Spend Analysis and Rebate Negotiations for Buying Groups
Do you know how much, and how often, your members spend with a specific supplier? The answer to that question is key to negotiating a fair and realistic vendor buying agreement with your vendors. When it comes to supplier negotiations, the power balance in the supplier/group relationship has always favored the former. For groups looking to optimize their members’ rebates, vendor spend analysis data is key to the success in re-balancing that equation.
Most Buying Groups and Purchasing Cooperatives lack comprehensive real-time insights into what their members’ purchase. The same is often true of your suppliers – they often don’t recognize the full buying power of your group. That’s why accurately presenting spend analysis data is vital to improve Buying Groups’ negotiation of supplier contracts as well as improve their relationships with suppliers.
What is Spend Analysis?
Basically, spend analysis is the process of collecting, cleansing, classifying, and analyzing all available spending data that results in a better understanding of how money is spent in the procurement of products. It is considered to be the fundamental foundation of sourcing.
Spend analysis attempts to answer:
- What are members buying?
- Who are they buying it from?
- Which members are buying it?
- How often do they buy it?
- When did they buy it?
- How much did they pay?
- How much rebate did your members and your group earn?
- Is the group and its members getting what they were promised?
- How does the data compare to previous years?
Sources of Spend Analysis Data
Buying Groups and Purchasing Cooperatives are reliant on after-the-fact reports submitted manually by either suppliers or members. This often results in missing or inaccurate data.
The best source of purchasing data is invoice data routed electronically through the group’s databases via EDI. Central bill groups have an advantage of having easier access to this data, but it is possible – and advisable – for Direct Bill groups to have invoice data routed through their system as well. Note that invoice data, not purchase order data, is key for accuracy.
While invoice information provides the most accurate information, claims, remittance advices, advance shipping notices, and other supply chain documents, when captured electronically are useful supplements.
A spend category is the logical grouping of similar items. For example, “power tools” may be considered a spend category. To be effective in a Buying Group, spend categories must apply across members.
Once spend categories are set up, line items on invoices that flow through the group must be assigned to appropriate spend categories. Preferably, this task should be automated with the help of product information management (PIM) software.
Once invoice data has been collected, cleansed, and categorized at the line item level, procurement data may be sliced and diced based on a number of key performance indicators (KPIs). Some of the most common metrics include:
- Spend by category
- Number of suppliers by category
- Number of transactions by category
- Average purchase order value
- Spending distribution of key members
- Total expenditure by supplier
- Payment terms and conditions
- Rate of payment
- Number and dollar value of claims or returns
- Frequency of out of stocks
- Average delivery time by category
Using Spend Analysis
Successful, long-term negotiations and relationships must be strategic. Too often, we hear horror stories of groups entering less-than-favourable supplier contracts because they don’t realize how much their members are buying or they enter negotiations with a “hunch” rather that data-backed reasoning.
Using accurate spend analysis data, Buying Groups can re-establish their leverage with suppliers. Done correctly, you may find that you have more information about your members’ buying habits than your suppliers do.
Crucially, spend analysis is most effective when comparing suppliers with competing suppliers within the same category. This is information your suppliers do not have, giving you a clear advantage. Understanding your alternatives, and strategically inserting them into the negotiation process adds more leverage to the Buying Group.
Managing supplier relationships and keeping them win-win is often key to a Buying Group’s success. Spend analysis is not just competitive, but collaborative. Sharing data where appropriate helps to establish your group’s credibility and trust.
Spend analysis should be a vital aspect of the negotiation of supplier contracts and the maintenance of positive and mutually beneficial vendor relationships. Buying Groups need to overcome their lack of comprehensive data through the adoption of EDI as well as analytics tools. With a proper, automated, and real-time supplier spend analysis process in place, Buying Groups can ensure that they have the best preferred vendors for each spend category with optimized terms and rebate programs for their members.
Written by Steve Seguin
LBMX offers a business-to-business marketplace platform, helping independent businesses, their Buying Groups, and suppliers buy better and sell more. Its Private Group Marketplace for Groups has transformed billing and ordering, rebate management, real-time analytics, e-commerce and product information management across the building materials, HVAC, plumbing, sporting goods, industrial supply, manufacturing, and agricultural industries. Its LBMX Supply Cloud platform allows suppliers to look at their industrial distribution customers through one lens, offering full EDI, PIM, Analytics and Payments.