Organizations face many problems during their procurement process. The procurement of raw materials or other products for their business depends on many factors.
The procurement department of organizations was affected by the recent shutdowns and border restrictions due to the pandemic. The world has now opened up for business again, but some issues still affect businesses across the globe.
The procedure to deal with this situation is to conduct a spend analysis by the department. It is a process that identifies, gathers, groups/categorizes, and analyses the organization’s spending data.
This is really helpful in reducing procurement costs and improving the department’s (procurement) efficiency by increasing transparency and visibility. It is a smaller part of a much larger field in spend management. It is utilized to view all the data (patterns) to make better sourcing and supply decisions.
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The problems faced by the procurement team can be listed as below:
- Supply-chain disruption
- The drastic decline in demand
- The need to ramp up and ramp down the supply chain
- Overcapacity in various segments
- Suppliers and manufacturers facing financial issues
- Disruption and tension in commodity pricing
Whatever may be the problem, spend analysis can solve most of the issues faced by the procurement team. The core areas of this analysis are:
- Visibility
- Analysis
- Process
When an organization leverages these three areas, they can identify how much they spend, where they spend, and the return on investment on that spending.
If an organization can figure out these things, a significant part of the problem gets resolved. This method gives so much clarity about the company’s spending patterns that they can immediately start working on those issues highlighted by the analysis.
How can the department conduct this analysis in their organizations?
Spend analysis is a straightforward process, and it consists of just six steps. There’s no need for any professional or third party to conduct this analysis; your in-house team is more than enough for this process.
The six steps of this procedure are:
Identify
The initial step is to identify where all the expenses are coming from. Observing the expenses will show a detailed report of the company’s spending in different places. This step can identify any discrepancies and malpractices.
Gather Data
Gathering the data means collecting, arranging, categorizing, and turning the data into information to analyze the situation.
Cleanse the data
Cleansing the data means identifying all the errors and mistakes made by the procurement team. After the correction and rectifications, the procurement process will be more transparent and clear.
Group Suppliers
The grouping of the suppliers based on the material/product they supply is the next step. It helps you identify where the issues of supply are coming from and whether you need to change the supplier or not.
Categorize
This step categorizes the spending of the organization. This step will identify the category where most of the spending is happening, different areas where the purchase is made, and many more.
Analysis
In this step, the department measures the spending data. You analyze how much data is relevant, how you can minimize cost, etc. And finally, you can finalize whether to cut off suppliers or get in contact with more.
These are the main steps in spending analysis. Conducting this procedure will definitely benefit the organizations, and the more frequent it is, the better the cost minimization.
Read More: Financial Analysis and Reporting: Why Are They Important?
