Beyond enabling transactions and meeting compliance requirements, vendor information plays another important role. Together with ERP transactional and p-card data, vendor information supports spend analysis.
What is spend analysis? It is a process that provides answers to these fundamental questions:
- What did we buy?
- How much did we buy?
- What did we pay?
- Whom did we buy it from?
- Who (in our organization) bought it?
- On what terms?
The process involves gathering data on expenditures, cleansing and organizing it, then analyzing it to understand spending and identify opportunities to save money and improve policies and procedures. The Aberdeen Group has estimated a lack of adequate spend analysis is costing businesses more than $250 billion annually in missed savings.Spend analysis gives visibility into who is buying what from whom, how often and at what cost. The transparency allows the company to see, for example, if it might consolidate suppliers for savings, or if it might be over-exposed in relying on too few vendors. Or it can show whether they may be paying one vendor much more than another for the same product or service.
Spend Management Benefits
Expenditures sorted by commodity, GL code and vendor provides a wealth of intelligence. A few metrics uncovered by spend analysis include the following (there are more):
- Total expenditure
- Total number of transactions
- Number of vendors
- Amount spent per vendor
- Purchased product prices
- Spend by department or unit
- Payment terms
- Payment formats
- Maverick spend
With this information, your organization can better manage expenditures. You can eliminate excess vendors and negotiate better terms and discounts. You may also uncover opportunities to shift payment types, for example, to expand p-card usage. You might discover that you are not taking all available discounts.
If you are buying from many vendors, you may be able to consolidate to fewer vendors and lower cost through increased purchase volume. Perhaps you find that one region has much more favorable pricing than another region. Perhaps you uncover a lot of 15-day terms and can renegotiate them to 30 days, favorably impacting DPO.
Spend analysis also reveals maverick spend, which is expenditure outside of procurement policies and vetted vendors, or without procurement or budget-holder approval. Identifying maverick spend is the first step in getting it under control. (It may indicate and require fixing your policies and procedures, so ask why it’s happening. Process controls must account for different purchase types, since one policy won’t fit all, and cumbersome policies may be ignored.)
What You Need and the Steps
To the extent you have gathered key data in vendor onboarding, you have key identifiers. For example: product type and industry code or general ledger account number are critical sort elements. Business classification, e.g., woman-owned business, is another example of data you may need to analyze according to customer or corporate policies.
The steps in spend management begin with data gathering. Once the data is in one place, it must be cleaned and standardized. This can be a useful process in determining the state of your data, since preparing it for analysis will show incomplete records and missing data.
Spend analysis highlights the importance of obtaining complete and accurate information at vendor onboarding, and of performing regular vendor master file maintenance. Likewise, the quality of transaction information is important. Automated spend analysis software is a valuable tool.
But the adage applies: “garbage in, garbage out.” The data put in must be accurate and complete. Of course, this includes specific transactional data, as well as vendor information. But implementation and consistent application of policies and procedures for vendor onboarding and vendor file maintenance increases the accuracy of data analyzed.With the aggregate data clean, the next step is to organize and categorize the data according to products, units and vendors. Then an organization—typically procurement or strategic sourcing—can begin analysis of the data. Management and budget owners also benefit from the analysis. The vendor information manager’s job is to provide accurate and complete vendor information.