Finally, Mitchell believes that enterprises looking to take their spend analysis to the next level should look at applying the analytical tools to understand their total costs, to "get under the hood," as it were, and truly parse the costs in their supply and demand chains. "Spend analysis leads to cost analysis and activity analysis," he says, "and this is where being able to understand the constituent component costs is going to be really important." For example, a sourcing analyst may see that the company has a significant amount of spend in a particular commodity, but what is driving those costs, and to what degree? Is it purchase price, freight costs, inventory? "The more you can start to get that level of visibility, the more you're going to get ahead of the curve," Mitchell concludes.
Sidebar: Best Practices for Spend Analysis
For spend analysis to be effective, companies need to focus on four best practices, says Kevin Potts, director of product marketing with spend management solution provider Emptoris.
* First, the data must be holistic. "You have to make sure that you're looking at all your spend data for this commodity or for this supplier and not just the data from one system," Potts says.
* Second, the data must be accurately mapped against the correct category and vendor. Consider IBM, which sells multiple categories of goods — hardware, software and services, for example. IBM also has multiple subsidiaries, such as Lotus Software. Prior to negotiating with IBM, a company probably should understand all of its spend with IBM, not just how much it spends on hardware or what it spends with Lotus," Potts explains.
* Third, the spend analysis data must be accurate and granular, and the end user — whether it's a chief procurement officer or a commodity manager or an individual buyer — must be able to look at the data in the way that makes sense to them. Again, Potts: "You cannot afford 40 percent or 50 percent of the spend to be classified in the miscellaneous category; that's not really useful to you. And if you are negotiating for an indirect category like office supplies, it might be good enough to know what is your total office supplies spend, because you do not need to know how many pencils you bought. However, in direct materials and MRO categories you need to get a detailed item-level view to know exactly how many of each part you buy."
* Finally, automate as much of the process as possible so that it produces usable information in a timely way, and so that the process can be repeated at regular intervals. "Spend data," Potts notes, "get old as companies buy or sell other companies, launch new products and retire old ones. So being able to refresh your data on a repeated basis and make it viewable quickly is very important."