How to Cut Costs with Procurement Spend Analysis

With the Covid-19 pandemic having had a major and disruptive impact on the global economy over the last few years, many C-suite executives are challenging their procurement function with the mammoth task of reducing spend. In fact, effectively managing supplier spend is one of the top priorities of CPOs.

Cost-cutting is critical for procurement teams as it helps organizations achieve their financial goals by reducing expenses and increasing profitability. Procurement teams play a key role in managing the organization’s spend. By cutting costs, procurement teams can help the organization save money, improve cash flow, and increase profitability. 

A study by The Hackett Group found that top-performing procurement organizations are able to achieve cost savings of up to 19%. If you want this number to go higher, the best way to optimize your finances while looking out for cost-cutting opportunities is to implement spend analysis. Spend analysis can help procurement teams identify areas of overspending, negotiate better pricing and terms with suppliers, and identify ways to consolidate suppliers and streamline procurement processes

Scroll ahead to learn how spend analysis can help your procurement team focus on revenue generation by cutting redundant costs.

Procurement Spend Analysis Process 

Procurement spend analysis helps companies understand their spending structure and make necessary adjustments.  The following is a general outline of the procurement spend analysis process:

Data Collection

The first step for any analysis is collecting the data. This data can be sourced from various systems, such as procurement software, accounts payable systems, and invoices.

Data Cleansing

Once the data is collected, it needs to be cleansed to ensure accuracy and completeness. This includes removing duplicates, standardizing data, and filling in any missing information.

Data Classification

The data is then classified into different categories: goods, services, and capital expenditures. This helps to identify spending patterns and highlight areas where cost savings can be made.

Spend Analysis

The spend analysis is performed using various analytical tools to identify patterns and trends in spending. This can include identifying top suppliers, high-volume purchases, and areas of maverick spending.

Supplier Analysis

Once the spend analysis is complete, the organization can analyze their suppliers’ performance in terms of cost, quality, and delivery. This helps to identify opportunities to consolidate suppliers, negotiate better terms, and improve supplier relationships.

Action Plan

Based on the results of the spend analysis and supplier analysis, an action plan is developed to address areas of concern and implement cost savings measures. This may include renegotiating contracts, consolidating suppliers, or improving procurement processes.

Monitoring and Reporting

The final step is to monitor the results of the action plan and report on the progress made toward achieving cost savings and process improvements. This helps to ensure that the organization is continuously improving its procurement practices and achieving its goals.

Overall, the procurement spend analysis process is critical for organizations to gain visibility into their spending patterns, identify areas for cost savings, and process improvements.

Why Does Procurement Spend Analysis Matter?

Performing spend analysis in different functions of the organization has a plethora of benefits, which are as follows:

Broader Visibility 

For every team in the company in charge of managing budgets, the biggest priority is to understand how much is being spent and where is the money being spent.  Through spend analysis, organizations gain a greater understanding of the costs of materials and services, expensive suppliers, and those suppliers meeting/not meeting expectations and can adjust their procurement processes as necessary.

Optimize Overall Procurement Function

Procurement spend analysis can help optimize procurement processes by identifying areas where processes can be streamlined and made more efficient. For example, if a company is spending too much time and resources on a particular procurement process, procurement spend analysis can help identify ways to simplify and automate the process.

Improve Forecasting Accuracy

Procurement spend analysis can also help improve forecasting accuracy by providing insights into spending patterns and trends. By analyzing spending data, companies can make more accurate predictions about future spending and adjust their procurement strategy accordingly.

Track Supplier Performance

By analyzing supplier performance data, organizations can identify which suppliers are delivering value for money and which ones are not. This information helps make better sourcing decisions and improve supplier relationships.

Decreases Risk of Non-Compliance

Procurement spend analysis helps organizations ensure compliance with regulations, policies, and procedures. By analyzing procurement data, organizations can identify areas of non-compliance and take corrective action to ensure that they are following regulations and policies.

Promotes Strategic Decision-making

By analyzing procurement data, organizations can identify market trends, evaluate supplier performance, and identify areas for improvement. 

Benchmark Performance Against Industry Standards

Procurement spend analysis can help companies benchmark their performance against industry standards by providing insights into how their procurement processes compare to those of other companies in the industry. By analyzing spending data, companies can identify areas where they are lagging behind or leading the industry and adjust their procurement strategy accordingly.

Improve Financial Reporting

Procurement spend analysis can also help improve financial reporting by providing accurate and timely data on procurement spending. By analyzing spending data, companies can provide detailed reports on procurement spending to stakeholders and auditors, improving transparency and accountability.

In summary, procurement spend analysis is essential for organizations looking to optimize their procurement processes, improve supplier relationships, reduce costs, ensure compliance, and make informed strategic decisions.

9 Ways of Reducing Costs with Procurement Spend Analysis 

Now that you know the relevance of spend analysis in procurement, here are a few actionable steps you can take to eliminate unnecessary spend within the organization: 

Consolidate Spend Data

When dealing with a large organization, there are a lot of troubles, like many departments which means separate budgets, different accounting systems, etc. It is vitally important that all data from these different areas are consolidated into one central database for effective spend analysis to take place.

Standardize Data

However, even after consolidating all spend data into one database, the fact that it has been sourced from many different areas means that differing formats, currencies, and languages will be involved. Work with internal departments and suppliers to standardize the formats of invoices and purchase orders for easy viewing.

Reduce Maverick Spend

The term “Maverick Spend” refers to purchases made outside of established procurement processes. It can be costly for companies because it can lead to higher prices and reduced contract compliance. Procurement spend analysis can help reduce maverick spend by identifying instances of non-compliance and providing insights into spending patterns. For example, a company can use spend analysis to identify employees who are consistently making purchases outside of established procurement processes and take corrective action to prevent it from happening in the future.

Monitor Supplier Performance

By monitoring supplier performance, companies can identify areas where suppliers are not meeting expectations and take corrective action to reduce costs. Procurement spend analysis can help monitor supplier performance by providing insights into supplier quality, delivery times, and pricing. For example, a company can use spend analysis to identify suppliers that are consistently late with deliveries and take corrective action to improve delivery times.

Negotiate Better Pricing

Procurement spend analysis can help companies negotiate better pricing with their suppliers by providing insights into market pricing and identifying areas where suppliers are charging above market rates. For example, a company can use spend analysis to identify suppliers that are charging above market rates for a particular product or service and negotiate better pricing with those suppliers.

Optimize Contract Management

Effective contract management can help companies reduce costs by ensuring that they are getting the best value from their contracts. Procurement spend analysis can help optimize contract management by identifying areas where suppliers are not meeting contract terms or where there are opportunities to renegotiate contracts. For example, a company can use spend analysis to identify instances where a supplier is not meeting contract terms and negotiate better terms with the supplier

Categorize Expenses

Every CFO is concerned with how their company is spending its money, and they get their answers by breaking down expenses into the likes of office supplies, marketing, travel, and legal spend. This will give you a much clearer idea of where your money is going and be able to make informed decisions about spend.

Implement Procurement Automation

Procurement automation can help reduce costs by streamlining procurement processes and reducing administrative costs. By automating procurement processes, companies can reduce the time and resources required for procurement and increase efficiency. For example, implementing an e-procurement system can help automate procurement processes and reduce administrative costs.

Zapro is one such tool that provides simple and intelligent software to run procurement operations for all companies.

Leverage Data to Make Informed Decisions

Finally, leveraging data to make informed procurement decisions can help companies reduce costs by identifying cost-saving opportunities and improving decision-making. Procurement spend analysis can help companies make informed decisions by providing insights into procurement trends, supplier performance, and spending patterns. For example, a company can use spend analysis to identify opportunities for cost savings, such as switching suppliers or renegotiating contracts.

By implementing these cost-saving measures, organizations can improve their procurement process and reduce costs, and companies can significantly improve their bottom line.

Wrapping it Up

As you can see, procurement spend analysis can save your company from mounts of  overspending by centralizing your spend data. However, this process, when done manually, seems like a drag. So, what’s the solution? 

Zapro’s eProcurement solution can help you get more value out of your spend to cut costs and increase throughput across categories. But why not try before you buy? Check out our free calculator to estimate your savings!

Schedule a demo with us today to transform the way you manage your business spend.