Spend Analysis Overview

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Questions and Answers

What is the primary purpose of spend analysis?

To increase supplier dominance

To simplify suppliers' contract obligations

To assess sourcing performance and identify cost-saving opportunities (correct)

To limit spending in all departments

Which of the following is NOT a role of spend analysis?

Enabling data-driven sourcing

Improving sourcing operations

Enhancing sourcing visibility

Reducing product diversity (correct)

What strategy can be derived from analyzing spend data?

Disregarding budget constraints

Standardizing product requirements (correct)

Ignoring market conditions

Increasing the number of suppliers

Which aspect is assessed in spend analysis to facilitate financial planning?

Cost of goods sold Signup and view all the answers

How does spend analysis contribute to supplier management?

By identifying saving opportunities and optimizing the supply base Signup and view all the answers

What type of information does spend analysis provide to organizations?

Insights into procurement efficiency and sourcing strategies Signup and view all the answers

In what way does spend analysis enhance visibility in sourcing?

By aggregating and classifying spend data Signup and view all the answers

Which question is typically addressed by conducting spend analysis?

What were the historical prices paid for products? Signup and view all the answers

What does Category A in ABC classification represent?

Items that contribute to overall profits and account for 80% of total spend Signup and view all the answers

Which of the following is NOT a step in the spend analysis process?

Supplier Negotiation Signup and view all the answers

In the Pareto principle, what percentage of outputs is typically responsible for 80% of the results?

20% Signup and view all the answers

Which classification category typically comprises the largest number of items with minimal profit contribution?

Category C Signup and view all the answers

What is the fixed leasing cost to operate each distribution center for the company?

$100,000 Signup and view all the answers

How many suppliers does Company A source from for their items?

570 Signup and view all the answers

What percentage of the total spend does Category B represent?

15% Signup and view all the answers

What is the median margin that Company A achieved in its first year?

50% Signup and view all the answers

What action should be taken if the total spend on an SKU is below $140?

Mark the SKU for consolidation. Signup and view all the answers

What is the threshold spend value for discontinuing a supplier relationship according to Principle 2?

$140 Signup and view all the answers

What should be done if total spend on a supplier is below $500?

Redistribute the spend among remaining suppliers. Signup and view all the answers

Which of the following SKUs must be marked for consolidation based on the principles provided?

SKU with total spend of $130. Signup and view all the answers

What does the principle suggest about sourcing SKUs marked for consolidation?

Explore alternative suppliers with similar item classifications. Signup and view all the answers

If a supplier has multiple SKU relationships, what should be the main consideration when consolidating?

The total spend on all SKUs from that supplier. Signup and view all the answers

What outcome is intended by redistributing spend from suppliers below the $500 threshold?

Avoid vendor lock-in. Signup and view all the answers

How should a single-SKU supplier relationship be handled if the consolidated SKU has a spend of $120?

Discontinue the supplier relationship. Signup and view all the answers

Which of the following is NOT a principle of spend analysis according to the provided content?

Suppliers with total spend below $500 should be discontinued. Signup and view all the answers

Why is it important to monitor the total spend on an SKU?

To determine if the SKU should be prioritized or discontinued. Signup and view all the answers

What percentage of total spending is accounted for by 22% of the SKUs?

80% Signup and view all the answers

How can the company potentially reduce costs according to the information provided?

By performing batch ordering Signup and view all the answers

Which classification can help identify which items contribute most significantly to spending?

ABC classification Signup and view all the answers

Which supplier pricing strategy was suggested to save costs?

Evergreen contracts Signup and view all the answers

From the Top 11 SKUs, what percentage of potential cost saving was identified when sourcing at minimum prices?

9% Signup and view all the answers

Which item type contributes to the smallest percentage of spend according to the ABC classification?

Category C Signup and view all the answers

Which statement reflects the 80-20 rule in the context of SKUs?

80% of total spending comes from 22% of SKUs. Signup and view all the answers

What potential strategy is NOT mentioned as a way to improve sourcing?

Implement supplier scorecards Signup and view all the answers

What was the spend amount of the item that accounted for 8% of total spend?

$235,000 Signup and view all the answers

How does the company currently relate pricing to SKUs?

There are price variations among the top SKUs. Signup and view all the answers

Which SKU had the highest actual spend according to the provided data?

23843 Signup and view all the answers

What is one of the principles of spend analysis that should be prioritized?

Carry forward advertised items Signup and view all the answers

Which option is a benefit of having a spend cube?

It provides a visual representation of spending categories. Signup and view all the answers

Which option is NOT a method suggested for improving sourcing strategies?

Conducting supplier audits Signup and view all the answers

Study Notes

Spend Analysis

Spend analysis is a strategic supply function that aggregates, classifies, and leverages spend data.
Its aim is to improve sourcing performance, ensure compliance, identify cost-saving opportunities, manage supply risks and optimize sourcing, budgeting, and planning strategies.

Spend Analysis Roles

Enhance sourcing visibility
- Facilitate financial planning such as COGS and taxation
- Ensure contract compliance
Measure and benchmark performance
- Product cost
- Supplier benchmark
- User spend rationality
Improve sourcing operations
- Streamline sourcing process
- Identify saving opportunities
- Rationalize suppliers and product portfolio
- Optimize supply base
- Manage supply risks
Enable data-driven sourcing

Spend Cube

3-d view on spend data asking:
- What types of goods are being bought?
- Who or which business unit is buying?
- Which suppliers are being bought from?

Spend Analysis Classifications

Pareto 80/20 rule: 80% of outputs (e.g., cost or revenue) are caused by 20% of inputs (e.g., products, cost drivers)
ABC classification: Classifies spend based on specific criteria such as:
- Total spend on SKUs
- Spend with suppliers
- Spend for customers
- Price per unit
- Criticality of the item
- Contribution to profits
ABC classification categories:
- Category A: Contains the items that contribute most to the overall profits (SKUs accounting for 80% of the total spend)
- Category B: Represents the next set of items, less profitable than A but still valuable (accounting for 15% of the total spend)
- Category C: Usually the largest category, small transactions with low contribution to profits but still valuable (accounting for 5% of the total spend)

Spend Analysis Process

Step 1: Identify Data Sources
Step 2: Data Extraction
Step 3: Data Cleansing
Step 4: Data Enrichment
Step 5: Classification
Step 6: Analyze Data

Spend Analysis Case Study: E-Business Platform

Company A is an online startup platform founded 2010, serving gift stores with a reputation for British themed gifts.
The platform's online shopping portal went live on 12/1/2010.
The company utilizes a pull-based model, with each order triggering a procurement plan, and sources items from a network of suppliers.
There are 20 Distribution Centers (DCs) with fixed operating costs of $100,000 per DC.
Company A serves 4,500 orders in the first year (2010/12-2011/12) with a median margin of 50%.
The company sources from over 570 suppliers for 3,140 items displayed on its website.

Case Study Challenges

After the first year, total spending reached $3M, but despite a 50% net margin on sales, the company remained unprofitable.
The CEO and founder urged the CPO and CFO to find ways to improve sourcing strategies to reduce operational costs and boost profitability.

Spend Analysis and Results for Case Study Company

80% of the total spending was accounted for by 22% of the SKUs
50% of the SKUs contributed to 95% of the spend
The top selling item accounted for $235,000 (8%) of the spend
- 1 /3 of the SKUs amounted to less than $60,000 or 2% of annual spend (the spend of each item in this group was about $140)
Ten out of the top eleven SKUs had price variations, suggesting potential for cost savings by sourcing at lower prices
The average of the minimum prices across these 11 SKUs shows a potential for a 9% cost savings.
In conclusion, the case study successfully identified areas for potential improvement based on spend analysis, demonstrating the importance of the tool and its role in optimizing operational costs.

Spend Analysis Principles

Principle 1: If the total spend on a single SKU (stock keeping unit) falls below a certain threshold (e.g., $140), the SKU should be marked for consolidation.
Principle 2: If an SKU is marked for consolidation under Principle 1 and no other SKUs have been purchased from the same supplier, the supplier relationship should be discontinued.
Principle 3: If the total spend on a supplier falls below a threshold (e.g., $500), the spend should be redistributed among other suppliers, prioritizing those classified as Category A or B. This helps avoid vendor lock-in.

Supplier Rationalization Example

Example: The example illustrates how the principles are applied to a dataset of supplier spend by SKU.
Discontinued Suppliers: Suppliers with a total spend below $140 for a single SKU are considered for discontinuation. This is because the spend is low, and the supplier may not be providing significant value.
Redistribution: Suppliers with a total spend below $500 should have their spend redistributed to other suppliers to avoid vendor lock-in and ensure better pricing and service.

Key Terms

SKU (Stock Keeping Unit): A unique identifier for a specific product within a company's inventory.
Vendor Lock-in: A situation in which a company is heavily dependent on a single supplier, making it difficult to switch to other suppliers.

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Description

This quiz explores the concept of spend analysis, a strategic supply function that aggregates and classifies spend data. Participants will learn about its roles in enhancing sourcing visibility, measuring performance, and optimizing operations. Dive into the importance of data-driven sourcing and the spend cube model.