PurchTips edition #126

Simplified, spend analysis is the systematic review of historical purchase data. The output of a spend analysis is a summary of purchases by various variables, such as category, supplier, and/or business unit.

The primary reason for conducting spend analysis is to identify opportunities for cost savings. When you look at the output of a spend analysis, there are at least four indicators that there are opportunities for cost savings:

Indicator #1: A large amount of spend in categories for which enterprise-wide contracts do not exist. Today’s educated purchasing professionals can apply best practices (e.g., strategic sourcing) so that their companies minimize cost. However, when these best practices have not been utilized in a category or purchase decisions are left up to non-purchasing professionals, there is a likelihood that the company is overpaying for goods and services. So identifying areas where Purchasing should be more involved in getting contracts for those categories is a sound strategy for cost savings.

Indicator #2: A significant Purchase Price Variance (PPV) for a high-spend item or category. PPV is the difference between the average price paid and a standard cost. When there is a large PPV, this indicates one of two things: either your standard cost is not valid or you are paying too much. In the latter case, you should consider taking some type of action, such as negotiating or sourcing, to ensure that you are paying a fair price.

Indicator #3: An unusually large number suppliers for the money spent in that category. Purchasing 101: the more you buy from a single supplier, the better discount you’ll qualify for. If you’re buying from too many suppliers, you’re not leveraging your volume and likely not maximizing your discounts. Seeing a large number of suppliers in a category can tip you off that supplier consolidation can deliver savings to your organization through price reduction and also through the more advanced benefits of an optimized supply base.

Indicator #4: Rising prices over time. If you’re paying more year after year, you simply need to pay more attention to the purchases in that category. With no one “minding the store,” price creep is likely to set in.

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