The Secrets of Successful Spend Analysis

The effectiveness of a strategic sourcing program can rise or fall on the quality of the spend analysis. Is your company ready?


Another advantage of the UNSPSC's numbering system is that it allows for unambiguous translation of a particular item's description into any language. This is a key benefit for multinational companies that want to analyze spending on a worldwide basis. While a given commodity will have different names in different languages, the UNSPSC system unites them all under a single unique number. Other coding systems lack this ability as well as UNSPSC's hierarchical organization and granular categorization.

"There are other codes available, but the United Nations Standard Products and Services Code is the one we rely on to support our strategic sourcing process," says Gary Reiner, senior vice president and chief information officer of General Electric. "The UNSPSC effectively gives us the means to capture a uniform, enterprise-wide view of our spending."

When all the numbers have been crunched, the resulting metrics will shine a light on potential savings in particular spending categories. Depending on the specific findings, purchasing managers may then be able to cut costs through the use of alternative products, supplier consolidation, merging products previously purchased separately into contractible groups, price reductions achieved through contract buying, improved contract compliance, the aggregation of purchases across divisions, reductions in maverick spending, and other means.

If a given analysis reveals that an enterprise is purchasing a particular part from 10 vendors at $100 each, for example, procurement officers can attempt to reduce expenditures on that item by narrowing the field to two vendors willing to provide price concessions in return for greater sales volume.

Without spend analysis, it is difficult if not impossible to spot these savings opportunities. Consider, for example, a Purchasing Magazine study of the procurement practices of the 250 U.S. companies with the largest procurement expenditures. The study found that only one in four companies were leveraging spending volumes across multiple divisions. In fact, the companies examined estimated that only 57 percent of their spending volumes have been fully leveraged. As the magazine noted, "U.S. companies are leaving billions of dollars on the table each year by not having sufficient insight into spending information to queue up and optimize their strategic sourcing engagements."

Bottom-Line Benefits

At the end of the day, the ROI of spend analysis can be considerable. For manufacturers, as mentioned earlier, industry experts estimate a potential net savings of 7 to 10 percent in the cost of goods sold, with anecdotal instances as high as 20 percent. This translates to the Holy Grail of higher gross margins. Both manufacturing and non-manufacturing enterprises can achieve additional savings on items ranging from office supplies to temporary staffing, contractors and consulting services.

Two telling statistics from Tim Minahan of the Aberdeen Group express the ROI story particularly well. Minhan notes that a 5 percent reduction in spending can have the same impact on bottom-line profits as a 30 percent increase in sales. He also estimates that nearly 75 percent of the savings opportunities in procurement stem from strategic sourcing. Pierre Mitchell, research principal at AMR Research, puts it another way. "A company that is spending, say, $50 million on everything from corporate supplies to IT to telecom services can save $5 million annually, which easily pays for a $1 million (e-procurement) application."

Spend analysis also yields tangible and intangible benefits in evaluating suppliers and vendors. It can measure price variations, on-time delivery, price/service ratio and incidences of quantity overages or shortages; help users choose between higher-priced vendors with on-time delivery and lower-priced vendors with late delivery; root out non-performing suppliers; and help boost contract compliance by continually monitoring pricing. Supplier scorecards aid these efforts by capturing both subjective and objective metrics that evaluate supplier performance.

Other advantages of spend analysis include faster sourcing cycles, reduced inventory and assistance in economic forecasting and long-term planning. It provides a realistic picture of future spend requirements based on forecasted planning data (for example, a company expecting 10 percent revenue growth in the next year can use spend analysis to determine what its expenses will be), and even makes it possible to assess the risk of a supplier facing bankruptcy or political unrest.

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