A common analysis of spend is in reviewing the trending per commodity spend.  Knowing if commodity spend is increasing or decreasing over a period of time will often drive the need or priority of opportunities.  What is often missed in this analysis is the core reason for the fluctuation.  Just knowing the spend for a commodity increased year over year does not necessarily make that commodity a candidate for a sourcing project.  You should drill into the detail to find if it was a change in the commodity cost, the quantity purchased, or in many cases, exchange rate fluctuation.

 

One of the Ariba Spend Visibility Project Managers, Eric Larocque, recently worked with one of his customers to create analysis reports that breaks out the variables.  Below are 3 examples of calculations that can be built to help pinpoint the cause overall commodity spend fluctuations.

 

Exchange Rate Variance - Companies that have spend in many currencies still typically view the corporate spend in a single currency.  Due to this, the exchange rate will impact the total spend figure.  By taking the difference of past and current spend, divided by a single rate (past or present) will show how much of the fluctuation was caused by the change in exchange rates.

 

Price Variance - It is fairly common to look at the price fluctuation, but in doing this you should also isolate any exchange rate difference as well.  For example, take (2009 Original Unit Price - 2008 Original Unit Price)  *  2008 Quantity and divide it by a common exchange rate similar to the above calculation, you isolate the unit price change.  One note, you still need to take into account the unit of measure if there are multiple measures in that commodity.

 

Quantity Variance - Lastly, you want to review the change in quantity.  For example, (2009 quantity - 2008 quantity) * 2009 unit price divided by a common exchange rate will show how much of the spend was due to the purchased quantity change. Other potential variables that could be reviewed include mergers/acquisitions transactions that could impact overall commodity fluctuation.

 

Other potential variables that could be reviewed include mergers/acquisitions transactions that could impact overall commodity fluctuation.