Key phrases that you should note are proper and done correctly.
There are a lot of benefits to conducting a spend analysis. There are also a good number of ways that an improperly performed analysis can wreak havoc. At worst, you could end up going to market with inaccurate data and lose out on potential savings or cause delays to the point of creating “lost opportunity” costs. So what leads to these issues, and how can we as Procurement pros avoid them?
Biggest Spend Analysis Mistakes to Watch For
While not an exhaustive list, the mistakes below represents seven of the most common (and most costly) that could throw you off track:
1. Ignoring time parameters,
2. Not accounting for shifting spend trends,
3. Ignoring low-spend suppliers,
4. Not taking into account niche players,
5. Improper cleansing techniques,
6. Seeking too much granularity,
7. Failing to act.
Let’s take a deeper look at the first two to better understand what is at stake.
Ignoring time parameters. The first problem also relates to one of the first questions you should be asking yourself as you begin the spend analysis process: “How far back should I go when collecting data?” The answer depends on the type of products or services being purchased. Take office supplies, or any other similar commodity, for example – We typically pull a year’s worth of a client’s data when planning a strategic sourcing initiative to ensure that we are properly identifying a basis for usage. We could simply take the last month, but can you be certain that this short time frame is representative of typical usage? There are also reasons to go back even further. A number of years can pass between capex purchases – if such purchases are relevant to your analysis, you must identify these time periods and collect data accordingly. In short, if we aren’t correcting enough historical spend data, we risk developing an inaccurate market basket for our RFP or RFQ at a minimum. Even worse, we could potentially exclude entire supplier relationships from consideration.
Not accounting for shifting spend trends. The benefit of collecting multiple years of data goes beyond simply “missing” spend. Being able to compare a supplier year over year also allows us to see developing trends. Let’s say, for example, you identify a commercial printer with a spend level of $100,000 over the last 12 months. That may be a level you feel is significant enough to warrant further investigation. But is it? Suppose in the 12 months prior to our analysis that figure was closer to $200,000 – what is the reason for such a drastic decline, and what does that tell us about this vendor relationship? This is no random example: as clients of ours have moved away from physical printed materials to digital alternatives, we have seen spend with commercial printers plummet. In such cases, is it worth your team’s time to seek savings with a supplier who may not even be around a year from now?
The Domino Effect
One thing you’ll note from the two mistakes above is that they are interconnected. In other words, it is bad to make the first mistake by itself – however, making it will almost certainly set the stage to make the second.
Over the next two weeks, we will continue to discuss these mistakes and the implications they have on the strategic sourcing process. Moving forward, these next two posts in the series will show that this trend continues: each issue plays into the others, making it more and more likely that any one mistake will lead to another.
For this reason, it is critical to take a look at your spend analysis process early on, and keep these mistakes in mind as you set out.
UPDATE: For part two of this post, click here.