Spend analysis is the process of data collection, collation, cleaning, taxonomy preparation, classification and finally analyzing to identify sourcing and cost reduction opportunities. The objective of spend analysis consulting is to prepare the ground for initiating organization wide program to reduce total cost of ownership, improve efficiency and ensure compliance.
Data Collection, Collation and Cleaning
Supplier spend analysis starts with collecting spend data of organization available from all the sources, systems, tools and applications. This spend data can be from multiple sources either from Purchase Order or from Non Purchase Order transactions. The data from various sources is then collated in a uniform format. The collated data is tested and checked to remove all kind of duplication’s and incorrect entries.
The next step is preparation of appropriate spend taxonomy to classify the collated spend data. This taxonomy is prepared depending on the spend characteristics of an organization. Taxonomy is usually multi layered and can range from 3 – 6 layers. The last level of the taxonomy represents unique set of suppliers with unique core competencies. Ideally the last level should represent a set of participants for a unique RFP. In the descending order of hierarchy the taxonomy levels are named as Group, Family, Category and finally Commodity. Commodity represents the last level in the taxonomy. It is usually the name of the goods or services being sourced through an RFP.
After preparation and finalization of the taxonomy the entire data is classified in this new format. When this data is populated in the spend analysis tool or presented in the form of spreadsheet it becomes a very powerful medium to generate useful insights.
The classified spend tool information can be sliced and diced to look at the spend information and useful interpretations are possible. Spend increase or decrease across different Groups, Families, categories, commodities and across different intervals and across other different dimensions can help in making appropriate decisions.
On an ongoing basis procurement metrics dashboards can be created to understand the trend across different dimensions and time intervals. The dashboard can be customized based on the short term and long term objectives.
Once the data is classified as per the taxonomy, the next logical step is to conduct opportunity assessment. This can either be an ongoing or annual affair, or can also be conducted if there are drastic changes within the organization. Some of the examples are merger or acquisition, sudden rise or fall in a specific product line, or any other internal or external factor that can affect the spend profile.
Opportunity assessment is one of most critical end result of any successful spend analysis project. The objective is to identify categories that should be taken up for RFP or categories that should be challenged. This identification process depends on multiple factors, these factors are broadly classified into two sections (a) Ease of Sourcing or Implementation and (b) Savings Potential. Within these two sections there are many sub factors as listed in the below table:
|#||Ease of Sourcing & Implementation||Savings Potential|
|1||Availability & quality of data||Potential to leverage|
|2||Degree of customization in design||Level of commoditization|
|3||Availability of suppliers/ geographical barriers||Competition in the market|
|4||Number of incumbent suppliers||Demand-Supply scenario|
|5||Time to qualify suppliers/ switching risk||Current compliance mechanism|
|6||Organizational sensitivity/ contractual complexity||Time since last RFP|
Along with identification of the categories, potential savings (%) that can be achieved is also estimated. Finally the end result is preparation of a sourcing road-map and implementation plan, this includes name of categories that should be reviewed, sourced or challenged. For all the shortlisted categories, so as to justify the savings potential, category profile is created, this document includes information like global trend, demand and supply situation, main competitors, market share, porters 5 forces and other critical insights.
We at EmpoweringCPO help improve sourcing strategies by classifying spend by commodity, category, location, department, function and even by method of purchase. EmpoweringCPO provides you with real sourcing opportunities based on external market conditions, our benchmarks are based on clients business forecast. We would be glad to share our case studies and sample category profile decks. Our cost reduction consultants can also conduct pilot projects to demonstrate our skills and capabilities.
Sign up now for our blogs and infographics for the latest insights on procurement and strategic sourcing.