Spend analysis is a bit like going to the dentist. You don’t want to do it, but you know you have to, especially if you want to take care of that cavity that has popped up recently. The same thing happens when a company is facing the fact that sales are down and now they have to look at what they spend and where they can cut.
Having a formal meeting about the spend analysis can be painful, but can also drive a lot of useful investigation into why purchases are made. The key is to have a measurable goal, and consistent reporting of progress toward that goal. It is imperative to create an open environment where hard conversations can take place about “why” we buy “what” we buy.
A good spend analysis requires goals. Instead of saying we want to drive down costs, we need to assign an achievable goal that we can measure. A better goal would be: we want to drive down the total print spend by 10% in fiscal year 2012. Clearer goals, provide better results and make analysis easier. To make it even easier let’s lay out seven reasons why having a specific goal is better than just the nebulous, “let’s drive down costs”.
- 1. Control Your Supply and Demand
This is the top reason to make a better goal for your spend analysis, because this is usually the biggest offender (in terms of money lost). Even if all of the other bases are covered, if you don’t control your supply and demand you could run up against a never-ending wall of escalating costs.
How many times do you follow-up on an order of flyers that marketing requested? If you do, do you often see that there are too many left after a promotion or not enough? This is a case of poorly managed supply and demand. The same goes for every other piece of collateral that is ordered, be it for marketing or other purposes. You have to have a clear plan on the supply of collateral you need to cover the demand. Once you have this hydra wrangled, you can be assured that your costs will start edging toward that specific annual goal you made.
- 2. Control Who Purchases
Controlling who purchases is another big place where companies can save costs. Do you have one person who orders all of the marketing collateral, another person who orders all of your operations manuals, and one more person who orders all of your company apparel? This can be turn into a nightmare for anyone whose trying to do a spend analysis. Why not have one person, department, or an outside company handle all of this for you? They will be able to control what gets spent where, and this practice will drive your costs down even more.
- 3. Control What You Purchase
Which brings me to reason number three: controlling what you purchase. Controlling what you purchase is another analysis headache. This is tangled up a bit with supply and demand, but also enters into quality territory.
For example, do you know what type of material you purchase for your corporate apparel? Is there a better quality product out there that costs the same or less?
Answering this hard question will help you drive your costs down, because you’ll have a better handle on the cost each type of product requires.
- 4. Control When You Purchase
Controlling when you purchase is another reason that can be tied in with controlling your supply and demand, but is more specific to how far out you purchase something. Are you constantly ordering things right before you need them? Did you know that ordering something last minute will often incur an extra charge? You can also control costs by ordering an item that you always need in a steady and consistent fashion. That way you always know what your are going to spend and you can budget for it accordingly.
- 5. Control Where You Purchase
Vendor relationships can cloud even the most efficient supply systems if their costs start going up. Will you continue to stay with a specific vendor just because you have always done business with them or because they are a personal friend? I’m not saying it’s bad to do business with your friends (as we always want to help our friends out) but sometimes it’s not the best answer for your business.
You need to make the smart decision when you consider where you purchase items, even if it means letting go of those past vendor relationships. This is a hard decision and only you can make it for your business, but I guarantee that making it will drive your spend down even more.
- 6. Control Why You Purchase
This is a really difficult question to ask and often gets bypassed when all the others are not. The reason it’s so difficult is because it is easier to ask, “Should we be employing this person to do this job?” or, “Should we order this many of this item instead of what we normally order?” than the big, “Why are we even ordering this in the first place?”. But tackling this question can go along way to achieving your cost reduction goal.
Do you ever wonder why you order that particular brochure? Is it even needed? Would having a QR code on a business card that goes to a landing-page be a better and more cost-effective solution that continuing to order that brochure time and time again?
If you answer these questions it will allow you to begin to drive your costs down because you are looking hard at every purchase you make and asking yourself about the usefulness of that purchase.
- 7. Control How You Purchase
The last reason to conduct a spend analysis ties all of the last six reasons together. Once you’ve answered all of these former questions you will be controlling exactly how you purchase, and this coupled with the correct reporting will continue to drive your costs down.
Accurate cost reporting will give you the information you need to drive your cost down year after year. Having a good reporting structure for your cost is the equivalent of going for a check-up at your dentist. He may not be doing much work, but he’s insuring that your teeth do not develop another cavity (i.e. he’s preventing you from incurring the cost of a filling or root canal).
Does a spend analysis seem like a lot of work? We can sympathize. We know how hard it can be because we do this all the time. The difference is we have experience at it. Call or email me if you have any questions about how to do a spend analysis for your company that will drive down your costs and make you more profitable.