How is spend analysis used in procurement

How is spend analysis used in procurement?

by Umair Ahmad Khan

Expenditure analysis is the act of finding, gathering, cleaning, grouping, categorizing, and evaluating spend data inside your business. This is done to reduce procurement costs and increase efficiency through increased visibility and openness. By utilizing real-time data and analytics, you may learn to save money and increase efficiency. Spend Analysis is a subset of the much broader discipline of spend management. It’s utilized to display all of your data to assist you in making more informed sourcing and supplier selection decisions. Additionally, it can aid in contract compliance, cycle time reduction, and the identification of maverick spending.

Data Sources for Spend Analysis

Any project involving expenditure visibility must begin with the recognition of pertinent spend data sources. Thus, where do you begin? The following are among the most often used sources of data for procurement expenditure analysis.

  • tools for enterprise resource planning (ERP)
  • general ledger data, i.e., financial information on an organization
  • orders for purchases
  • Suppliers’ data
  • risk assessments
  • credit scores
  • data relating to transactions
  • additional internal and external systems and sources

Direct vs. Indirect Spending on Procurement

The distinction between indirect and direct spending is frequently misunderstood. The following are the definitions for both of these critical areas of procurement. In procurement, direct expenditure refers to services and commodities directly connected to the manufacturing of products. Raw materials, components, hardware, and services associated with manufacturing processes are all examples.

Indirect expenditure in procurement refers to the acquisition of services and goods not directly connected to product manufacture. Businesses may sustain and expand their operations through indirect procurement. The following are some examples of indirect spending categories:

  • services of marketing 
  • professional services (advisors, consultancies)
  • transportation and lodging
  • MRO (repair and operations, maintenance)
  • IT (hardware, software)
  • Services related to human resources (recruitment, training)
  • logistics and fleet management
  • utilities (gas, electricity, water)

Direct material expenditures account for most overall expenditures in manufacturing sectors – often up to 80% of total expenditures.

Procurement Spending Categories

Indirect and direct procurement expenditures may be classified, facilitating the study and management of related items and services. A spend category is a logical grouping of related spending goods and services that have been specified unambiguously at the organizational level. For instance, “information technology” may be seen as an expenditure category that encompasses both IT hardware and software.

The spend taxonomy is the system through which a procurement organization categorizes spend. One approach to thinking about spending categories is a tree with several branches representing various levels or subcategories of spending. The number of layers in a spend taxonomy varies according to the procurement organization’s requirements but typically ranges between three and six tiers of categories and subcategories.

When creating a taxonomy, it is critical to convey it clearly and align it internally with important stakeholders such as local/global category managers and finance. A precise description and knowledge of each subdivision in the taxonomy aid incorrectly classifying your data. Accuracy is critical since you ultimately want to see what you’re spending, how much you’re spending, to whom you’re paying it, and where you may save money. Therefore, caution should be exercised when establishing imprecise or ambiguous subcategories, such as ‘Miscellaneous things’ or subdivisions that aren’t MECE (Mutually exclusive, collectively exhaustive).

When performed properly, Spend Analysis may result in increased savings and more visibility into corporate spending. Procurement professionals may utilize this tool to participate in factual, data-driven conversations with stakeholders. Not only does it boost procurement professionals’ productivity, but it also assists organizations in raising the value of procurement, which is a critical step toward converting procurement into a significant, value-adding activity.

 

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