The purpose of analysing the procurement portfolio is to develop a full and comprehensive picture (procurement profile) of the procurement needs of the organisation. The first step is to analyse past and projected procurement expenditure or spend for goods, services and works (spend analysis). The next step is to analyse the difficulty and risk associated with securing these goods, services and works (risk analysis). The third step is to develop a procurement profile that identifies past and projected procurement expenditure and associated levels of risk in form of a matrix. Finally, appropriate strategies can be developed for each of the categories of this procurement profile.
Spend analysis
The first question to ask when preparing a spend analysis is whether historic spending data is a good indicator of future spends. To establish this it is necessary to ask various questions such as:
- Were there special events affecting the historic spend that will not be repeated, e.g. a natural disaster or large scale project that caused a large, but temporary increase in spend?
- Are there anticipated special events that will affect future spend, e.g. a forthcoming large scale project?
- Are there events happening in the external environment that are likely to affect the spend profile, e.g. political or economic changes in the program country or in the behaviour of the donor community?
- Are there strategic organizational issues that are likely to affect spend, e.g. changes in the funding profile or in the priorities of the organization?
If, as a result of this analysis the conclusion is the historic spend will provide a reasonably accurate prediction of future spend, the next step is to undertake a ‘spend analysis’.
Analysing procurement spend provides data that can be used as a baseline to measure improvements, but also to provide reliable data for deciding strategies to realize short and long term savings. Various tools are available to conduct a spend analysis, but normally the first step is to download data from the financial management system, most usually the Accounts Payable. Data should include all invoices that have passed through the system within the specified time period. This data can then be analysed using parameters relevant for the particular organization, but typical parameters could include:
- spend and number of transactions per commodity or category
- number of suppliers per commodity or category
- average purchase order value
- total expenditure per supplier
- transaction distribution by dollar range (e.g. less than USD 1000, USD 1000 – 2500 etc)
- spending distribution between main clients
- spend and number of transactions per procurement officers
- number of procurement officers involved in the transaction per commodity group.
Special factors
Where special factors may indicate that the historic spend analysis will not be a good predictor of future spend, in most circumstances it would still be relevant to conduct a spend analysis and then adjust the results taking into consideration the special factors.
If there are factors involved that imply that the historic data does not provide any relevance in predicting future data, then the procurement profile would need to be constructed by analysing as much data as possible from information on the future strategies, and activities of the organization such as project plans, budgets and so on.
The resulting procurement profile should provide as comprehensive a picture as possible of the actual procurement spend including:
- what goods, services and works are purchased and how much is spent on them
- comparison of historic spend on each item with the projected spend
- how the goods, services and works are purchased
- who the goods, services and works are purchased from
- the geographical location of suppliers e.g. local, regional, international.
Risk analysis
Risk analysis should look at the following issues:
- how critical the goods, services or works are to the organization
- The difficulty and risk associated with securing the goods, services and works.
- the risk associated with each commodity or category based on:
- risk specific to the goods, services or works
- organization related risk
- supplier related risk
- market related risk.
When analysing supply risk the following key risk factors need to be analysed for each commodity or category:
- nature of the supply market
- probability of supply failure
- strategic importance to the organization
- impact on the organization of supply failure
- complexity of the procurement relationship.
