Spend Analysis: The First Strategic Sourcing Pillar

Ardent Partners’ The State of Strategic Sourcing 2014: Connecting the Dots is now out and available. Interested readers can find the report here and here.

This research report analyzes the strategic sourcing programs of almost 250 distinct procurement departments and presents the Best-in-Class competencies for improving the sourcing function and its results while also highlighting the market trends that shape strategic sourcing today. This report also utilizes market statistics to quantify and examine what leading sourcing organizations are doing to outperform their peers.

In the report, we introduce the concept that there are four primary “pillars” that mark the foundation of the modern strategic sourcing program – spend analysis, sourcing, contract management, and supplier performance management. All four are valuable business processes that, when automated, can elevate a sourcing team’s performance  and that, when connected, can transform an entire operation. Today’s article will focus on the first pillar, spend analysis – as both a business process and an automation tool.

Spend Analysis

Spend analysis is a foundational business process that can help procurement teams determine the next, best steps in the sourcing process including how to prioritize sourcing resources and where the largest savings opportunities exist. It is the process by which spend data is collected from multiple sources/systems (usually multiple) like AP/accounting, ERP, eProcurement, etc. and aggregated, integrated, analyzed, and distilled into usable information that can drive insightful outputs. Essentially, spend analysis helps sourcing teams better understand the spending habits of the entire enterprise, including:

• What the total spend was
• What the spend was by category, commodity, service, etc.
• Where externally the spend was located
• Who internally owned the spend (business unit, cost center, region)
• What the spend is by supplier
• Whether early payment discounts or favorable credit terms were leveraged
• Direct vs. indirect spend
• Line item pricing and pricing variances
• And numerous other ways that a sourcing team can slice and dice its spend

More recently, sourcing teams that utilize automated spend analysis are also pulling in third-party data about their suppliers and categories to improve their overall understanding of different supply markets. Other supplier information like performance can also be brought into a spend analysis tool. Indeed, the intelligence that can be drawn from spend analysis is rich.

While the manual collection and analysis of spend data is better than not performing spend analysis, an automated and repeatable spend analysis process can save sourcing teams time, money, and can transform mere data management into data analysis. When sourcing teams automate their spend analysis, they can easily consolidate multiple data streams into one system that categorizes, cleans, collates, and delivers regular reporting that is legible and actionable. As shown in our “Connecting the Dots” report, nearly 40% of sourcing teams have adopted and utilize an automated spend analysis system, with another 32% planning to adopt it in the near future – while not overwhelming, these figures are a relatively strong showing for this first pillar.

Of course, intelligence collection and analysis may be interesting but the outputs are meaningless if decision makers aren’t “connecting the dots” and leveraging that intelligence to make more informed, and ultimately, better business decisions. Sourcing professionals then have to take this intelligence several steps further.

• Is our supply base right-sized to the spend?
• Are we working with the right suppliers?
• Are they providing the value that was promised?
• Do we have the right service-level agreements (SLAs) in place with them?
• Do we need to hold as much inventory; or, can our suppliers hold some of it for us?
• How else can we cut our inventory costs?

Not surprisingly, Best-in-Class sourcing teams (which according to Ardent is the top 20% of performers in the market) leverage automated spend analysis tools to a greater degree (51.3%) than their competitors (38.5%).

Spend analysis in and of itself does not guarantee that sourcing teams save money and add more value, but it is the logical place for them to start. In future articles, we will look more directly at the different ways the Best-in-Class sourcing teams gain and hold their advantage – spoiler alert, spend analysis is one of them.

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The State of Strategic Sourcing – Connecting the Dots

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