Spend Analysis: Whatcha Looking For?

PurchTips - Edition # 126 May 15, 2007

By Charles Dominick, SPSM

How Can Spend Analysis Contribute To Savings?

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.

(keep reading for a FREE Offer)

Spotlight On Professional Development Opportunities

Are you tired of not getting enough opportunities, respect, and money out of your purchasing career? Well, guess what? Nothing will change unless you take action towards becoming a world-class purchasing professional.

You see, today's employers refuse to reward employees for yesterday's skills. They demand that purchasing professionals like you use the most modern skills and achieve unprecedented results. They want you to save more money, achieve better operational performance, and reduce risk.

Earning your Senior Professional in Supply Management^® (SPSM) Certification is the action to take if you want to bring the most modern purchasing practices into your organization and achieve your career potential. Learn how to earn your SPSM^SM Certification at:

www.NextLevelPurchasing.com

The Latest Purchasing News

• Are you a purchasing manager who worries about balancing the many demands of your leadership role? Next Level Purchasing has just launched a new online class, “Expert Purchasing Management,” to help you. Learn more about Expert Purchasing Management at www.NextLevelPurchasing.com/expert
• Considering a career move? Since the last edition of PurchTips, at least four jobs preferring candidates with the SPSM Certification have been posted at www.NextLevelPurchasing.com/jobs

FREE Offer!!!

Want to learn more about today’s topic? Then watch my interview in our latest video podcast! Video podcasts are pre-recorded shows that you can watch on your computer or iPod. Our Purchasing & Supply Management Podcast Series^SM is one more way for us to help you have a rewarding career!