ABC Spend Analysis
Spend analysis is a fundamental strategic procurement technique that helps determine the 20% high piority sourcing events to be focused for cost savings and reducing risks. And the 80% low piority events to be automated to save buyers valuable time.
Most procurement managers have never analysed their organisations spend
We have talked to procurement managers from all over the world and for our surprise we have discovered that only 20% of them have run a proper spend analysis and set strategies based on the results, 20% follow it partially and in 60% of companies the spend has never been analysed.
This means there is potential for major improvements in their supply chain, which can be achieved by using a fundamental technique called the Spend Analysis.
Use Excel and turn historic spend data to valuable insights
Accounts payable or the general ledger usually have company spend data categorized by supplier or product/service names and spend size. This data can easily be placed in an Excel spreadsheet to create the high level spend profile of the company.
The high level spend profile, provides procurement manager with an overview of the company’s spend structure to be able to understand which part of supply chain needs focusing and which part does not.
What is organisations ABC spend profile
The ABC spend profile provides to the procurement manager a good overview of the company spend structure needed in the phase of analyzing and prioritizing sourcing projects.
A category The A category holds 80% of company’s spend and only 5% of the suppliers and 5% of the commodities. This is the category that holds most supply risks and potential for cost savings.
The A category projects should be analyzed, prioritized and buyers should continuously look for ways for delivering cost savings and leveraging business risks using: category plans, cost reduction strategies, preferred supplier lists and other supply chain optimization best practices.
B category The B spend category that holds 15% of company’s spend, 15% of suppliers and 15% of commodities. This category holds very low potential for savings and very low business risks and the processes should be improved to save buyers time on working on the A category. There is a variety of tools and enablers that can help improve the processes and save buyers time.
C category This category represents only 5% of company’s spend and 80% of sourcing events. It holds no potential for savings and most usually no business risks and should be automated to avoid buyers wasting any time. Tools like DeltaBid can help save buyers time, create central suppliers database, reduce time spend on running RFPs, full overview of all bids and messages makes it easy to choose the best suppliers.
The difference between strategic and nonstrategic procurement organizations
Nonstrategic procurement organizations work on the B-s and C-s
Procurement organizations who don’t know their ABC spend structure usually rely only on negotiating deals and writing topnotch contracts.
These buyers are then burdened with buying category C items since that is where the volume is highest.
They only spend 10% of their time in category A where 80% of their spend and business risks are hidden.
Strategic procurement organizations focus on the A-s
Strategic procurement organizations have analyzed their spend profile and perform at a high level: their buyers are focused on dealing with category A suppliers and commodities. They deliver savings, leverage business risks, increase sustainability and more.
When dealing with categories B and C, these procurement experts look for ways to minimize their buyers’ time and effort by automating the buying process. Their buyers do not spend much time on category C spend because their processes are simple, fast, and automated.
Get a Simple ABC Spend Analysis Guide
Use Excel to turn spend data into valuable insights
Unhide potential savings
Visualize business risks
Prioritize sourcing projects