It’s great to be back on this highly addictive and engaging platform. The germination of my latest post sprouted from a rather casual conversation with my neighbor who works at a large FMCG company. He was lamenting the fact that he has to dispose of fifty cartons of festival offer leaflets and year planners which are of no use now. If the procurement team had done some kind of calculation of the actual requirement before printing the leaflets, they could have saved a good amount of money. Our discussion gave me some food for thought to write something on how expenses can be managed or a management lexicon about spend analysis. Leaving aside business units, we never realize but all of us do exercise small scale spend analysis at our home on a monthly basis.
“Spend analysis is the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of reducing procurement costs, improving efficiency and monitoring compliance."
Spend analysis as an activity is quite comparable to paying our monthly bills or doing an annual full body medical checkup. Activities that we know are very critical but pushed behind the background of the daily routine of unrelenting deadlines and impossible timelines. Call it the tyranny of our times or sheer lack of prioritization that we tend to defer vital actions for the immediate firefighting resulting in a situation when the reality of unmanageable costs bites us hard. The same thing happens when a company faces the fact that sales are going south and now they have to look at what they spend and where they can cut.
Having a formal meeting about the spend analysis can be agonizing, but can also drive a lot of useful examination into why purchases are made. The key is to have a measurable goal, and consistent reporting of progress towards that goal. After all, it is rightly said that-What gets measured, gets done. It is crucial to create an open environment where in-depth discussions can take place about buying patterns.
Supposedly you are the procurement head of a company and you would like to prepare the budget for the next financial year. How will you do so unless you are aware of the various overheads of the expenses as well as actual requirements for the fiscal year? You can have a final figure of your total spend but it will not help you to plan for your future budget. For that you need to know each category of your spending data that will help you to plan your budget in a more efficient manner. For example which category of spending is very essential and the company needs to procure them every month. Preparing a contingency plan is only possible if the sources of spend are known. Also, it will help in a more process oriented procurement practice. Depending on the spend data, a preferred vendor list can be created, contracts can be signed and the performance of those contracts can be tracked. In a nutshell, spend analysis gives a platform to rethink your investment in sourcing.
A proper spend analysis requires a clearly defined objective. Instead of a broad statement like “We want to drive down costs”, specific achievable goals need to be assigned and measured. A better goal would be “We want to drive down the total procurement spend by 15% in the fiscal year 2015”. An amalgamation of clearer objectives with defined fixed timeframes will provide better results and make analysis easier.
Secondly, a good reporting structure for your spend data is the equivalent of paying a health insurance premium. The policy might seem like another document, but it does ensure that your financial health does not take a hit when your physical health does.
There are multiple approaches on how to get a spend analysis done.
- Implement an enterprise-wide spend analysis suite with integration into ERP systems
- Perform a one-time spend analysis using external services provider
- Perform an on-going spend analysis using external services provider
The first approach is very expensive. Most organizations cannot afford to implement an enterprise-wide spend analysis suite with integration into ERP and sourcing systems because of the huge amount of capital expenditure (CAPEX) and operational expense (OPEX) involved. Also, conducting a spend analysis without an expert team is a challenging piece of work and can actually create a chaotic situation.
So the next time you are in my neighbors' situation, facing the consequences of unplanned expenses, do not despair as help is just a few clicks away. Given our experience handling complex spend analysis, we can play a very decisive role in the generation of reports to pin down your expenses under various classifications. We have a satisfied client base for whom we have performed spend analysis and recommended few changes in the procurement system. Upon implementing those rules, customers are expected to save millions of dollars on each year’s total spend. Call or email us, if you have any questions about how to do a spend analysis for your company that will drive down your costs and make you more profitable.