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Why a spend analysis sucks...

…..as a primary tool for identifying strategic procurement improvement opportunities.

I know, this seems like swearing in church. To many buyers, the spend analysis is some sort of holy tool; it is key to their existence. They have often spend years on developing and fine tuning the tool. Setting up all the different spend categories and ensuring that all incoming invoices are assigned to the right categories.

Because, as they say, it is critical to know how, on what and with whom your company is spending it’s hard earned cash.

Now, apart from the fact that this is not necessarily true, it is something the spend analysis is not even telling you. It merely shows how you have been spending your money. Depending on your systems, this may involve real time data and thus include even todays orders, or you may be looking at last years numbers. In any case, it is about the past. A spend analysis is like a rear view mirror; it shows you the road behind you; not the one in front. So if you are not careful, your future actions may be based on yesterday’s behavior. Which may not be the smartest thing to do.

In addition, a spend analysis does not tell you anything about costs; it merely captures price. Unless all the different spend categories are linked to each other and combined with your own personnel costs in relation to the final result. But I’ve never seen this though.

How for instance will the spend analysis tell you what the actual cost of a certain customer report is, when the binder, the paper, the copier, the toner and the copier maintenance are all sourced from different suppliers? It will definitely not include the hours your employed consultant has spend on making it happen. But at least you’ll know that you have spend 440k per year on A4 paper and 1.2 m on toner cartridges. So what?

But even more important than these minor issues with the spend analysis is the fact that for most companies spend is not strategic. Now maybe I have to clarify my understanding of the popular catch phrase ‘strategic’.

In my opinion, strategic has to do with the ‘reason for being’ of a company. Why does it exist? Why do customers buy (competitive advantage)? How does it make money? How does it continue to do so? Or why do you receive (government) funding? What’s the recognized value in your being?

Unless your prime positioning argument is that you are the cheapest in the market and lowest price is the reason for customers to buy, spend has nothing to do with this. This positioning is only valid for one party in the market; there can be only one with the lowest price. All the others have customers because these customers value something other than price.

So if you want to be in strategic procurement, and your company is not the cheapest, a spend analysis is not going to give you much to go on.

You should start with an ‘income analysis’ instead. Which customers are (or will be) most valuable to you? This can be in regards to turnover, margin, reference or whatever. What is it they value most in your company’s performance? Is it your product’s performance? It’s reliability? Your salesforce? Your customer service? Your brand? Your…? If you are not aware of this, how on earth can you make any strategic decisions related to your supply base?

Your strategic suppliers are the ones who support you in delivering the performance your customers value most. And there is no direct connection with spend.