Spend Analytics: How To Get Started
Spend analytics are critical to an organization, as they provide the thorough insight needed to make educated procurement decisions for the future. Not to mention they enable organizations to analyze procurement spend and identify cost areas that could be decreased, optimized, or potentially even eliminated.
Spend analytics showcase the data needed for sourcing managers to enhance their negotiation strategy with suppliers while also increasing stakeholder engagement. With all of the critical information that spend analytics may provide, you may be thinking - it has to be rather difficult to implement, right?
Fortunately, not at all! A proof of concept (POC) can likely be completed by a data analyst within a month and only consists of a few simple steps.
Step One - Payment Data Extract
The first step will require you to collaborate with IT to obtain a data extract of all payments over the past two years. Payment data should be for all external suppliers and exclude employee payment data. The key data fields to include are the following:
Supplier
Entity
General Ledger (GL) Account
Cost Center
Invoice Description
Payment Amount
Currency
Payment Date
Invoice Date
Payment Terms
Extracting this valuable information is critical in your spend analysis, as it provides the foundation to build this tool/metric. The file that is pulled will take some time to dive into, as it will likely be very data-heavy. You will need to sort through the information and make it easy to understand for your stakeholders and organization, which is where the next step comes into play - data normalization.
Step Two - Data Normalization
Data normalization (also referred to as data cleansing) will be required to ensure better data quality and adequate data comprehension. Data normalization pertains to the process of reorganizing data and making it appear similar across all records and fields, thus allowing users to utilize it for analysis and queries.
For example, let’s say you have different suppliers with spend that are tied to a global supplier (e.g. ABC Computer may have three suppliers for US, APAC, and EMEA). Normalizing the data would include cross-referencing (xref) the suppliers to the global supplier.
You may also cross-reference the cost centers to each business unit (e.g there can be six cost centers for the marketing business unit). If you are in an international business and have different currencies for payments, then you will want to convert all payments to US dollars (USD). This will clean up your data and make it much easier to understand for further analysis and when presenting to business stakeholders.
Step Three - Dimensions
Once completing payment data extraction and normalization, now it is time to decide on the different dimensions that you want to view in your data. This will vary based on the organization, but there are a series of key dimensions that should be considered by all businesses:
Global Supplier (Created from Data Normalization)
Business Unit (Created from Data Normalization)
Cost Center
General Ledgers (GL) Account
Entity
Region (Created from Data Normalization)
Quarter (Created from Data Normalization)
Supplier
Now that the data is cleansed and you have established your dimensions, you are ready to generate reports to present to the team and stakeholders.
Step Four - Generating Reports
You have already done most of the work and categorized your data, in which now all that is left is to generate reports. This is very simple and can be conducted through Microsoft Excel or Google Sheets for the proof of concept (POC). After the proof of concept, you may want to consider transitioning to a more robust report writer. A few reports to generate include the following:
Spend By Global Supplier
Spend By Business Unit
Spend By General Ledger (GL) Account
For each report, drill down by each of the dimensions. For example, for the Spend by Business Unit, drill down by supplier, cost center, and general ledger (GL) account. This will showcase the clearest, most concise visual of your organization’s spend analytics.
Linking The Spend Data To Other Data Tables
While steps one through four will most likely be sufficient for your team, there may be a need to link the spend data to other data. An example of this includes obtaining the visibility of the contract pipeline per supplier. This ensures that all parties involved are aware that the contract will be expiring soon and will need to be reviewed. To link spend data, you will need to have a common field, in which for this example the common field would be the supplier number to link the spend data to the contract data.
How to Use Your Spend Analytics
You finally have your spend analytics - so what now? With all of the information that your spend analytics provides, you may be wondering how exactly to utilize this data. While there is so much value in the spend data, we will focus on two cases - educating the business on the spend and locating areas to cut costs.
The Sourcing Managers should set up a yearly spend review with the business unit(s) they support. This will ensure that the business is educated on what they are spending and clearly outline what areas of the spend can be optimized. Providing these spend analytics will allow business heads to have a clear understanding of where the organization’s money is going and what areas of costs could be reduced.
Rightsizing Your Strategy With Spend Analytics
While spend analytics are easy to obtain, using that information to your organization’s benefit can be challenging. Developing the right-sized strategy and approach for your procurement culture is a concept that many organizations struggle with, so it may be beneficial to outsource the knowledge and expertise needed to optimize your spend.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
