Spend Analysis 101: Why?

The purpose of a spend analysis is to identify areas of opportunity and then plan out how you wish to accomplish targeting these areas. The main takeaways from conducting a spend analysis are to see how much you are spending, see your suppliers and their usage, and following through to see if you are getting what you were promised. By analyzing spend, you are able to decide if you would like to consolidate your suppliers and spend. You are also able to benchmark your spend and suppliers against industry competitors to see how you are doing. It is believed that organizations with spend analysis programs have more efficient procurement operations and stronger supplier relationships.

Businesses who run spend analyses tend to be more cost effective, have faster cycle times, are more efficient in regards to processes, and have greater staff productivity. These benefits arise from seeing where the problems may lay and then going back and tweaking any issues. Even the slightest changes can cause drastic improvements in procurement. The spend analysis shows an organization areas where they can improve their costs and efficiency. This information then allows companies to rework their structure and look into current and potential suppliers. They will pursue supplier relationships where they are able to have faster response times and lower overall costs in securing materials and services. In addition to faster lead times, the processes in general become more streamlined. This translates into less employees needed, which reduces the amount of salaries you have to pay.

When comparing two companies, one who runs a spend analysis program and one who does not, the results are eye-opening. The two company’s discussed both have revenues of about $5 billion. It is believed that the company running a spend analysis program would spend $8.5 million on procurement activities while the company who does not have a spend analysis program would spend $19.5 million on the same procurement activities. The company who does not implement spend analysis programs is spending more than double the company who does. Over time, this increased spending adds up and takes away from the bottom line. The graph below depicts how much the procurement cycle composes their total revenue. As an organizations performance increases, their procurement costs become more than half of their revenues. Should more efficient processes be put in place due to spend analysis programs, revenue could be significantly greater.




A lot of useful information can be obtained when generating spend analysis reports. Although the information created is constructive, if no changes occur, it is ineffective. Every organization can improve in some form, and spend analysis programs are a great opportunity for growth and improvement.