Spend Analysis

Part 1 – Buyer’s Guide to Cost Savings

As a buyer or purchasing professional, evaluating your organization’s spend is essential. But what does this involve, and how does it benefit your company? In simple terms, a spend analysis reviews how your organization allocates its operating budget and identifies cost drivers.

Step 1: Gather Spend Data

Start by running a historical report from your purchasing software. Ideally, the system should allow you to drill down and identify your top 20–30 vendors and the amount spent with each over the past 12 months. Even better, if it includes commodity descriptions, you’re off to a great start.

If your purchasing system can’t provide this data, your next best option is the accounting department. They can supply a list of the top vendors that Accounts Payable issues payments to.

Step 2: Apply the 80/20 Rule

Once you have your list, you’ll likely find that the top 20% of vendors account for roughly 80% of your operating budget. This is the classic 80/20 rule. Why focus on the top 20%? Because your time is limited, and targeting high-impact areas delivers the greatest savings. Spending hours negotiating toilet paper contracts to save $10 isn’t the best use of your time.

Cost-conscious business owners dedicate significant effort to analyzing this 80% spend. Developing a spend analysis report is a vital component of your procurement strategy. These are the vendors where you can make meaningful savings.

Step 3: Analyze Details

Start by gathering specifics. For example:

  • How many units of Item A did you purchase from Vendor X in the past 12 months?
  • This is your annual usage or consumption.

Evaluate the purpose and quality of these items. Could a better-quality product reduce long-term costs? What about competition? If you suspect you’re paying too much, the best way to confirm fair market pricing is to issue an RFQ (Request for Quotation) to qualified vendors.

Your spend analysis report will guide this process. Include anticipated usage in your RFQ—volume matters because it influences pricing. Specifications, quantities, and delivery requirements should all be clear. Remember: “The right goods at the right price” is the purchasing department’s motto.

Step 4: Pre-Qualify Vendors

Before issuing an RFQ, do your homework:

  • Request samples and secure user department approvals.
  • Confirm origin, stocking locations, and delivery capabilities.
  • Ensure suppliers can meet quality and timeline requirements—low price means nothing if they can’t deliver.

As part of your tender, request firm pricing for the next 12 months. In exchange for this commitment, offer a one-year contract. This benefits both parties:

  • You lock in costs for 12 months.
  • The vendor gains security and can stock adequate inventory locally, allowing you to reduce on-hand inventory and carrying costs.

Step 5: Embrace Competition

Issuing RFQs to determine current market pricing is the preferred approach. It’s transparent, fair, and signals to suppliers that you monitor spend and expect competitive pricing.

Why This Matters

Targeting major spend areas and leveraging a spend analysis report helps you build a strong purchasing strategy. If creating an RFQ is now on your radar, plenty of sample templates are available online. We also offer comprehensive RFQ and RFP template bundles to help you create professional documents quickly and efficiently.

Here’s to your success!

 

Tags: , , ,