Spend analysis

What it means

Spend analysis is a breakdown of what a company buys, from whom and at what price. Spending is grouped by category, supplier, department and period to show where the money really goes and where purchasing could be done better.

It exposes fragmented purchasing, where different departments buy the same thing from different suppliers at different prices, duplicate suppliers, purchases outside approved contracts and categories where the company has never negotiated terms despite paying large amounts.

It is the foundation of strategic sourcing and supply chain management. Without it, negotiations with suppliers rest on impressions; with it, the company knows exactly what volume it buys from a supplier and how much bargaining power it really has.

How it works in practice

The starting point is accounting data, mainly the purchase invoice book and cost accounts, supplemented by orders and contracts. Cleaning the data takes most of the effort: unifying supplier names, assigning categories and splitting summary invoices that cover different kinds of goods.

Results are usually ranked by value, and it often turns out that a small number of categories make up most of the spend. The company tackles those first: it consolidates suppliers, issues a request for quotation or signs a framework agreement on better terms.

The analysis also supports management accounting and budgeting. When the cost structure in the chart of accounts is detailed enough, spend analysis can be repeated regularly with little effort to check whether agreed savings have actually materialised.

What to watch out for

The lowest price is not always the best choice. When consolidating suppliers, quality, delivery reliability and the risk of depending on a single partner must be weighed. For key suppliers it is wise to add a supplier audit to the analysis.

Analysis built on poor data leads to wrong conclusions. If costs are booked inconsistently, for example the same kind of service sometimes to one account and sometimes to another, the booking rules have to be unified first, otherwise comparisons between periods cannot be relied on.