In many organizations, procurement data is often scattered across multiple systems and departments, making it difficult to gain a clear and comprehensive view of overall spending. This lack of visibility leads to missed cost-saving opportunities, inefficiencies in supplier management, and a higher risk of miscalculations in decision-making.

This is where procurement-spend analytics becomes a powerful solution. By bringing all procurement data together in one place, businesses can solve these problems.

Maybe that’s why the global market for spend analytics increased from $2.53 billion in 2023 to a projected $11.52 billion by 2032, with an annual growth rate of 18.35%. As supply chains grow more complex and span across regions, businesses are leveraging insights from procurement spend analytics to optimize their budgets and operations.

What is Spend Analysis?

How confident are you that your company’s spending is optimized? Spend analysis can reveal inefficiencies you never knew existed.

Spend analysis in procurement reviews and evaluates a company's expenditure data to gain insights into spending patterns. It involves breaking down procurement data to help businesses make informed decisions, optimize spending, and implement better expense optimization strategies. 

In a nutshell, procurement-spend analytics enables companies to understand where their money is going and how to spend it more strategically.

Key questions that spend analysis typically answers include:

• What are we buying? – Identifying the products and services your business is purchasing.
• How much are we paying? – Understanding the costs associated with these purchases.
• Who are we buying from? – Recognize the suppliers you rely on and evaluate their performance.
• Who is doing the buying? – Tracking which departments or individuals are making purchasing decisions.‍
• On what terms? – Examining the terms of contracts, payment agreements, and delivery schedules.

Steps to Conduct Spend Analysis

Each step in procurement-spend analytics plays a crucial role in turning raw data into actionable insights. Let's break down the key steps involved:

Identify Data Sources

Start by clearly understanding the spend categories you want to cover, which helps limit purchases to key sources. Next, segment your spend into groups and identify the data sources available across departments, plants, and business units. Common sources of procurement spend data include:

• ERP systems
• General ledger information
• Purchase orders
• Invoices
• Supplier data
• Transaction records
• Other internal and external systems.

Data Extraction

After identifying the data sources, the next step is data extraction, which involves pulling all spend data into a centralized database. Businesses must consolidate the data from multiple departments to ensure it is ready for analysis.

Centralizing data is crucial for procurement-spend analytics, as it provides a unified view of spending across the organization. Depending on the complexity and structure of the data, automated data extraction tools or manual processes can be used.

Data Cleansing

Data cleansing is essential for ensuring accurate, actionable insights in procurement by eliminating inconsistencies and errors. It's particularly challenging when dealing with invoices from multiple vendors with different taxonomies and formats.

Here's how effective data cleansing adds value:

• Corrects duplicate entries, missing information, and misclassified transactions.
• Harmonizes diverse vendor data for a unified view of spending.
• Using systems like UNSPSC helps categorize products/services consistently.
• Enables clearer spend visibility for smarter procurement decisions.
• Provides a reliable data foundation, reducing anomalies and enhancing cost optimization prospects.

Data Enrichment

Data enrichment adds the missing details to gain real value from your analytics. This may involve standardizing supplier names across departments or categorizing spend by product or service type. Enriched data makes it easier to categorize and analyze spend data. Tools designed for procurement and spend analytics configuration help streamline the enrichment process, saving time and ensuring consistency.

Invoice categorization 

One of the most crucial steps of spend analytics in procurement is invoice categorization Suppliers/Vendors send invoices in varied formats with different taxonomies. It’s really challenging for businesses to correctly categorize these invoices in the correct spend categories as per their taxonomies. This is where AI tools like INSIA can help a lot, wherein machine learning algorithms can help businesses automatically categorize invoices as per the right taxonomy.

• Automatic Categorization: Machine learning algorithms can automatically categorize invoices according to the correct taxonomy, reducing errors.
• Grouping Suppliers: The system can group suppliers from the same parent company, helping to consolidate spending data.
• Clear Data Categories: It organizes spending data into clear categories, making it easier to manage across the organization.

This process allows procurement teams to understand where money is spent, leading to better sourcing decisions. Both direct and indirect procurement expenses can be sorted into distinct categories, making it easier to analyze and manage related goods or services efficiently.

• A spend category is a way to group similar expenses or services at an organizational level. For example, “IT” could be a spend category that includes both software and hardware purchases.
• The spend taxonomy is the structured framework that procurement uses to classify expenses hierarchically. It can be considered a branching tree, where each branch represents different levels and subcategories of spending. It provides a clear structure for organizing and analyzing costs.

Research shows that 53% of procurement organizations have developed their spend taxonomy, enabling them to manage the complexities of spend data more efficiently. To be effective, the taxonomy should be communicated to stakeholders, such as Finance and Category Managers, ensuring everyone understands each subcategory.

‍Important Note: UNSPSC can be helpful but isn't always ideal for more strategic sourcing approaches. Therefore, a tailored spend classification system often proves more effective in optimizing procurement.

Data Analysis

Data analysis uncovers opportunities for cost savings and improvements in procurement processes. It can address critical business questions such as

• Are we getting a volume discount?
• Are we making the best use of pay terms?
• Which suppliers offer the best contract deals?
• Are buyers consistently purchasing from preferred suppliers?
• Are we buying the same non critical component from multiple vendors

This analysis can also reveal opportunities to reduce the number of suppliers within each category and negotiate more favorable rates.

At this stage, it is advantageous to explore how external data assets can enhance your analysis with deeper, strategic insights. Integrating third-party data with your spending information enables more informed decision-making.

This approach is particularly valuable for sustainable procurement. By connecting carbon emission data to your spending, you can cut down Scope 3 emissions—indirect emissions from your supply chain that usually make up the largest part of a company's carbon footprint. This helps meet sustainability targets and reduces long-term risks associated with climate change. 

Additionally, incorporating supplier sustainability scores into your category analysis ensures you partner with eco-friendly vendors, creating a more sustainable procurement network. This comprehensive view enables informed decision-making, driving progress towards a net-zero supply chain.

Data Reporting

Finally, the insights generated from the analysis must be communicated clearly through data reporting. This is typically done using procurement and spend analytics dashboards, reports, and presentations to share findings with stakeholders and drive decision-making. Visual tools like dashboards make it easy to understand the results of procurement spend analytics. Reports should include key takeaways, actionable insights, and areas for improvement or cost reduction.

Importance of Spend Analysis

By analyzing spend patterns, manufacturers can gain valuable insights into purchasing behavior, helping them streamline sourcing and supply chain processes. This data-driven approach allows manufacturers to adapt quickly to industry changes. 

Let’s dive deeper into how spend analysis can transform your manufacturing operations.

Financial Management and Procurement Strategy

Spend analysis is a key driver in improving financial management by pinpointing areas where spending can be optimized. Companies can manage their budgets more effectively by identifying spending reduction possibilities and refining procurement and spend analytics strategies.

Example Scenario: A company analyzes procurement-spend data and spends $300,000 annually on specific machine parts across multiple departments. By consolidating orders and negotiating a bulk purchase, they reduce unit costs by 8%.

• Formula: Total Savings = Original Spend × Percentage Reduction
• Total Savings = $300,000 × 0.08 = $24,000

Using spend analytics, the company saves $24,000 annually on manufacturing costs, allocating funds more efficiently and improving overall production efficiency.

Enhances Transparency and Accountability

Procurement-spend analytics enhance transparency by providing clear visibility into how funds are allocated. This allows businesses to track spending patterns more accurately and hold departments accountable, making it easier to identify and correct inefficiencies.

Example Scenario: A company uses procurement-spend analytics to monitor raw material purchases across departments. It finds that a specific department regularly exceeds its budget by 20% due to unplanned orders.

• Formula:Overspend = Department Budget × Percentage Overrun
• Overspend = $100,000 × 0.20 = $20,000

By identifying this $20,000 overspend, the company addresses the issue, holds the specific accountable, and adjusts its procurement process, reducing unnecessary expenses and improving overall manufacturing efficiency.

Supplier Relationships

You can use a Supplier Performance Index (SPI) to evaluate supplier performance, factoring in key metrics like delivery time, quality, and cost. Here's a simplified formula for assessing supplier relationships based on spend analysis:

Formula

SPI = (Total Spend / Number of Defects) + (Delivery Score × Weight) + (Cost Efficiency × Weight)

Where:

• Total Spend = Total amount spent on the supplier in a given period.
• Number of Defects = The total number of defects or issues related to the supplier's deliveries.
• Delivery Score = A rating based on the timeliness and accuracy of deliveries (scaled from 1 to 10, for example).
• Cost Efficiency = A rating reflecting the supplier's cost-effectiveness (scaled from 1 to 10).
• Weight = A predefined value for how important each factor is (such as 0.5 for delivery and 0.5 for cost efficiency).

The SPI helps businesses assess overall supplier performance by determining how much is spent and how well the supplier performs on key metrics. The higher the SPI, the better the supplier relationship.

Example Scenario:

Let’s say a manufacturer has three suppliers and wants to analyze their performance using spend analysis:

• Supplier A:some text
  • Total Spend: $50,000
  • Number of Defects: 5
  • Delivery Score: 8
  • Cost Efficiency: 7
  • Weight for Delivery and Cost Efficiency: 0.5 each
• Supplier B:some text
  • Total Spend: $40,000
  • Number of Defects: 3
  • Delivery Score: 7
  • Cost Efficiency: 6
  • Weight for Delivery and Cost Efficiency: 0.5 each
• Supplier C:some text
  • Total Spend: $60,000
  • Number of Defects: 6
  • Delivery Score: 9
  • Cost Efficiency: 8
  • Weight for Delivery and Cost Efficiency: 0.5 each

Now, calculate the SPI for each supplier:

• Supplier A:
  SPI = (50,000 / 5) + (8 × 0.5) + (7 × 0.5)
  SPI = 10,000 + 4 + 3.5 = 17,500
• Supplier B:
  SPI = (40,000 / 3) + (7 × 0.5) + (6 × 0.5)
  SPI = 13,333.33 + 3.5 + 3 = 16,836.33

Supplier C:SPI = (60,000 / 6) + (9 × 0.5) + (8 × 0.5)SPI = 10,000 + 4.5 + 4 = 18,500

Interpretation:

In this scenario, Supplier C has the highest SPI (18,500), indicating strong performance in delivery and cost efficiency despite having a higher total spend. Based on these results, the company may choose to consolidate more of its procurement needs with Supplier C due to its better performance.

Process Improvements

How much time is wasted on manual procurement processes in your organization? Streamlining operations with spend analysis can save both time and money.

Spend analysis highlights inefficiencies in procurement processes, such as maverick spending—unapproved purchases made outside the established process. By identifying these issues, businesses can streamline procurement and improve compliance.

Example Scenario: By analyzing its spending, an IT company finds that 30% of its purchases for software licenses were unapproved, resulting in $150,000 in maverick spending annually. Using this insight, it streamlines its procurement process, cutting maverick spending by 60%.

• Formula: Maverick Spend Savings = Total Maverick Spend × Reduction Percentage
• Savings = $150,000 × 0.60 = $90,000

By identifying and eliminating unapproved purchases, the IT company saves $90,000 and significantly improves procurement efficiency, allowing for better budget allocation toward essential IT investments.

Strategic Decision-Making

Do you have the real-time data to make proactive, strategic decisions? Spend analysis provides insights that put you in control. With real-time insights into spending, businesses can make smarter procurement decisions. Spend analysis provides the data for more informed strategies, allowing companies to align procurement decisions with long-term goals. 

Example Scenario: A manufacturing company spends $1 million annually on machine maintenance, but spending analysis reveals that 20% of the costs are due to emergency repairs. Using real-time data, they implement a preventive maintenance program, reducing emergency repair costs by 50%.

• Formula: Savings from Emergency Repairs = Annual Emergency Repair Costs × Reduction Percentage
• Savings = ($1,000,000 × 0.20) × 0.50 = $100,000

By saving $100,000, the company strategically optimizes spending, ensuring smoother operations and aligning maintenance with long-term manufacturing efficiency goals.

Benefits of Spend Analysis

According to a McKinsey & Company report, the primary goal of procurement-spend analytics is to provide transparency into where cash is spent, helping organizations optimize external spending—often 40 to 80 percent of total costs. Below are some of the most impactful benefits, along with unique insights into how they contribute to a company's overall success:

Expense Optimization

The potential savings a company can achieve by identifying and eliminating cost-inefficient patterns through procurement-spend analytics can be surprising. Let’s take a look at some common habits that waste money:

• Maverick spending: Purchasing goods and services from unapproved suppliers without negotiated contract pricing.
• Duplicate payments: Making payments multiple times for a single invoice.
• Late fees: Incurring late payment penalties, which not only increase costs but damage a company’s reputation with suppliers.
• Unnecessary departmental spending: Departments pay separately for the same subscriptions or items, leading to redundant expenses.

By utilizing procurement-spend analytics, companies can identify non-essential goods and services that consume a significant portion of the budget and explore cheaper alternatives that do not impact the final product’s quality.

Enhanced Visibility

Procurement-spend analytics enables companies to gain full transparency into spending—how much money is being spent and on which items. It also provides valuable insights into supplier relationships and the terms under which business is conducted.

This clarity allows organizations to identify strengths and weaknesses in their procurement processes. For example, a company might realize that it has missed better sourcing opportunities or overlooked hidden costs due to insufficient data.

This information lets decision-makers make informed, data-driven decisions and set realistic, actionable goals to optimize procurement strategies.

Simplifies Forecasting and Building Budgets

Accurate data from procurement-spend analytics enhances the ability to forecast future expenses and set realistic budgets. With clear insights into past spending, businesses can track the financial impact of previous decisions and identify unforeseen costs that affected earlier budgets. Being informed means being better prepared for future financial planning.

Identifies Underperforming Suppliers

Integrating spending data with purchasing process data gives a holistic analysis of organizations' dependencies on their suppliers and helps identify risks. 

3 of the most important questions it answers are:

• Are we spending too much on suppliers frequently missing delivery timelines 
• Did suppliers reduce their prices with an increase in orders? i
• Is the supplier's average price, lead time, and fulfillment rate in line with those of the organization's best suppliers? 

Addressing these questions before renewing contracts ensures informed decision-making.

Volkswagen's relationship with its supplier, Car Trim, is a prominent example of identifying and addressing underperforming suppliers. In 2016, Volkswagen canceled a €500 million contract with Car Trim due to the delivery of flawed leather seat covers. This decision led Car Trim to halt all deliveries to Volkswagen, resulting in significant operational disruptions for the automaker, including the temporary shutdown of six plants and the reduction of hours for nearly 28,000 workers.

Streamlines Internal Procedures

Procurement-spend analytics reveals overlapping purchases across departments, allowing for better cooperation and fewer, more efficient purchase orders. Unified data also streamlines financial reporting, making tracking and verifying spending easier. Analyzing supplier performance alongside contract terms enables businesses to establish clear expectations, ensuring value from supplier relationships.

Key Metrics to Track in Procurement Spend Analytics

Procurement-spend analytics provides a wealth of data, but companies can miss out on actionable insights without focusing on key metrics. Below are the most important metrics that should be tracked to ensure effective procurement management.

Spend Under Management (SUM)

Spend Under Management (SUM) refers to the portion of a company's total expenditure that is overseen and controlled by the procurement function. While organizations may define SUM according to their specific policies and practices, it is generally considered synonymous with spend under procurement.

A related concept is spend under contract, which represents the amount of expenditure managed through formal supplier agreements. This often falls within the broader category of spend under procurement.

To calculate SUM, use the following formula:

SUM (%) = (Total procurement-managed spend / Total addressable spend) x 100

Where:

• Total procurement-managed spend includes direct and indirect expenditures overseen by the procurement department.
• Total addressable spend represents all organizational expenditures, excluding employee salaries and tax payments.

SUM Calculation Example: For example, let's imagine the following is a company's annual financial data:

• Total expenditure: $100M
• Employee salaries: $30M
• Taxes: $15M
• Procurement-managed spend: $40M

Calculation:

1. Total Addressable Spend = $100M - ($30M + $15M) = $55M
2. SUM (%) = ($40M / $55M) x 100 = 72.72%

‍What does it mean? The procurement function manages 72.72% of the company's addressable spend. This indicates that nearly three-quarters of the company's controllable expenditures are overseen by the procurement department, suggesting a relatively high level of spend management.

Spend Visibility

The term "spend visibility" is often mistaken for "expense tracking," but spend visibility is much more than just monitoring expenses. It provides a complete and detailed view of how money flows through your organization.

Think of spend visibility as a clear lens into your company's financial activities, showing exactly where funds are allocated.

For example, suppose your company recently invested in significant raw materials like steel. Wouldn't you want to understand why a particular supplier was chosen, who approved the purchase, how the pricing compared to industry standards, and whether you're getting the best deal for those materials?

Fragmented spending across various suppliers and categories can be hard to manage. Inconsistent processes make it easy for payments to go unnoticed, allowing for potential risks, fraud, and, ultimately, a lack of spending control. That's why having an accurate, accessible, and up-to-date view of spending data is essential for procurement professionals.

Cost Savings

Tracking cost savings involves more than just looking at reduced expenses; it’s about understanding where and how these savings are achieved. Distinguish between “hard savings” (actual reductions like lower contract prices) and “soft savings” (like process improvements or time efficiencies). Benchmarking against industry standards helps you gauge if your savings efforts are competitive. 

Cost avoidance, which prevents future expenses (e.g., negotiating longer payment terms), is as important as direct reductions, even though it's harder to quantify. This process is integral to the strategic sourcing and supplier management roles, as it helps identify areas for cost reduction and efficiency improvement.

Spend By Category

Firstly, “spend category”, mentioned in the Data Classification section, and “Spend by Category” are closely related concepts in procurement analytics but have slightly different meanings and uses.

“Spend category” is a classification system for grouping similar expenses, while “spend by category” represents the actual amounts spent within these classifications. The former organizes procurement data, while the latter quantifies it, enabling analysis of spending patterns.

Here's a simple example to illustrate the difference between spend category and spend by category in procurement-spend analytics:

Imagine a small tech company with the following procurement data:

Spend Categories:

1. Office Supplies
2. IT Equipment
3. Software Licenses

Spend by Category (for Q1):

1. Office Supplies: $5,000
2. IT Equipment: $15,000
3. Software Licenses: $10,000

Analyzing spend by category reveals which areas consume the most resources, helping you develop tailored strategies for each category. This metric isn't just about grouping expenses but understanding the market dynamics, supplier dependencies, and risk factors associated with each category. 

Category-specific insights allow for more targeted negotiations, such as consolidating purchases with a single supplier to leverage volume discounts. Furthermore, it helps you identify where to implement tighter controls or pursue alternative sourcing options.

Supplier Performance

We have already discussed above how supplier performance can affect your business through Volkswagen’s blunder with CarTrim.

Supplier performance assessment is a key metric in procurement-spend analytics that goes beyond on-time delivery rates. It's about evaluating various aspects such as product/service quality, adherence to agreed terms, pricing consistency, and their ability to handle demand fluctuations. Regularly monitoring these factors allows you to identify which suppliers are strategic partners and which may pose risks. 

Implementing a robust procurement analytics platform that regularly tracks KPIs helps build long-term partnerships, improve terms, and even co-develop innovative solutions.

Tail Spend

Tail spend, typically consisting of low-value, frequent purchases, often goes unnoticed but can represent up to 10-20% of total spend. Neglecting tail spend can result in missed savings opportunities and inefficient procurement practices.

Effective tail spend management involves strategies like consolidating suppliers to reduce fragmentation or using automated procurement solutions to handle these smaller transactions more efficiently. Regular analysis of tail spend is crucial as it can uncover hidden trends and facilitate negotiating better deals, even for seemingly insignificant items.

Best Practices in Spend Analysis

Automating key steps ensures efficient and accurate spend analysis. Tools like Insia’s procurement-spend analytics platform provide unified data operations, management and analytics of procurement data, simplifying reporting and offering actionable insights.

Centralized Cloud-Based Data Storage

Secured, cloud-based storage allows businesses to access procurement data anytime, eliminating the need for multiple, disconnected data systems. This ensures seamless collaboration across departments, real-time updates, and a single source of truth for procurement information. With centralized data, teams can make faster, more informed decisions, reducing errors and inconsistencies across the organization.

Trident achieved a 90% reduction in data processing time by using INSIA's centralized cloud-based data storage solution. Additionally, they experienced a 70% improvement in reporting accuracy, which led to faster decision-making and better insights.

Seamless Financial System Integration

Integrating financial systems such as QuickBooks, Xero, and Netsuite ensures smooth data flow between platforms, synchronizing records and reducing discrepancies. This seamless connection means that changes in one system reflect across others, giving you a comprehensive, real-time financial picture. This not only minimizes errors but also allows for more strategic financial management.

Automate Purchase Processes

Automation allows your team to focus on strategic decisions instead of paperwork. Automating tasks like purchase orders, invoice management, and receipt handling eliminates bottlenecks and reduces human errors. Custom approval workflows add flexibility, ensuring compliance with company policies and speeding up procurement processes, boosting departmental efficiency and accuracy.

Proactive Discrepancy Tracking

Mistakes in purchase orders often lead to costly delays and disputes. Proactive discrepancy tracking flags potential errors early, allowing procurement teams to address issues promptly. This prevents delays, ensures smoother transactions, and strengthens supplier relationships by resolving discrepancies before they escalate, ultimately saving time and reducing unnecessary costs.

INSIA’s implementation helped Kirloskar Oil Engines monitor and resolve data inconsistencies by unifying fragmented data from multiple systems, enabling real-time tracking of discrepancies. Kirloskar experienced a 70% faster time to insights and a 40% reduction in reporting costs.

Build Item and Supplier Catalogs

Creating item and supplier catalogs centralizes all procurement information, making comparing offerings and managing vendors easier. By maintaining an up-to-date catalog, businesses can streamline ordering processes, reduce errors, and ensure consistency in procurement activities. This organized approach simplifies access to product details, helping teams make more informed and faster purchasing decisions.

INSIA enabled Alaric to manage over 50,000 SKUs by categorizing them into groups (Very Fast Moving, Fast Moving, Slow Moving, and Very Slow Moving) and integrating detailed specifications, storage requirements, and expiration dates. Alaric saw a 50% improvement in managing fast-moving drugs and a 60% reduction in forecasting time.

Departmental Budget Management

Setting and managing budgets at the departmental level ensures financial control and prevents overspending. By tracking spending against allocated budgets, teams can monitor expenses more effectively and avoid unexpected overages. This approach empowers departments to manage their finances independently while maintaining overall budget compliance, leading to better resource allocation.

Reduce Data Errors with Mandatory Fields

Implementing mandatory fields or drop-down options in procurement documents ensures data consistency by enforcing structured data entry. This minimizes the risk of incomplete or inaccurate data, providing all essential information is captured correctly. As a result, the procurement process runs smoothly, with fewer disruptions caused by missing or incorrect data.

Again, INSIA helped Crescent Foundry reduce data errors by consolidating fragmented data from systems like SAP Business One, MS SQL, and spreadsheets into one platform. This shift enabled more structured data entry and ensured accuracy by reducing manual intervention. Crescent Foundry achieved a 50% faster time to insights and a 40% reduction in reporting costs.

Customizable Reports with Visual Insights

Customizable reports provide visual insights like graphs, pie charts, and dashboards, making tracking and analyzing procurement data easier. These visual tools help decision-makers quickly identify spending trends, patterns, and inefficiencies, enabling them to make informed decisions. Clear visual insights ensure that data-driven strategies are more effective and aligned with organizational goals.

Benchmarking with Industry Best: What’s the Best AUM?

Regarding Asset Under Management (AUM) in procurement, INSIA stands out as an industry leader by offering a comprehensive procurement analytics platform. Its platform provides a holistic view of procurement activities, allowing organizations to analyze spend distribution, track vendor performance, and streamline procurement processes.

By focusing on actionable insights rather than manual data preparation, INSIA ensures businesses can optimize their procurement strategy, reduce inefficiencies, and gain a competitive advantage in managing spend effectively. This approach helps achieve the best AUM by aligning procurement processes with industry-leading practices.

Conclusion

Many businesses struggle with inefficient procurement processes due to a lack of clear spending insights. Procurement-spend analytics helps solve this by offering data-driven decisions that improve cost efficiency and vendor management. Adopting spend analysis software from INSIA is crucial for enhancing procurement operations and achieving optimal results.

 INSIA’'s Tools for Effective Spend Analytics:

• Unified data integration that centralizes and syncs procurement data from multiple sources
• Automated workflows streamline purchase orders, invoices, and approval processes.
• Vendor performance tracking with key metrics like delivery times and contract compliance
• Customizable reporting provides real-time, visualized insights into spending patterns.
• Budget management to set and control department budgets aligned with financial goals

Transform your procurement process—request a free demo with Insia and see how our spend analytics platform can elevate your operations!