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Why Spend Analysis

Why Spend Analysis?

This question has gained increased significance in the current market scenario where every organization is desperately looking at avenues to cut costs. Analyzing the spend incurred, indirect as well as direct, is generally the first step of any cost cutting program and it defines the next course of action(s) to be taken.

There are a number of competing solutions in the market for analyzing Spend and we will have a look at these at a later date. For now, assuming that an organization has implemented one of the available Spend analysis/ management solutions, where does it go from there?

It needs to find answer for a new and more pressing question:

What after Spend Analysis?

It is important to note here that Spend Analysis, although an important initiative, in itself will not result in any savings unless some action is taken on its findings. There needs to be a well defined strategy to control the excess Spend that has been identified.

The various ways to deal with this identified Spend can be broadly classified into one of the following two categories.

Upstream Spend Management:  This would include processes like –

  1. Consolidate the Supplier base,
  2. Get a better rate from the existing Suppliers through better contracts,
  3. Search for alternative cheaper Suppliers etc.

Essentially, we are trying to target the Source of the Spend and can tackle the above through a suitable Sourcing and Contract Management Solution.

Downstream Spend Management: This includes processes that are focussed on the Purchase side –

  1. Improving Contract compliance,
  2. Increasing the Spend against PO,
  3. Elimination of ‘maverick’ Spend etc.

A robust Procurement and Order Management Solution will help in addressing these downstream processes.

In most cases, an organization does not need to go with a big bang approach and deploy all of the above mentioned solutions at once. Based on the spend analysis results and savings priority, the initial focus has to be only on those solutions that would be best suited to meet the immediate needs.

So how does an organization go about defining the savings priority? In the next posts we will look at a few real life examples that should help in understanding this decision process better.

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