In case you need to catch up, here’s what we’ve covered so far in the Cost Reduction Series:
As we continue in the Spend Analysis Process, after we’ve collected our data the next step is to cleanse and standardize the information. You’ll start by sorting your data by the supplier field and creating a new column called Cleansed Supplier Name. You’ll more than likely find (especially if your supplier relationships do not all flow through one single point of contact or group), that each data set or even within the same data set, has multiple names for a particular supplier. Take for example FedEx. If your company makes payments to FedEx, you will probably see this supplier listed as FedEx, Federal Express, FedEx Corp, and so on. In the cleansed supplier name field, standard­ize all these different options to a single name. Repeat the process for all lines of data.

At this stage it may not make sense to standardize supplier names across 100 percent of the data. If you are dealing with hundreds of thousands of records, this could be a very tedious task. If that is the case, utilize the 80/20 rule. Run a pivot table on the data by supplier, then total up the spend. Identify which suppliers make up 80 percent of the total spend and focus your efforts on standardizing those supplier names. Ignoring 20 percent of the spend may seem troublesome, but keep in mind that within this data there are likely to be repeat entries for the same supplier (for example, FedX instead of FedEx). At this point, we are simply identifying target areas. Once we identify worthwhile projects we then focus on collecting more detailed information; at that point we will look more closely at the FedX data.

Once you have cleansed and standardized supplier names, it is time to group the data into sourcing categories. Sourcing categories are essentially high-level identifiers that indicate suppliers that provide the same or similar services. Grouping them together allows you to identify project areas and, eventually, leverage opportunities. Creating your category list is the first real step in the spend analysis pro­cess—turning raw data into actionable information. Spend analysis is not an exact science; there is no right or wrong way to do it, although there are some best practices that are worth considering.

First, be general in your initial classification. Start at the highest level of categorization you can identify, knowing that you may want to drill down later in the process. For example, you may know that Staples is used for pens and pencils and Xerox is used for paper products, but categorizing them in different buckets is not appropriate at this time. At its base, the initial spend classification is looking to identify which suppliers provide the same or similar services. Right now, you may use Staples for some items and Xerox for others, but a potential sourcing strategy might be to consolidate all of this spend with a single supplier. So for now, classify both suppliers under the category Administrative Supplies.

Many suppliers provide a wide range of goods and services, making classi­fication difficult. If you have managed to capture any line-item usage details in your initial data collection, this information can be used to classify the supplier. If a single supplier performs two different services or provides two very different types of goods, it is important to provide only one high-level classification for the supplier at this time. The final stage of spend analysis is an overall Oppor­tunity Assessment, and understanding the full impact of a supplier relationship is critical to identifying these opportunities. This high-level classification will help that analysis.

Another way to develop the initial list of supplier categories is through the use of industry standard categorization tools, such as NAICS (North American Industry Classification System) or UNSPSC (United Nations Standard Products and Services Code). NAICS is used predominately in the United States, Mexico, and Canada, and classifies suppliers based on the most general category of products or goods they provide. UNSPSC is recognized globally and classifies products and services down to the line item detail. Both coding systems are used regularly in the United States.

Once you have completed the initial classification, it is time to start rank­ing categories for further analysis.
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