Spend analysis: how to find out what your organisation really buys
Spend analysis answers three questions: what are we buying, from whom, and who is buying it? It sounds simple, but in most organisations the data is scattered across finance systems, purchasing tools, card statements and spreadsheets, with the same supplier spelt a dozen ways. Cleaning and classifying that data is the foundation for almost every other procurement activity.
Why it matters
Without a reliable picture of spend, a procurement team cannot prioritise. Spend analysis shows which categories are large enough to justify a sourcing project, where many small suppliers could be consolidated, where purchases bypass existing contracts, and where prices for the same item differ between sites. It also underpins risk work (which suppliers are critical?) and sustainability reporting: for many organisations, estimates of scope 3 emissions under the GHG Protocol Corporate Value Chain (Scope 3) Standard start from spend data multiplied by emission factors.
Step 1: Extract the data
Gather transactional data for a defined period, usually the last twelve months for a first exercise. Common sources:
- Accounts payable: every invoice paid, with supplier, amount, date, general ledger account and cost centre. This is the most complete source because almost all spend is eventually paid.
- Purchase orders: richer line-level descriptions of what was bought, but they miss spend that never went through a PO.
- Purchasing card and expense data: many small transactions, often outside contracts.
- Contract repository: to compare actual spend against contracted suppliers.
- Supplier master data: legal names, addresses, tax identifiers, parent companies.
If the organisation has several ERP systems or subsidiaries, extract from each and record the source so totals can be reconciled with the financial accounts. A spend cube that does not reconcile with the ledger will not be trusted.
Step 2: Cleanse and normalise suppliers
The same supplier often appears under many names ("ACME Ltd", "Acme Limited", "ACME UK", a subsidiary name). Normalisation groups these into one supplier, ideally linked to its ultimate parent, so you can see total exposure to a group. Useful techniques include standardising legal suffixes and punctuation, matching on tax or company registration numbers, and fuzzy matching on names and addresses with human review of uncertain cases. External identifiers such as the Legal Entity Identifier help for larger companies.
Step 3: Classify spend
Classification assigns each transaction to a category in a taxonomy: a hierarchy running from broad groups (IT, facilities, logistics, raw materials) down to specific categories (laptops, cleaning services, road freight, steel coil). Options include:
- An internal taxonomy designed around how the organisation manages categories. Practical, but hard to benchmark.
- UNSPSC (United Nations Standard Products and Services Code), a four-level open classification of products and services widely used in e-procurement and catalogues. Very granular; most organisations use only its upper levels for analysis.
- Industry or public-sector codes, such as the EU's Common Procurement Vocabulary (CPV) used in public procurement notices.
Classification can be based on the supplier (what does this supplier mainly sell?), the general ledger account, the line description, or a combination. Supplier-based rules quickly classify most spend because a large share typically sits with relatively few suppliers; line descriptions are needed for diversified suppliers such as distributors. Rule-based and machine-learning tools speed this up, but plan for human review of large or ambiguous items.
Step 4: Build the spend cube
The cleaned data can be viewed along three axes, often called the spend cube: category, supplier and business unit (cost centre, site, country). With it you can answer questions such as "how much do we spend on road freight, with which carriers, from which sites?" A pivot table can do this for a first pass; dedicated spend analytics tools add automation, refresh and dashboards (see the e-procurement software landscape).
Step 5: Turn analysis into opportunities
Common patterns to look for:
- Fragmentation: many suppliers in one category, each with small volumes. Consolidation can improve prices and reduce administration.
- Off-contract spend: purchases from non-contracted suppliers in categories where a contract exists.
- Price variance: different prices paid for the same item across sites or over time.
- Tail spend: the long list of suppliers that together account for a small share of spend but a large share of invoices and supplier records. Catalogues, marketplaces or purchasing cards can make this cheaper to manage.
- Demand issues: high consumption that should be questioned rather than renegotiated, such as unused software licences or over-specified items.
- Concentration and risk: heavy dependence on one supplier or one country for critical items.
Prioritise opportunities by addressable value, ease of implementation and risk, and feed them into a category plan (see category management).
Keeping it alive
A one-off spend analysis is useful; a refreshed one is far more so. Improve data at source by requiring categories on purchase requisitions, maintaining clean supplier master data with a single creation process, and pushing more spend through purchase orders. Refresh the cube monthly or quarterly so savings and compliance can be tracked over time.
Common pitfalls
- Trying to classify everything perfectly before producing any output. A reasonably accurate view of most of the spend is enough to start.
- Ignoring credit notes, intercompany transactions and taxes, which distort totals.
- Mixing currencies without a consistent conversion rule.
- Treating spend analysis as a procurement-only exercise. Finance owns the ledger and budget holders own demand; involve both.
Sourcing & negotiationCategory management
Defining categories, the Kraljic matrix and how to write a category plan.
Process & toolsThe procurement process
From identifying the need to invoice matching and payment, step by step.
Process & toolsE-procurement software
Source-to-pay suites, e-sourcing, contract management and P2P: what each type of tool does.