch, and other meta data for further breakdowns.
Next, you need your items bought, whether you control stock (track quantities) or not, tagged in your system with category, or commodity. Also make sure there is a default GL account associated, or a way to connect an item to a previously used GL account.
We can now answer questions like:
- What is our true spend across divisions, plants, locations, or departments?
- Where are the opportunities for consolidation?
- Where can we use data to work with current vendors?
- Where are we able to reach existing incentives like rebates?
- Where are we compared out our contracts?
You can now slice that data multiple ways in order to look for opportunities.
A good starting place is the following look at spend which give various looks at vendors, categories, and time:
And then graph that data in useful ways to help ‘see’ aspects of our spend look for opportunities.
While there are many things to look for, I’ll give you a few:
- What categories comprise the most spend? Have we looked into specifying this relationship?
- Where can we consolidate?
- Where are prices or spend outside of the market or expected spend?
Another may be less about the items, and more about the vendor opportunities?
Perhaps there are some areas like Consumables that are too fragmented and can be consolidated with better pricing? Or maybe Metal needs to be market checked and verified since it’s heavily consolidated.
Doing a spend analysis once a month is a powerful way to keep tabs on costs, prevent bloat, and keep eyes open for improvement opportunties, or building better relationships with higher quality vendors.
