How to Conduct Procurement Spend Analysis?

Performing procurement spend analysis is critical to your business.

You can quickly improve supplier relationships and recoup massive savings.

So, how do you conduct the analysis?

For you to conduct a reliable procurement spend analysis, you need data. Yes, you need clean data representing what’s happening in the procurement department.

Let’s assume your department has elaborate systems in place to gather reliable data.

How do you proceed from here?

This is where a Sankey Diagram comes in.

The visualization gives you a detailed, high-level view of your procurement department’s data flows and changes from one stage to the next.

Tracking these movements reveals critical insights, such as where you’re losing money due to inefficiency.

Microsoft Excel lacks Sankey Diagrams for visualizing procurement spend data.

We’re not advising you to do away with the Excel spreadsheet.

Install a particular add-in in your Excel to access a ready-made Sankey Diagram.

Table of Content:

1. What is Procurement Spend Analysis?
2. How To Perform Procurement Spend Analysis? (Easy Steps)
3. Spend Analysis in Procurement KPIs and Metrics
4. Procurement Spend Analysis Best Practices
5. Benefits: Why is Spend Analysis important in Procurement
6. Procurement Spend Analysis Tools | Easy to Use Tools
7. Video Tutorial: Conduct Procurement Spend Analysis in Excel
8. Wrap Up

Before diving into the how-to guide, we’ll address the following question: what is procurement spend analysis?

What is Procurement Spend Analysis?

Spend analysis entails analyzing procurement spend with the goal of:

• Decreasing costs
• Increasing efficiency and improving supplier relationships

Procurement spend analysis and spend analytics are sometimes used interchangeably.

But they do not mean the same thing.

Without spend analytics, you’re unlikely to have reliable data for analysis. Spend analytics gets you the data. On the other hand, procurement spend analysis describes what you do with data.

You could extract insights from the data using visualization charts and graphs, such as the Sankey Diagram.

Let’s dig a little deeper.

Spend analytics has everything to do with spend data management. And it starts with the gathering and cleansing of data.

Then, the data is classified and consolidated, ready for analysis.

One of the straightforward analysis strategies is data visualization.

You only need to feed your data into a tool, and boom…you have insights displayed in charts, such as a Sankey Diagram.

You can examine your spend data for strategic and actionable insights if your goal is to drive cost savings.

The procurement spend analysis is one of the significant methods you should consider to:

• Identify savings opportunities
• Manage risks
• Optimize buying power

Spend analysis is a fundamental foundation of sustainable sourcing.

Besides, it’s a methodology you can implement to drive superior performance.

It provides a baseline for measuring improvements. And creates a reliable reference for making high-level decisions.

As procurement transitions into a strategic function for your business, we recommend you implement a spend analysis strategy.

And this is because it is a fundamental strategic technique that creates a parallel process for guiding you to maximize value in the long term.

what is a procurement spend analysis report?

Procurement spend analysis reports provide insights into how your business is spending in sourcing materials and services from third parties.

This report answers questions, such as what, when, who, why, etc.

How To Perform Procurement Spend Analysis? (Easy Steps)

This section will give you an overview of the steps involved in procurement spend analysis.

Let’s dive in.

• Identify Sources of Data

To begin procurement spend analysis, define your data sources.

Then, segment them into different groups. Identify the areas of your business that make significant buys, such as marketing and production.

• Extract Data

Once you’ve narrowed your scope, capture your spend data and consolidate it for analysis.

Your data is most likely in different formats, languages, and currencies.

So, consolidating that data into one single source might prove challenging.

But there are software programs to make this step easier.

• Clean Your data

Cleaning entails detecting inaccuracies and removing corrupt redundancies in your data.

Find and eliminate errors and discrepancies in transactions. Identify data points that are incomplete or irrelevant.

• Enrich your data

This process entails enhancing and refining raw spend data.

Enriching the procurement spend data can help you to increase accuracy and reliability.

Data can sometimes miss specific fields. Or even have misspellings and abbreviations that can be misleading.

• Classify your data

Classification of procurement spend analysis entails grouping suppliers under the parent company or organization.

For example, Microsoft purchases like Azure and Microsoft 365 should be consolidated under a single group.

Also, categorize the data into meaningful departments.

For instance, consolidate all purchases associated with finance under the finance department.

This will help you know how each unit in your business spends money on purchases.

Besides, it makes everything for you easier to address and manage expenses in your business.

Data classification has everything to do with consolidating all purchases into a single group for easier analysis.

• Analyze Your Data

This last step is crucial, especially in identifying opportunities for savings and improvements.

You can direct your analysis towards investigating business problems, such as whether you’ve negotiated the best contract deals that provide maximum value at reasonable costs.

Now that you have the basics on how to put together a procurement spend analysis, let’s dive into associated key performance indicators and metrics.

You don’t want to miss this.

Spend Analysis in Procurement KPIs and Metrics

Some of the KPIs you should look out for includes:

• Cost savings
• Spend under management
• Supplier performance
• Operational KPIs
• Employee related KPIs

Let’s dive into best practices.

Procurement Spend Analysis Best Practices

Below are some strategies you can apply when setting up this methodology.

• Classify spend data at a higher level

Categorizing each data point at the item level is one of the tested and proven ways to do spend analysis.

It can provide visibility as well as more details of the key metrics under study.

Higher-level classification has its own benefits. You can easily get a precise view of your spending with each supplier.

• Adopt a common classification template for your business

We recommend you adopt a common template to make everything easier and standardized.

This uniformity is key to driving accurate and reliable analysis.

• Pursue a permanent solution

We don’t recommend labor-intensive procedures and systems if your goal is to save time.

Adopt a more sustainable and standard practice that keeps data fresh and real-time. Set up a team to focus on this if you intend to get reliable insights.

• Continuously improve and expand the scope of spend data

Procurement spend data management is a dynamic process.

We recommend you constantly look for ways to expand the uses and scope of procurement spend analysis.

For instance, conducting reviews can help identify immediate areas for improvement.

Besides, it can help you illustrate the positive impact of the analysis.

• Collaborate with IT and other key stakeholders

To enjoy cost savings, create a collaborative partnership between the procurement department and other business units.

Yes, you read that right.

Every business unit should be held accountable for results.

To achieve the full potential of the spend data you’ve got to foster the spirit of cooperation.

If your procurement and finance departments collaborate closely, they can create systems that drive cash savings.

• Define category strategies and measure impact

We recommend you implement a procurement spend analysis strategy that’s aligned with your objectives, such as:

• Maximizing value
• Reducing risk
• Effective management of supply of goods and services.

A careful review of this strategy can help you to assess the actual impact and results.

So, why is spend analysis important in procurement?

Benefits: Why is Spend Analysis important in Procurement

• Get visibility into your business’s spend

Spend analysis can help you create transparency into the amount of money spent in purchasing materials and services.

• Identify savings opportunities

We recommend you conduct a procurement spend analysis if your goal is to drive cost savings.

This analysis can help you establish your spending patterns and the potential savings in each of your business units.

For instance, insights from the analysis can help you cut costs by sourcing alternative products, consolidating suppliers, merging purchases into groups for discounts and renegotiation, etc.

• Streamline and centralize procurement

As we said earlier, procurement spend analysis can help you drive cost-effectiveness and process efficiency.

Processes, such as financial reporting and budget preparation, will improve significantly due to new-found insights from the methodology.

By streamlining the procurement system, you’ll enjoy benefits, such as:

• Lasting relationships
• Lower supply cycle time
• Declining supply costs

• Evaluate supplier performance

To enjoy superior performance and strong supplier relationships, collect data to optimize everything including communication.

Once you establish suppliers that align with your goals and objectives, engage them within an established framework.

Let them know you have data-driven procurement systems and you’re looking for maximum value at a reasonable rate.

From time to time, organize capacity-building sessions to ensure that your internal standards and processes align with your suppliers.

• Benchmark internally

Procurement spend analysis can help you benchmark your performance across your business units.

This allows you to create meaningful comparisons for strategic decision-making.

Collecting and organizing procurement spend data enables you to answer a wider range of questions, such as:

• Average number of vendors or spend by category
• Vendors generating the highest cumulative revenues.

Procurement Spend Analysis Tools | Easy to Use Tools

Microsoft Excel is one of the spreadsheet applications you can use to store, organize, and analyze data.

But it lacks visualizations designed purposely to visualize procurement spend data for in-depth insights.

We’re not advising you to do away with Excel. 

There’s an add-on you can easily install in your Excel to access procurement spend analysis-based visualizations, such as Sankey Diagrams.

The application is called ChartExpo.

What is ChartExpo?

ChartExpo is an add-in you can easily install in your Microsoft Excel to access charts for visualizing procurement spend analysis data.

Features and Benefits

• ChartExpo is inexpensive compared to other applications. It only costs $10 per month to access many ready-made charts.
• You don’t need design or programming skills to generate ready-made charts for your stories.
• The procurement spend analysis-based application has a super-friendly dashboard to save you time.

Example

This section will use a Sankey Diagram to visualize the procurement spend data below.

Total Spending	Departments	Suppliers	Items	Spend
Total Spending	IT	Spreader Technology	Keyboards	6000
Total Spending	IT	Spreader Technology	Printers	13000
Total Spending	IT	Spreader Technology	Routers	3000
Total Spending	IT	Vintage Solutions	LEDs	15000
Total Spending	IT	Vintage Solutions	Speakers	4000
Total Spending	IT	Vintage Solutions	Servers	26000
Total Spending	Office Furniture	Wayside Furniture	Desk	4000
Total Spending	Office Furniture	Wayside Furniture	Chairs	3000
Total Spending	Office Furniture	Wayside Furniture	Chair Rests	1000
Total Spending	Office Furniture	Star Furniture	Sofas	2000
Total Spending	Office Furniture	Star Furniture	Wall art	10000
Total Spending	Office Furniture	Star Furniture	Table	13000
Total Spending	Office Furniture	Star Furniture	Filing cabinets	8000
Total Spending	Miscellaneous	Electric	Bulbs	1000
Total Spending	Miscellaneous	Electric	Fans	2000
Total Spending	Miscellaneous	Electric	AC	6000
Total Spending	Miscellaneous	Kitchen	Plates	200
Total Spending	Miscellaneous	Kitchen	Tea Cups	200
Total Spending	Miscellaneous	Clean	AC Cleaning	100

To get started with ChartExpo in Excel, follow the steps below:

• Open your Excel application.
• Open the worksheet and click the Insert button to access the My Apps option.

• Click the Insert button to initiate the ChartExpo engine.

• Once the Sankey Chart is up, click on its icon to get started.

• Highlight your data and click the Create Chart From Selection button, as shown.

• Check out the final chart.

Insights

• Vintage Solutions is the biggest service provider for IT department and this departmenthasspent more on procurement on servers and etc.
• Second highest procurement spent was on Office Furniture. Budget was spent on Wall art, table, filling and so on.
• 8% procurement budget spent on miscellaneous activities like cleaning, electric maintains, kitchen crockery.

FAQs:

What is procurement analysis?

Procurement spend analysis entails analyzing procurement spend data with the goal of:

• Decreasing costs
• Increasing efficiency
• Improving supplier relationships

It allows you to examine your spend data for strategic and actionable insights. It is one of the significant methods your procurement department should consider to:

• Identify savings opportunities
• Manage risks
• Optimize buying power

What are the procurement best practices?

We recommend categorizing each data point at the item level. And this is because it’s one of the tested and proven ways to do spend analysis.

It can provide visibility as well as more details of the attributes, that reflect estimates and comparisons.

Higher-level classification has its own benefits. You can quickly get a precise view of your spending with each supplier.

Wrap Up

Performing procurement spend analysis is critical to your business.

You can easily improve supplier relationships and recoup massive savings.

For you to conduct a reliable procurement spend analysis, you need data. Yes, you need clean data representing what’s happening in the procurement department.

Let’s assume your department has elaborate systems to gather reliable data. How do you proceed from here?

This is where a Sankey Diagram comes in.

Microsoft Excel lacks Sankey Diagrams for visualizing procurement spend data.

We’re not advising you to do away with the Excel spreadsheet.

We recommend you install third-party apps, such as ChartExpo, to access procurement spend analysis-based charts, such as a Sankey Diagram.