Spend analysis is a method used by companies to track spending patterns and reduce costs. Specialized software is used to collect and analyze data from various divisions and vendors, identifying areas for negotiation and cost savings.
Spend analysis is a method used by companies to track how money is being spent by the company, with the ultimate goal of decreasing spending. Information about suppliers, purchases, and orders is organized and analyzed for patterns. Due to the enormous amount of information involved, most companies use specialized software to perform spend analysis.
The data collection and analysis process is more difficult than it seems at first glance. For spending analysis to be effective, all aspects of a company’s spending patterns must be taken into account. This information is usually stored on discrete computer systems in each division of the company. Divisions can be separated by distance and language. Gathering all of this data and organizing it into a usable format requires a great deal of time and money.
Much of the complexity can be removed by using software to facilitate spend analysis. The first spend analysis software was created in the early 2000s. While still very expensive, the software eliminates the need for human labor and creates an easy interface for accessing the resulting information.
The software works by pulling data from existing record keeping systems. This could be simple spreadsheets, warehouse data or other sources. This data is then cleaned up, which means formatting is standardized, duplicate records are merged, and missing details are found. The software classifies the data according to industry standards and company-specified standards. Purchasing specialists can access the data for reporting and analysis.
An important aspect of spending analysis is evaluating vendors. Spend analysis can show which vendors are getting the most money from the company. The company can use this information to negotiate better deals or renegotiate contracts. Most companies have preferred suppliers, suppliers that offer the best service or reduced prices for bulk purchases. Analysis may reveal that supplies or services currently purchased from a non-preferred supplier may be purchased from a preferred supplier for less.
The company may also purchase similar supplies or services from multiple vendors. This is known as shredded merchandise. You can save money by making one large purchase from a single supplier rather than a series of small purchases from multiple suppliers.
Spend analysis also helps to identify separate spend. This occurs when purchases are made that are not covered by the contract. Without a contract, the company charges full price rather than the negotiated price specified by an ongoing contract with a preferred supplier. This type of expense can cost the company a lot of money over time.
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