Some Spend-related Useful Definitions
I’ve noticed that there are a lot of terms being used with the word “spend” in them.
Oftentimes one word can mean different things to different people at different companies. In an effort to eliminate confusion, here’s a central repository for Sourcing Force’s definitions for all things “spend” related.
The most common definition for the word spend is “To pay out or expend money.”
It’s considered a verb, however, in our industry, spend is used as both a verb and a noun. “How much do you spend on office supplies?” as well as “What is your annual spend?”
Not just aggregating your spend, this refers to combining buying power in specific categories in order to secure the best pricing and service agreements from suppliers.
If you can identify that you’re spending $10M with a particular supplier, you’re more likely to negotiate better contract terms than if you’re spending only $1M with that supplier.
This involves the entire process of collecting, cleansing, classifying and analyzing your spend with the purpose of reducing procurement costs, improving efficiency and monitoring compliance.
It should be an in-depth analysis of your spend, including the who, what, when, where and why.
Who do you spend with, what do you spend on, when do you spend it, where do you spend it and why do you spend it. (That was a lot of hanging prepositions, I know.)
Companies categorize and evaluate their spend at the category or item level in order to identify areas that may offer savings opportunities.
This should be an ongoing process rather than a one-time initiative.
Watch this video to learn more about how to measure accuracy in Spend Analysis:
Spend Categorization/Spend Classification:
Group your spend into categories so that you can easily manage your spend.
The number of categories can run into the hundreds, depending on the company and the industry.
Categories can be structured using taxonomies such as UNSPSC, eClass, or company proprietary taxonomies.
Spend can be categorized at a high level, such as “office supplies,” or they can be detailed, such as “legal-size paper.”
This is an Olap Cube:
I had never heard of a spend cube before, and I had a hard time finding a definition.
Apparently it’s also known as an OLAP cube, or a data cube.
A cube aggregates the data in each level of each dimension in a given OLAP schema. The business intelligence industry uses the word “cube” because it best describes the resulting data.
Would you like to learn more about OLAP schemas? Have fun.
Fortunately, with Sourcing Force’s products and services, you don’t need to understand such things.
Spend Data/Spend Data Management:
Managing any and all data that relates to a company’s spend.
This typically includes item number, price, unit of measure, category and supplier, however it can also include much more robust information such as producer price indexes, commodity pricing, freight information, parent/child linkage and global insight market data.
Spend management incorporates all aspects of spend analysis, spend categorization/spend classification, spend data management and spend performance management.
Spend management is an ongoing process and a company-wide initiative to control and optimize a company’s spend, effectively improving their bottom line.
The spend management process should include:
- Define objectives, goals and benchmarks
- Obtain data from all sources and consolidate
- Ensure data accuracy and completeness
- Analyze the data
- Turn the data in to business intelligence, make smart decisions and take strategic action that saves money and increases profits.
To a more detailed approach on Spend Analysis VS Spend Management, click on the link below:
Spend Performance Management:
Setting limits to spend, setting limits to the number of suppliers per category and adhering to contract terms are all part of spend performance management.
Processes need to be put in place to ensure that the savings identified are being monitored and managed dynamically.
Spend Under Management:
Taking a company’s entire spend, the percentage that procurement manages is considered the percentage of “spend under management” of procurement.
Complete visibility to up-to-date spend data at all times.
You shouldn’t have to login to a VPN to bypass a firewall, you shouldn’t need to login to multiple systems, you shouldn’t need special permission and you shouldn’t need to wait weeks or months while a third-party completes the collecting, cleansing and classifying of your data.
Have I missed any? Feel free to add your own spend terms or spend definitions.
To learn more on How to conduct a better Spend Analysis, download your free e-book here: