Spend analysis in supply chain management is a process to examine purchasing trends in a company, with a view to leveraging its buying power and minimizing risks to the continued supply of materials necessary for business operations.
Some of the insights provided by spend analysis include the following information:
1. Amounts paid to the various vendors and serviced providers.
This information offers the opportunity to leverage the buying power to obtain justifiable concessions and improvements in supply and technical know-how and collaboration, potentially leading to a vendor partnership. It can also help institute procedures and practices to avoid potential malpractices.
2. Vendors’ quality and service level ranking.
This information allows the buyers to provide feedback to vendors for continuous improvement, and also allocate more share of orders to the better-performing vendors. Setting up service level and quality targets also provides standard criteria to identify and approve new vendors.
3. Number of sources for mission-critical materials.
Most companies have the policy to have more than one vendor for items that are necessary for their key products and processes, and that is so for a good reason: to avoid the risk of disruption or discontinuation in case the vendor is unable to supply for any reason. Spend analysis provide this key input by listing the number of vendors for each item, especially the critical ones.
4. Global synergies where possible in the case of multinational corporations.
Companies with a global footprint have a tremendous opportunity to optimize centralization and decentralization of their purchasing to gain capital efficiencies on a larger scale and the necessary flexibility at the local plant level. For example, a company may centralize its capital equipment and technology buying, while decentralizing the procurement of certain operating supplies and local services.
5. Ratio of maverick buying or emergency buying.
While allowing spot purchases is necessary to overcome any immediate needs, it must be minimized and audited to avoid a deliberate avoidance of the buying procedures and approvals. Setting a limit on maverick buying and following it up with root cause analysis keeps this aspect under control.