In the world of procurement, understanding where your money goes is the first step to optimizing costs, improving supplier relationships, and driving operational efficiency. One of the most critical tools in your procurement toolkit is a direct spend analysis—a deep dive into the money your organization spends on goods and services directly tied to producing your products. Whether you’re in manufacturing, retail, or any product-driven industry, mastering this process can unlock significant savings and strategic insights. Let’s break it down step by step.
Before we dive into the “how,” let’s clarify the “what.” Direct spend refers to the procurement of goods and services that go straight into your core product or service offering. Think raw materials, components, or packaging—items that end up in your customers’ hands. This is distinct from indirect spend, which covers operational expenses like office supplies, utilities, or factory equipment. Direct spend is often the largest chunk of a company’s procurement budget, making it a prime target for analysis and optimization.
A direct spend analysis is not just for reducing costs. Direct spend analyses can help unlock strategic insights to improve overall quality, performance, and health of your supply chain. These include:
Strengthen supplier negotiations: Analyzing the data can unlock insights that can lead to stronger negotiating positions. For example, it will be easier to see which supplier’s pricing is increasing beyond their competitors or where there are opportunities to aggregate volumes for discounts.
Manage volumes & Mitigate risk: Ensure your procurement volumes are matched to the capacity of the supply base. Allocating more volume than a supplier is ready for can impact supplier on time delivery performance and quality. Direct spend analyses can help inform how to implement supplier diversification strategies to mitigate single sourcing risks.
Improve visibility: Spend visibility across departments and programs is crucial for controlling costs. Procurement systems with access to real-time spend data can be a valuable technology resource to leverage to curtail rogue spending or coordinate sourcing strategies for similar purchases to achieve better deals. There also may be redundant purchases across departments that could be shared as a centralized resource.
Begin by clearly defining what you aim to achieve. There are many benefits to conducting a spend analyses, but ensure that the overall business objective is top of mind as different goals will require different datasets and methods of analysis. For example:
Once the business objectives are clear, this will make it easier to identify which datasets are most relevant and need to be collected for the analysis. Data sources can include:
For a thorough analysis, aim to gather at least 2 years’ worth of historical data to account for seasonal variations and identify trends. Of course, if 2 years is not available, then whatever is available will do and you certainly do not need to wait until you have 2 years of data to conduct a spend analysis. However, when using a smaller set of data, it is important to be cognizant of seasonal trends and normal fluctuations that occur within data.
Data quality is crucial for meaningful analysis and this step often consumes the majority of the total analysis time but is essential for accurate results. The essential tasks include:
It is important to implement a consistent categorization framework that will allow you to group similar spend together and there could be many relevant dimensions to consider when determining category tags. Additional considerations include:
There are many methods and tools to utilize to analyze your date to uncover insights. A few of these could include:
Supplier concentration analysis: Identify what percentage of spend goes to top suppliers
Price variance analysis: Compare prices paid for identical items across suppliers or time periods
Volume analysis: Understand purchasing patterns and identify consolidation opportunities
Contract compliance: Determine if negotiated terms are being followed
Total cost of ownership: Look beyond unit price to include quality, delivery, and service metrics
Commodity risk assessment: Identify categories vulnerable to supply disruptions or price volatility
Visualizations can help uncover patterns or trends that may not be immediately apparent when looking at raw tabular data. What may be otherwise opaque without visuals can become clear and obvious with proper data visualizations. Some these can include:
Pareto charts showing spend distribution
Trend lines showing price movements
Heat maps highlighting risk areas
Scatter plots revealing price vs. volume relationships
Dashboards combining multiple metrics for key stakeholders
Transform insights into action:
Strategic sourcing: Consolidate volumes with preferred suppliers
Negotiation opportunities: Use data to support better pricing discussions
Specification optimization: Identify over-engineered components
Make vs. buy decisions: Evaluate insourcing opportunities
Inventory optimization: Align purchasing with actual consumption
Supplier development: Target improvement areas for key partners
Close the loop by tracking outcomes:
Establish baseline metrics before implementing changes
Set clear KPIs for each initiative
Monitor progress with regular reporting
Adjust strategies based on results
Document successes and lessons learned
Skipping data cleaning: Garbage in, garbage out. Dirty data leads to unreliable conclusions. Leveraging procurement software can help ensure your data is kept organized and clean.
Overcomplicating the scope: Start small—don’t boil the ocean in your first analysis.
Ignoring stakeholders: Engage procurement teams and suppliers early to ensure your findings are practical.
A well-executed direct spend analysis isn’t just a one-time exercise—it’s a gateway to smarter procurement. By shining a light on your direct spend, you can cut costs, improve supplier relationships, streamline operations, and position your organization for long-term success.
Ensuring you have the right technology can help save an immense amount of time and improve the data quality and subsequent insights from your analysis. Procurement software like Lasso can be hugely beneficial as these platforms can automatically collect and store all supplier and procurement related data. Then when users want to access the data, users can quickly and easily filter and export historical data or real-time data.
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