Spend analysis is a foundational capability in modern procurement and supply management. It enables organisations to clearly understand where money is being spent, with whom, on what, and under which commercial conditions. In practical terms, spend analysis converts large volumes of raw procurement data into meaningful insights that support strategic sourcing decisions, cost optimisation, supplier performance improvement, and value-for-money outcomes.

What Is Spend Analysis in Procurement?

Spend analysis is a structured and systematic process that involves collecting, cleansing, classifying, and analysing procurement data to generate clear, visual, and actionable insights. It is not a one-time activity, but a series of interlinked steps that together form the backbone of strategic procurement.

Core Activities in Spend Analysis

A typical spend analysis exercise includes:

  • Collecting procurement data from multiple sources such as:
    • Purchase Orders (POs)
    • Warehouse / Stores receipts
    • Accounts Payable and invoice records
  • Cleansing and validating data for accuracy and consistency
  • Grouping and categorising spend logically
  • Presenting insights through dashboards, charts, and analytical reports

Key Outputs of Spend Analysis Dashboards

The final output of spend analysis is usually an interactive dashboard that allows management to view procurement spend from multiple dimensions.

Common Spend Views Include:

  • Spend by product and service category
  • Spend by supplier
  • Spend by location (country, region, division, plant, project, or site)
  • Spend by product
  • Spend by buyer
  • Percentage of on-contract vs off-contract spend
  • Percentage of credit purchases vs advance payments
  • Percentage of on-time vs delayed deliveries
  • Percentage of quality-accepted vs rejected / returned supplies

Beyond the financial perspective, spend analysis also provides deep visibility into supplier performance and procurement effectiveness.

Supplier Performance Insights from Spend Analysis

Spend analysis supports detailed evaluation of supplier and category performance, including:

Lead Time Analysis

  • Highest lead time
  • Average lead time
  • Lowest lead time

Payment Terms Analysis

  • Longest credit period
  • Average credit period
  • Shortest or advance payment terms

Price Trend Analysis

  • Highest price paid
  • Yearly average price
  • Quarterly average price
  • Monthly average price
  • Lowest negotiated price

Price Fluctuation Analysis

  • Number of upward price deviations from average
  • Number of downward price deviations from average
  • Frequency of price changes during a year, quarter, or month

These insights help procurement teams understand pricing behaviour, negotiation effectiveness, and supplier reliability.

How Dashboards Support Management Decisions

Spend dashboards allow values and percentages to be:

  • Sorted from highest to lowest
  • Filtered by category, supplier, or location
  • Viewed at both summary and detailed levels

This helps senior management quickly identify:

  • Where the maximum spend is occurring
  • Which suppliers control significant spend
  • Which categories offer the highest cost-saving potential

Common Charts Used in Spend Analysis

Different chart types are used to analyse procurement data from multiple angles:

  1. Pie Charts used to understand category-wise or supplier-wise spend percentage and total value.
  2. Bar Charts used for analysing supplier-wise spend comparisons, both in value and percentage.
  3. Column Charts used for location-wise analysis such as country-wise, plant-wise, project-wise, or buyer-wise spend.
  4. Line Charts used to analyse price trends over time, highlighting highest, average, and lowest prices.
  5. Multi-purpose Charts the same chart formats can also be applied for:
    • Lead time analysis
    • Payment terms comparison

Why Focus Only on Top Spending Categories and Suppliers?

Large organisations often deal with:

  • Hundreds of categories
  • Thousands of SKUs
  • A large and complex supplier base

It is neither practical nor effective for a Chief Procurement Officer (CPO) or procurement head to focus equally on every item or supplier.

Applying the Pareto Principle (80/20 Rule)

Spend analysis typically applies the Pareto principle:

  • Around 80% of total procurement spend comes from 20% of suppliers, categories, or products

Spend analysis highlights and “pins” these high-impact areas, enabling management to focus on:

  • High-value categories
  • Strategic suppliers
  • Critical products and locations

This focused approach delivers:

  • Better negotiation outcomes
  • Faster cost savings
  • Improved supplier performance
  • Higher procurement productivity

Historical vs Real-Time Spend Analysis

Historical Spend Analysis

Traditionally, spend analysis is conducted using previous financial year data.
This historical view supports:

  • Strategic sourcing initiatives
  • Annual budgeting
  • Contracting and renegotiation strategies

Real-Time Spend Analysis – With digital procurement systems and dashboards, organisations are increasingly adopting real-time spend visibility.

This enables:

  • Live monitoring of procurement spend
  • Early identification of supply delays
  • Faster corrective actions
  • Better operational decision-making

Real-time spend analysis is especially valuable for cost control and supplier performance management.

Importance of Data Cleansing in Spend Analysis

Data cleansing is one of the most critical and time-consuming steps in spend analysis.

Procurement data is often scattered across departments:

  • Purchase order data – Procurement
  • Goods receipt data – Stores / Warehouse
  • Invoice and payment data – Accounts Payable

All data must be consolidated into a single, consistent, and analysable format, such as a spreadsheet or database.

Essential Data Fields for Accurate Spend Analysis

Each record should be accurately linked to:

  • Project / Plant Code and Name
  • Region (North, South, East, West)
  • Division (Electrical, Buildings, Transportation, Water, Railways, Irrigation, etc.)
  • PO Number and PO Date
  • Contract Number and Contract Date
  • Supplier Country and Supplier Name
  • Product Group, Category, and Sub-Category
  • PO Line Number and Product Description
  • Unit of Measurement (UOM)
  • Ordered Quantity and Delivery Date
  • Basic Price, Discount %, Net Price
  • Taxable Value
  • Payment Terms (30, 60, 90 days credit or advance)
  • Delivery Terms (EX-Works, FOB Origin, FOB Destination)
  • Buyer Name
  • Category / Project Procurement Manager
  • On-contract or Off-contract indicator
  • Receipt Date and Received Quantity
  • Payment Date and Paid Amount
  • Remarks

This structured linkage ensures data accuracy, traceability, and audit readiness.

Role of ERP Systems in Spend Analysis

ERP systems such as Infor LN, SAP, and Oracle play a crucial role in spend analysis.

Procurement data can be extracted using system queries and then validated through data cleansing.

Typical Data Cleansing Activities Include:

  • Eliminating duplicate item codes and descriptions
    (e.g., same cement grade or steel item created under multiple codes)
  • Standardising units of measurement
    (e.g., converting KG to MT for steel items)
  • Ensuring consistent product specifications
  • Reorganising product groups, categories, and sub-categories

Example Classification Structure

  • Group: Steel
  • Category: Reinforcement Steel, Structural Steel, Stainless Steel
  • Sub-Category: TMT Bars, Angles, Channels, Flats, Fabricated Items

Supplier data must also be validated for:

  • Supplier codes and names
  • Payment terms
  • Lead times
  • Commercial conditions

Warehouse receipt data should confirm:

  • Receipt dates
  • On-time vs delayed deliveries
  • Quality acceptance or rejection

Challenges in Spend Analysis

Data Inaccuracies One of the most common challenges is inaccurate data. As you mentioned, selecting the wrong product during purchase order preparation can lead to data inconsistencies and inaccuracies. For instance, if a 43 Grade cement is selected as the product but is written as 53 Grade in the product specifications, this can result in significant inaccuracies in the spend analysis, such as skewed price baselines and incorrect understanding of price fluctuations.

Inappropriate Grouping and Categorization Another common issue is improper grouping, categorization, and classification of material master data in the ERP system. If materials are improperly categorized, the resulting spend analysis could misrepresent the organization’s spending pattern, leading to misinformed strategic sourcing decisions.

Lack of Product Grouping and Classification in ERP Systems Some companies do not maintain product grouping and classifications in their ERP systems, which results in a manual process of categorizing and grouping in Excel spreadsheets. This can be both time-consuming and prone to error, further increasing the probability of incorrect categorization and inaccurate values in the spend profile.

Solution to Overcome Challenges Implementing a robust and automated spend analysis tool can help address these challenges. These tools come equipped with capabilities to identify and correct inaccuracies in data, streamline the classification process, and eliminate the need for manual categorization. However, the key lies in setting up the system correctly and ensuring a high level of data quality. Rigorous data cleansing, implementing standardized procurement practices, and proper staff training are also crucial steps to overcome these challenges.

Leveraging the Power of Negotiations

By identifying similar categories of products or services, procurement leaders can consolidate these into a single Request for Proposal (RFP). This not only simplifies the procurement process but also enables organizations to buy in bulk, thus creating larger contracts with suppliers.

Suppliers often offer volume discounts as a way to encourage larger purchases. By consolidating similar categories and increasing the order quantity, organizations can take advantage of these volume discounts. This can result in substantial cost savings and improved contract terms.

Furthermore, consolidation allows organizations to reduce the number of suppliers they deal with, simplifying vendor management and reducing administrative costs. It also enhances the organization’s negotiation power, as suppliers are more likely to offer favorable terms to customers with larger contracts.

Strategic Suppliers identifications and collaboration

One popular framework used in spend analysis is the Pareto principle or the 80/20 rule, which suggests that 80% of the spend is typically concentrated around 20% of the products or services. By identifying these top 20% products or services, organizations can focus their efforts on strategies such as supplier negotiation, alternative sourcing, and process optimization to reduce procurement costs and improve supply chain performance.

Similarly, identifying the top 20% of vendors allows organizations to develop and execute a Supplier Performance Management Program. Such a program enables organizations to monitor and manage supplier performance in terms of on-time deliveries, quality rate, and service levels, among other metrics. This process ensures that the organization is getting the best value for its spend and fosters strong, collaborative relationships with key suppliers.

Key Notes for Spend Analysis

  • Vendor Analysis Prioritize and negotiate with top suppliers for better terms and consolidation opportunities.
  • Category Insight Focus on crucial materials for inventory optimization and uninterrupted operations.
  • Price Benchmarking Use historical data to set price baselines for informed contract negotiations and savings identification.
  • Regional & Project Spend Allocate resources efficiently by understanding high-spend areas to target cost-saving initiatives.
  • Lead Time Optimization Set lead time benchmarks in contracts to improve supply chain efficiency and reduce inventory.
  • Buyer Performance Tailor sourcing strategies based on buyer activity to align with organizational goals and improve efficiency.
  • Contract Management Increase on-contract spend to leverage negotiated terms and improve spend under management.

With this comprehensive overview, leaders can pinpoint areas for cost-saving opportunities, enhance supplier performance, and streamline procurement processes. This in turn, can significantly boost overall supply chain performance.

When accurate data and real-time analytics are provided to the top management, they can better understand the operation’s flow and the crucial role of supply chain management. Consequently, this raises the profile and perceived value of the supply chain function within the organization, reinforcing its strategic importance to CEOs and top management.

Hence, spend analysis isn’t just a tool for cost reduction—it’s a strategic driver that fosters operational efficiency, enhances supplier relationships, and ultimately contributes to the organization’s success.

Conclusion

Spend analysis is far more than creating charts and dashboards.
It is a disciplined analytical approach that enables organisations to clearly understand how procurement money is spent and why.

When implemented correctly, spend analysis empowers procurement teams and leadership to:

  • Take data-driven decisions
  • Strengthen strategic sourcing
  • Improve supplier performance
  • Achieve sustainable cost savings
  • Enhance overall procurement maturity

For organisations aiming to move from transactional purchasing to strategic procurement, spend analysis is not optional—it is essential.