How to conduct vendor spend analysis

The right vendor can be a huge asset to your business. But one that overcharges or underdelivers can slow down growth or even stunt your profits. Vendor spend analysis is the best way to prevent such problems.

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Vendor spend analysis process can give you real-time insights into which business partnerships are having the biggest impact on your success. This allows you to streamline who you work with by deepening relationships with vendors that hit the mark and discontinuing contracts with the ones that don’t.

What is vendor spend analysis?

Vendor spend analysis is a type of spend analysis that evaluates the money spent on goods and services to keep your business running. It assesses spending patterns across suppliers to identify potential cost-saving opportunities. It helps you optimize your procurement process, improve supplier relationships, and boost spend visibility.

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Vendor spend analysis provides actionable insights that streamline procurement strategies and support better decision-making.

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Vendor spend typically includes line items such as:

• Physical products necessary to maintain your business, including everything from inventory to office supplies
• SaaS services such as Slack, Microsoft Teams, and other online tools
• Services from contractors or agencies

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Vendor spend typically does not include line items such as:

• Employee salaries
• Employee expense reimbursements for travel or meals
• Taxes

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Generally speaking, you should only include vendors that you plan to buy from regularly. A spend analysis example might include a monthly or yearly subscription, a long-term contract with an agency, or a supplier that restocks necessary office supplies to help you evaluate whether to continue those relationships. Don’t include one-time purchases that fall outside the scope of your day-to-day business.

Key vendor spend analysis terms

To better understand vendor spend analysis, it's important to know key terms. Here's a quick guide:

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Why is vendor spend analysis important?

Vendor spend analysis is a critical part of any spend management strategy. Here’s why:

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• Cost savings: Identifying inefficiencies and savings opportunities
• Supplier performance: Improving supplier management by assessing supplier performance
• Strategic sourcing: Refining procurement strategies to better align with business needs
• Informed decision-making: Making data-driven decisions with insights from spend analytics

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By utilizing spend analysis, businesses gain a better understanding of their spending patterns and can adjust procurement practices for better efficiency and profitability.

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Other areas for improvement include:

Supplier performance and category management

Supplier management is a key area where spend analysis has a direct impact. By analyzing supplier contracts, payment terms, and supplier performance, businesses can negotiate better terms.

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Effective category management can also help your business categorize and track spend better. This means procurement teams focus on high-value suppliers and minimize tail spend or maverick spending.

Risk management and compliance

Vendor spend analysis helps your business manage risks by providing a clear picture of spending practices. It also ensures compliance with procurement policies and contract terms. You can quickly spot issues related to payment terms or supplier performance that could lead to operational inefficiencies.

Understanding your vendor spending analysis objective

It’s vital to determine the objective of your analysis before you begin. What do you hope to accomplish? Setting an objective will save you time by defining which pieces of data are relevant to your analysis.

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Common objectives include:

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• Identifying areas for growth and increased spending
• Finding savings opportunities through vendor negotiation
• Reducing zombie spend
• Assessing vendor risk and ensuring compliance

How to conduct vendor spend analysis

Vendor spend analysis is a strategic process that requires careful planning and execution to be effective. Below is a detailed step-by-step guide to ensure that your vendor spend analysis is thorough, actionable, and aligned with your business goals.

1. Identify your data sources

The foundation of vendor spend analysis lies in the data you have access to. Gather comprehensive spend data from multiple sources within your organization. Common data sources include:

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• Purchase orders: These provide information about the quantity, price, and supplier for each order
• Accounts payable records: These track payments made to suppliers, offering insight into transaction volumes and payment history
• ERP systems: These systems store a wealth of data, including vendor-related transactions, invoices, and payment schedules
• Spreadsheets: Often, historical or non-digital data is stored in spreadsheets. Consolidating this data is crucial for accuracy.

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It’s important to ensure that the data gathered is accurate, complete, and up to date. Inconsistent or outdated data can skew the analysis and lead to incorrect conclusions.

2. Categorize your spend

Once you collect your data, categorize your spend into relevant groups. Spend categorization helps to organize spend data and ensures that you’re looking at each expense from the appropriate angle.

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Common categories include:

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• Indirect spend: Non-core expenses such as office supplies, marketing, or travel
• Direct spend: Costs associated with production or core services, such as raw materials or components
• Tail spend: A portion of spend that’s difficult to manage or track, often representing small, fragmented purchases

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Use a consistent taxonomy to classify each item. A well-defined taxonomy ensures uniformity and makes it easier to analyze trends over time. Automating this process with spend analysis tools or software can speed up categorization and reduce human error.

3. Use spend analysis tools

Manual analysis can be time-consuming and prone to errors. Spend analysis tools offer a much more efficient alternative by consolidating and processing data quickly. These tools help in:

• Consolidating data from multiple sources into a single, unified format
• Automating categorization based on pre-defined rules or machine learning algorithms
• Real-time tracking of spend across different categories, yielding up-to-date insights
• Generating actionable insights, including identifying inefficiencies or maverick spending

Popular spend analysis tools include Ramp, NetSuite, and Sievo, which provide dashboards that visually represent spend across different categories and help track key KPIs like supplier performance, total spend, and savings opportunities.

4. Analyze the data

Once you consolidate and categorize the data, it’s time for deeper analysis. The goal of this step is to identify trends, inefficiencies, and areas where cost reduction is possible. Steps include:

• Identify inefficiencies: Look for patterns of maverick spending—expenses made outside of established procurement processes. These might include unapproved purchases or purchases from non-preferred suppliers.
• Detect duplicates: Use data analysis to uncover duplicate payments or orders made to the same supplier that can be consolidated for better terms
• Supplier performance: Evaluate based on performance metrics, including delivery times, quality, and pricing. Identify underperforming suppliers and see if you can negotiate better terms.
• Spend trends: Identify seasonal or cyclical trends in your spending. This could provide insights into how you might better time procurement decisions or find bulk-purchase discounts.
• Cost-saving opportunities: Look for areas where you can reduce spending by consolidating purchases, negotiating better payment terms, or exploring alternative suppliers

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This phase is where spend analysis software can be particularly helpful, as it can run algorithms to spot these inefficiencies faster than manual review.

5. Present findings to stakeholders

You should share your analysis results with the relevant stakeholders, including procurement teams, finance departments, and senior leadership. Presenting the findings effectively helps drive action and ensure that your insights lead to changes in procurement practices.

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Consider the following approaches when presenting your findings:

• Reports and dashboards: Use dashboards to present data visually, making it easier for stakeholders to understand key metrics such as total spend, supplier performance, and cost-saving opportunities
• Key metrics: Highlight important metrics such as savings potential, supplier performance, and spend patterns to emphasize areas that need immediate attention
• Actionable recommendations: Provide clear recommendations based on the findings. For example, suggest renegotiating contracts with underperforming suppliers, consolidating purchases, or switching to a more cost-effective vendor.
• Risk management: Identify any potential risks, such as reliance on a single supplier or maverick spending, and propose strategies to mitigate them

6. Implement changes and track progress

The final step is to implement the changes and monitor progress. This involves:

• Negotiate better terms with suppliers based on the insights gained from your analysis. This could include volume discounts, improved payment terms, or longer-term contracts.
• Consolidate suppliers to reduce complexity and increase negotiating power. For example, shifting purchases to a smaller pool of trusted vendors may lead to better rates.
• Implement procurement policies to ensure all future purchases align with the recommendations made in the analysis. This could include creating guidelines on when to purchase, who to purchase from, and how to track spending.
• Monitor progress by continuously reviewing spend data and supplier performance. This allows you to confirm the changes you made are working and lets you adjust further if needed.

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Regular monitoring ensures that vendor spend analysis is ongoing rather than just a one-time task. This helps to maintain cost savings and improve supplier relationships over the long term.

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Automated vendor spend analysis

Automation is best for businesses that wish to scale quickly and are comfortable using a tech stack.

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Platforms such as Ramp make it easy to automate the most critical facets of your vendor spend analysis. Ramp’s Vendor Management dashboard provides a single view into every vendor detail, document, and transaction. It also extracts the most important details from each contract automatically, and you can set 30 or 60-day reminders that will alert you when a contract is coming up for renewal.

How to automate vendor spend analysis

Automating vendor spending analysis takes a little bit of forethought, but it cuts the number of steps in half.

Step 1: Connect all spending to one platform

To automate vendor spend analysis, you must be able to connect all business spending to one platform. This can be tricky because different vendors accept payment in different ways.

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To help streamline this process, look for a spend management platform that offers all of the following:

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• Virtual corporate cards: Virtual cards are unique and secure credit cards you can generate to pay for online goods and services. By generating a separate virtual card, you gain complete control and insight into how much money is being spent with each vendor.
• Physical cards/digital wallets: For vendors that require your physical presence or prefer digital wallet payments from platforms such as Apple Pay or Google Pay
• ACH payments: ACH payments allow you to quickly issue a digital bank transfer

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To truly be automated, all these payments should automatically categorize whenever a card or ACH payment is used to pay a vendor. This makes it easier to catch where you’re able to consolidate or eliminate subscriptions and services and take advantage of other savings opportunities.

Step 2: Access automated analytics

Once you have your system and accounts set up, all you have to do is check your dashboard. When all your spending exists in one place, you can access your spending data in real time.

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Here’s an example of what this would look like in Ramp’s Vendor Management dashboard:

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In terms of vendor spending, this makes it easier to catch duplicate spending, flag when a service is no longer being used, negotiate contracts, and plan future partnerships. It also means that you get real-time updates on vendor spend. If an invoice is accidentally processed twice or if an unusually large purchase is made, it takes minutes to appear on your dashboard.

Common challenges in vendor spend analysis

Vendor spend analysis isn’t without its difficulties. Here are some common hurdles:

• Data fragmentation: Data may come from different systems—ERP, accounts payable— making it difficult to consolidate
• Inaccurate classification: Spend may be miscategorized, especially without a clear taxonomy.
• Resistance to change: Some teams may push back against new procurement strategies or automation tools.

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Advanced spend analysis techniques

To level up your spend analysis, refine procurement strategies, and uncover deeper cost-saving opportunities, explore advanced techniques such as:

Forecasting future spend

One of the most powerful aspects of spend analysis is its ability to forecast future procurement needs. By analyzing historical spend data, you can predict trends, adjust budgets, and save more. Forecasting also allows for more proactive and strategic decision-making.

Benchmarking supplier performance

Use benchmarking to compare supplier performance against industry standards or similar suppliers. This allows you to assess whether you’re getting the best value from your suppliers and where you can make improvements, such as on contract terms or payment terms.

KPI tracking and spend optimization

You can’t measure success without tracking KPIs. Metrics such as total spend, cost savings, supplier performance, and procurement efficiency paint a clear picture of progress and where to improve.

Power your vendor management with Ramp

With virtual corporate cards, real-time alerts, and an AI-powered reporting dashboard, Ramp is uniquely equipped to save you time and money. It files and categorizes vendor invoices and payments automatically, giving you powerful insights without tedious data entry.

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Ramp also notifies you about duplicate subscriptions, increases in spend, and unused partner rewards.

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Whether you’re a small team or a growing enterprise, taking control of your vendor spend starts with automation—and Ramp.

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