Spend Analysis for direct (merchandise) purchases helps retailers track and analyze this (largest) expense as well as provides them with a great tool for managing their purchasing decisions. With a little innovation, spend analysis can also help the retailers manage their cash-flows, provide negotiating leverage with the vendors, maintain contract compliance, and keep a close tab at the cost trends.
Total Spend Analysis for Retailers
Total Spend Analysis brings together various important facts related to the direct merchandise spend. It can contain the actual spend, planned/budgeted spend, committed spend, and can also provide projected spend through projected accruals and forecasts. Most of these numbers are simple to calculate and provide a wealth of information into one of the largest COGS items. The total spend is often organized by vendor, item, organization/location and merchandise category. These dimensions (vendor, item, organization/location and merchandise category) can have company specific hierarchies so that the data can be rolled up, or dis-aggregated along the hierarchy levels as required.
- Actual Spend is simply the value of all order line items that have been “closed” and settled. This can be easily calculated with the PO data available from the PO management systems (or ERPs). This number exists only for current and historical time buckets.
- Planned Spend (or purchasing budget) is generally sourced from the merchandise financial planning systems. Merchandise Financial Planning (MFP) is a top-down exercise that provides planned spend targets generally required to support the financial plan of the company for revenues, profitability, and inventory. Some MFP solutions also allow a bottom-up approach for setting up these targets, that are then reconciled with the top-down numbers before publishing the final plan numbers. This number exists for historical and future time buckets.
- Projected Committed Spend is the cumulative cost of all open purchases that are committed to vendors through confirmed purchase orders. This is also a simple calculation that adds up the price on all PO line items that are “open”, and not yet “received” (and therefore not yet accrued). This data is normally sourced from the PO management systems (or ERPs). This number is meaningful only for current and future time buckets.
Projected Accruals are calculated using vendor acknowledgments, ASN (advanced shipping notices), or simply the need dates on the open purchase orders. This is the spend that is expected to accrue based on projected delivery of inventory from the vendors. If required, a longer term projection for the cash outflow can also be made using statistical projection using the historic data. These numbers are meaningful only for current and future time buckets.
- Projected Available Spend (or Open to Buy) dollars can then be calculated as the cumulative actual spend till the current time bucket versus the planned (budgeted) dollars for the whole planning horizon or season. These numbers are most commonly used for seasonal products to track and control the seasonal item spend during mid-season. However, the concept is equally applicable for any item with a generic definition of planning horizon.
- If there are supplier contracts that either have purchase obligations, tier pricing, volume discounts, cash-back rebates, etc., then it also makes sense to bring in the contractual data into such analysis. This is a cumulative value of all purchases made under a specific contract, as well as the contract volume/tier threshold information at which cost changes, or discounts/rebates become available.
Depending on the role, different will use this data for different reasons. However spend analysis provides a powerful decision support system for all users that manage the purchasing activity in an organization.
- Buyers who are responsible for certain vendors may be interested in spend reports by month by vendor across all vendor-items and locations. If the contract data is available, buyers can compare actual, accrued and committed spend with the contractual obligations to determine compliance, as well as current rebates, discounts and pricing tiers. Buyers can typically use this information to track the total spend; for vendor negotiation; contract compliance; and to avail proper contract pricing/rebates/discounts. When the analysis tool allows projections of the spend into the future (using historical data), it can provide valuable demand information for negotiating future contracts with the vendors, for evaluating bids, and awarding the contracts to maximize the cost-savings. Top and bottom n vendors by spend is another useful report that buyers can use.
- Merchants may want to see the same spend data by categories managed by them, with the intention of controlling and manipulating the seasonal spend. They can also use the data to determine profitability trends at the merchandise category, vendor or regions. (YOY) Year over year comparison for spend, when combined with the revenues for the same product category provide a clear picture of profitability trends for the merchandise categories. Similarly, spend trending is another useful analysis tool. Trending quickly shows if the costs are going up, down or stabilizing. When the revenue trends are mixed with the cost trends, it provides an easy way to create a powerful visual picture of the profitability by category, regions, or a vendor. Top and bottom n categories by spend is another useful report that merchants can use.
- Finance Analysts also need this spend data organized by regions with the intention of managing invoices, accruals, settlements, and the cash flow. This analysis can be used for projecting and managing the future accruals and outbound cash flow.
Spend analysis is one of the easier analytics applications to build and use. It primarily requires purchase data that is easily obtained from most ERP, or legacy systems; and can be quickly enriched with other data from financial planning and settlement (AP) systems. The analysis is easy to understand, and directly affects the largest single spend for retailers.