Spend Analysis

Spend analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of gaining visibility into cost reduction, performance improvement, and contract compliance opportunities. It is part of an overall spend management and visibility process that includes the analysis, award, and monitoring of corporate spend. Additionally, it is the first and last step of the strategic sourcing process that drives total value.

Spend Analysis gives out the data regarding who is Buying, What is being bought, from whom, from where, and at what price.

Spend analysis can be an important competitive advantage for companies that use it, especially in highly competitive industries. It enables companies to out-think and out-execute their competitors by helping them lower costs and leverage supplier relationships. Spend analysis consists of six phases, which are repeated cyclically on a quarterly, monthly, or even weekly basis. The level of effort is highest during initial dataset construction; subsequent refreshes require significantly less work. The fifth step, Spend Decision, ties spend analysis directly to the overall sourcing process.

1. Collection, Consolidation and Translation
2. Cleansing and Categorization
3. Data Enrichment
• Commodity Mapping
• Data Extension
4. Analysis, Assessment and Reporting
5. Spend Decision
6. Refresh and Maintenance

Implementing a successful spend analysis project is not necessarily easy. It takes a lot of work and a lot of challenges will need to be overcome, especially the first time the organization undertakes a considerable spend analysis project.

In getting a spend analysis project up and running, the challenges are the following:

• Lack of Spend Understanding:
Chances are that organizational spend data currently exists scattered throughout disparate
Systems, each of which uses different classification schemes; consequently, no one knows for sure how much is spent on the same supplier, or the same commodity, across the organization.

• Lack of Resources:
A sourcing team might have difficulty obtaining the C-level executive buy-in they need to help them secure the budget and support that is required to ensure a successful
spend analysis project.

• Required Analytics Capabilities:
Significant analytics capabilities are needed both for the extraction and cleansing of the data and in the execution of the spend analytics process. This is true from both a technological perspective and a human resource perspective.

Once a spend analysis system is in place, there are a number of studies that can be performed that improve visibility with regard to appropriate sourcing strategies. These data studies include building commodity-specific datasets, identifying areas for demand reduction, monitoring contract status, detecting fraud, and running an opportunity assessment.

While challenges exist, there is great reward for those companies committed to a spend analysis project. Companies that leverage best practices will contribute to the overall success of a spend analysis project in more ways than might initially be visualized.

A list of best practices includes:
• Identify Business Needs and Organizational Goals
• Define Corresponding Spend Visibility Requirements
• Understand and Baseline Organizational Spend
• Identify and Segment Key Commodities
• Leverage Category Expertise
• Have a Holistic Approach
• Analyze Continuously
• Utilize Decision Support Tools.
• Ask the Right Questions.
• Cover the Majority of Global Spend.
• Institutionalize Knowledge.
• Invite Everyone to the Party.
• Build More Than One Dataset.

Note: The Article is essentially taken from eSourcing Handbook. The article is only meant for reference for people interested in topic. Additional details about the topic/ Book are available on http://www.esourcingforum.com/archives/category/blog-aggregator/