Why spend analysis is important in Corporate Sourcing?

Let's start simple: We cannot control what we cannot measure.

Of course, that applies to lots of business KPI's as well to corporate spend. Most important, we cannot optimize what we think is fully optimized...even if there are lots of improvement opportunities.

Now, of course there are tons of technological features that could help us control our company spend like process automation, business rules, policy automation, approval workflows, budget validation, alarms, reports, BI, etc.

However, most of those mechanisms are designed and conceived to control spend at the operation level, meaning that we are controlling purchase transactions one-by-one. Now, there are indeed saving opportunities at this level, but we are talking about low-level ones and we should say that main opportunities at this level are about process control and accountability.

A real CPO, cannot guarantee the best results operating only at transaction level, so we need to start thinking strategic. The first step in Strategic Sourcing takes place when we decide to use historical spend information to better know where we are spending the most, so we could find better opportunities.

A good spend analysis should help a CPO with the following capabilities:

1) Consolidate corporate spend: When we work in a large company with different ERP systems, we need to consolidate the spend of different business units so we can leverage our economy of scale. The higher the volume, the higher the discount.

2) Standardize spend categories: We need to make sure that all our spend is well categorized so we can give a proper name to all our purchases and that we can analyse our spend not only at category level but we can go deeper into subcategory, families and maybe until SKU level. This is very important when we have spend data from different ERPs with different category or material catalogs. This capability lead to better identify our negotiation priorities as well as the right strategy to each category.

3) Perform a parentage run: We need to make sure that we can analyse our spend at company level but also at a corporate level. For example, we are transacting with 2 suppliers "Supplier X with 10M USD yearly spend" and "Supplier Y with 5M USD yearly spend". While a simple BI tools will report spend for both of them, a state of the art platform must have the capability to identify that those companies are part of "Corporate ABC" so we can report a 15M USD consolidated Spend for Corporate ABC or 10M USD for Supplier X and 5M USD for Supplier Y. This capability allows the category manager to identify the appropriate level at which we need to negotiate our contracts. The greater the spend, the greater the discount. 

4) Identify and classify the best opportunity savings: The last but not the least important, a state of the art tool can help us with business intelligence rules in order to detect and prioritize the best opportunities via supplier rationalization, savings benchmarks and other advanced features. This lead the category manager to focus on the big savings instead of the long tail of minor opportunities.

With the information that could be provided by a proper Spend Analysis process, the CPO can develop a Strategic Sourcing plan that will include category waves, sourcing approach, priorities, owners, timing and planned savings. This plan will be the foundation of the Strategic Sourcing process at the company and the beginning of the realization of the economic benefits that could be delivered by the Source to Pay process.