Spend analysis is a method used by businesses to track how money is being spent by the company, with the ultimate goal of decreasing spending. Information about vendors, purchasing, and orders is organized and then analyzed for patterns. Due to the huge amounts of information involved, most companies use specialized software to perform spend analysis.
The process of gathering and analyzing data is more difficult than it first appears. In order for spend analysis to be effective, all aspects of a company's spending patterns must be taken into account. This information is usually stored in discrete computer systems within each division of the company. The divisions may be separated by both distance and language. Gathering all of this data and organizing it into a usable format takes a large expenditure of time and money.
Much of the complexity can be removed by using software to facilitate spend analysis. The first spend analysis software was created in the early 2000s. Though still very expensive, the software removes the necessity of human labor and creates an easy interface for accessing the resulting information.
The software works by pulling data from existing record-keeping systems. These could be simple spreadsheets, warehouse data, or other sources. This data is then cleansed, meaning that the formatting is standardized, duplicate records are merged, and missing details are found. The software then classifies the data according to industry standards and standards specified by the company. Procurement specialists can then access the data for reports and analysis.
One important aspect of spend analysis is evaluating suppliers. Spend analysis can show which suppliers are getting the most money from the company. The company can use this information to bargain for better deals or to re-negotiate contracts. Most companies have preferred suppliers, suppliers that offer the best service or reduced prices for buying in bulk. Analysis may reveal that supplies or services currently being purchased from a non-preferred vendor could be bought from a preferred vendor for less.
The company may also be buying similar supplies or services from several suppliers. This is known as fragmented commodity. Money can be saved by making one large purchase from a single supplier rather than a series of small purchases from several suppliers.
Spend analysis also helps to identify maverick spending. This occurs when purchases are made that are not covered under contract. Without a contractm the company is charged full price rather than the negotiated price specified by a standing contract with a preferred supplier. This type of spending can cost a company a lot of money over time.