3.6 Tools: Spend Analysis

How well do you know what your spend looks like? In other words, could you provide accurate and detailed responses to the following questions?

• How much did you spend last year to operate your household?

• What did you buy? That is, what did you spend all of that money on?

You probably wouldn't be surprised to hear that very few people can answer these questions with confidence. Most companies can't either. But, to identify the right organizational structure for your firm, you need to know what your annual spend looks like. The process for making spend visible is called spend documentationThe process of taking a close look at your organization’s spend to determine what is bought, when, in what quantities, from whom, and under what terms and conditions (T&Cs). , which is the first step in a spend analysisThe process of taking a close look at your organization’s spend to look for opportunities to improve efficiencies—e.g., to standardize SKUs or aggregate buys. .

In reality, for all but the smallest of startups, no one person knows in real time how much is being spent to support operations. Think about your household. Different people buy things. Some pay cash; some use credit or debit cards. Because they don't always communicate, you probably do not know exactly what is being bought when. It's entirely possible that from time to time, you have two gallons of milk sitting in the refrigerator bought from two different stores at two different prices. This is true for companies as well. The total spend cannot be ascertained from any single source—even at the category level!

To demystify your spend, you need to take a close look at the data found in your firm's enterprise resource planning (ERP) system or accounts payable files. Your goal is to determine what is bought, when, in what quantities, from whom, and under what terms and conditions (T&Cs). A refined spend documentation enables you to see who buys what by business unit, product line, buying location, supplier, and subcategory. Although most spend documentation looks backward to see what has been purchased, you should be proactive and match future spend to product, market, and technology plans.

Once you know what your spend looks like, you can define the "best" organizational structure and identify improvement opportunities. Specifically, look for the following:

• Standardization opportunities (i.e., are you buying unique SKUs that do the same thing?)

• Aggregation opportunities (i.e., are you buying the same SKU from different suppliers?)

• Duplication (i.e., are you doing the same thing in different places needlessly?)

• Supplier performance differences (i.e., are some suppliers outperforming others?)

Like a well-managed household budget, a systematic spend analysis will help you make sure you are getting the best value for your money, time, and efforts.