The Importance of Spending Analysis in Firm's Development

Introduction

Spending is the heart of the economy, performed by everyone either that’s called an individual either a big firm. Irrespectively of the importance that spending has, spending analysis is sometimes overlooked because people/firms ignore the importance of it, being confident that all their spending was valuable or unavoidable and in the right direction. However, spending without an analysis of it can’t remain healthy for long especially for a firm that needs to compete or lead a market.

Primarily by performing spending analytics, we have visibility of our overall spending and the categories that define it. That means we can answer the question if we are indeed spending to the right categories the right amount (planned). We can also realize which categories are profitable and which are not so we can deal with them. Firm’s real spending can drive us to better conclusions and decisions about future goals. For example, we have the chance to amend our spending or the overall approaching to a certain category if the margin of profit is low since the problem has been acknowledged. Risk for the further downfall is managed and savings can be made.

Additionally, we can eliminate supplier overpayments. Data about suppliers, categories, profit and spending becomes very accurate and comprehensive while absorbing data for other usages doesn’t require the involvement of heavy IT work. More detailed and easier analysis is achieved with time. Data are interpreted in that way that sends messages to all interested parties. We can then categorize and prioritize very fast all the big opportunities for savings. A case where data would be very helpful is when negotiating with Firm’s vendors for the best possible deal. “There is so much negotiation you can do because Spend Analysis gives you great insight over your spend data and can help you identify opportunities you didn’t know existed.” Besides, off - contract spending becomes apparent and actions to be reduced can be taken like new contracts or new suppliers, thus risks are mitigated and savings from that risks becoming real issues are realized.

A new strategy can emerge out of all the above conclusions, tailored to success, tailored to harness Firm’s corporate spend. Data derived from spend analysis, such as number of the suppliers, categories and number of the products supplied from each and every supplier give a detailed view of the supply chain and answer on the following:

Dependence on shepherds

Spending too much with one supplier can create the risk of staying without goods or services if supplier bankrupts or fails to delivery. Through spend analysis, we can investigate if we actually have the desired number of suppliers – meaning that monopoly and exaggerated cost are avoided and that these are not sole sourcing to the same critical tier. Critical tier failure can easily create a disastrous domino effect. A greater number of suppliers creates competition and risk is mitigated for instance if weather or lack of raw materials to a location/supplier disrupts their delivery. Stock out is eliminated, if possible.

By recognizing the above risks and controlling them we have reduced costs (savings) while we reassure supply doesn’t fail, either through increasing inventory or by engaging other suppliers locally or international. We know exactly when and how many times a supplier failed to deliver and we can exclude them from further contracting. As we can see, “Supply risk management is essentially about protecting supply performance outcomes.” Risk management can control maverick spending, a spending that is not done under the purview of the Procurement Department by making sure spending pass a procurement process. Less maverick spending means more savings and risks (not always maverick spending is disadvantageous but usually).

Category strategy is directly linked to Spend Analytics. Spend analysis shows how much money we spent over the past years while the top categories of spending are revealed as well. For example, if a very profitable category is identified which was not in the core of Firm’s planning now can be expanded and Firm can focus on it. Or if a supplier introduces risks through delays or bad service quality, now is identified and disqualified from Firm’s supply chain.

In that case, we can choose to engage a new supplier, develop the other suppliers of the same category or manufacture in-house. Moreover, we find out with which suppliers we had the most spending and assess if it worth’s it. Can we find suppliers with less spending on the same quality of service? The solution of investing to suppliers located in emerging markets can be investigated. For instance that can be correlated with the firm’s decision to sell or manufacture locally or in an emerging market.

Furthermore, since we know all firm’s suppliers we can assess if they are actually approved. Verification that we have received the products we have paid for is much easier. That’s how risk management makes use of spend analysis results that lead to category strategy development eliminating risk and increasing savings.

Conclusion

Summarizing, Spend Analysis and category strategy development give firm all the tools and information to recognize risks, strategies, and opportunities essential drivers to cost leadership and product/service differentiation.