How to Meet Cost Reduction Goals with a Spend Analysis
What is a Spend Analysis?
A spend analysis is what we do to analyze the many things that you buy and narrow them down to only those components for which you have opportunity to either renegotiate and save money or perhaps redesign the part or component and save money by designing the cost out of the part. As a sourcing manager, the main reason you want to conduct a spend analysis is to meet your cost reduction goals. A spend analysis helps you achieve those goals by identifying outliers – the most promising parts on which to focus your cost reduction efforts.
When you conduct a spend analysis, you will be able to identify
- specific parts for which you may be overpaying and roughly by how much
- products that could be redesigned for cost reduction
- items which perhaps are not being made in the most cost effective manner, i.e., via the most cost effective routing or process
- which suppliers may be a better fit for the parts that you are buying
How to Identify Outliers
We use two types of analysis to identify outliers: should-cost analysis and cost versus mass analysis.
A should-cost analysis is simply an exercise in comparing a should-cost estimate with how much you’re actually paying for the part and then identifying those parts where the gap is significant.
During a cost versus mass analysis, we compare the cost of parts that are of similar material and are produced via similar manufacturing process. Then we look more closely at the parts that have a higher cost per mass. Those parts tend to have more complexity and, therefore, more opportunity to be redesigned to possibly reduce costs.
Spend Analysis Methodology Overview – 7 Steps Across 3 Phases
When conducting a spend analysis, we recommend the following methodology, which has three phases consisting of seven main steps.
First, identify outliers.
Begin by determining your scope. You have literally thousands of parts that you buy and you cannot examine all of them at once so it’s important to be able to narrow down the scope for what you’re going to analyze each and every time. Next, gather the data that you need to estimate part costs and perform the analysis necessary to identify outliers.
Second, analyze the outliers.
Review the initial outliers to confirm that you’ve estimated each part correctly. Now that you gone from perhaps a scope of a hundred parts to twenty or twenty-five outliers, it’s worth looking at that subset and making sure that the cost estimates that you are generating are as accurate as possible, ensuring that you have the right volume, the right manufacturing process, the right material, etc. Next, analyze the outliers and create a plan of action for each, whether you’re going to attack it from a redesign or renegotiation point of view.
Finally, execute on your cost reduction plan.
Take action on the outliers based on the plan that you have developed for each part or component, whether it be to redesign the part or renegotiate with the supplier. Lastly, validate your savings. Determine whether or not you have had success on each part and how much success you have had.
Cost Reduction Results
Experienced sourcing managers using a spend analysis to meet cost reduction goals typically achieve savings of 3-5% of the spend analyzed. For optimum savings, we recommend you conduct your spend analysis continuously, working through each manufacturing process to identify outliers, analyze those outliers and execute on cost reduction plans.
Have you done a spend analysis? How do your results compare? How much have you saved either in total or as a percent of spend analyzed? Tell us about it in the comments.
Want to Learn More?
Check out the article, “How to Conduct a Spend Analysis: Methodology in Detail.”
And download our whitepaper, Are You Overpaying for Your Outsourced Parts?, for best practices on identifying components with the greatest potential for cost savings.