Spending Analysis @ Barilla

A key moment in the life of a company comes at year’s end when the final numbers are crunched. And a critical aspect of this number crunching is spending. Do the costs we actually incurred correspond to what we budgeted for? Unfortunately, often the answer is no. So when there is a discrepancy, it’s essential to figure out what the underlying causes are, to make future budgets more accurate, and to have more control over procurement policies.

One way to tackle this challenge is by using spending analysis. This approach allows companies to handle supply management processes effectively and to plan and monitor corporate activities correctly. Spending analysis involves two spheres of action:

• evaluating spending trends and related criticalities ex-post;
• pinpointing the trends that could impact future planning, and recalibrating procurement policies accordingly (if need be).

So thanks to spending analysis, we can get a clearer picture of any variance that might emerge between the numbers in the budget and the real data.

An emblematic case study is Barilla. To fuel its production processes, this company needs to have a wide range of semi-finished goods and raw materials on hand, sourced from all over the world. So Barilla is exposed to the price volatility we typically find in global supply chains, which in turn makes it hard to predict the level of cost performance that the company can realistically achieve.

To address this uncertainty, the company has developed a system called “Spending Analysis @ Barilla.” The aim here is to come up with a cost reporting model that can support the activities carried out by the Procurement Department as well as Planning and Control.

Barilla’s spending analysis centers on three different reference products which are cacao-based ingredients used in a number of their baked goods: chocolate, chocolate cream, and hazelnut cream. To manage the procurement of these products from suppliers, Barilla has begun using ‘open calculation accounting.’ This innovative type of contract sets the purchase price by taking into account all the various factors of production:

• the costs of purchasing the commodities needed to produce and process the reference products (cacao, hazelnuts, vegetable fats, sugar);
• the costs linked to logistics (both short- and long-range);
• the supplier’s margin (calculated on tons of products ordered instead of the absolute purchase volume).

To run the spending analysis, the Barilla team collected the following data set: the standard price (per ton) of each factor of production, the standard price for each reference product, the purchase/ consumption forecasts, the real evolution of commodity prices and exchange rates throughout the year, and lastly the orders that Barilla actually placed with its suppliers (and relative costs).

Comparing the initial budget with the costs incurred at year’s end, actual spending turned out to be 2.6% lower than what had initially been factored into the budget. Thanks to the spending analysis, the company was able to break down this variance into three main components:

• purchase volumes which were bigger than projected, meaning higher actual spending;
• exchange rates which were worse than expected, again incrementing actual spending;
• purchase prices on commodities that bested the forecasts, in particular for cacao, making actual spending in this case below budget.

The favorable trend in commodity prices had the biggest impact of the three factors listed above. In fact, this is what generated the overall drop in the cost of purchasing reference products that Barilla saw.

• Price variations for commodities on international markets can have a major impact on purchasing costs for companies that are highly integrated in global supply chains. So Procurement Departments have to take this price volatility into account when drawing up the budget. They also might consider taking out ad hoc insurance policies, for instance to protect against exchange rate risk.

• Spending variations linked to bigger volumes of goods purchased by a company, instead, reflect an overall increase in sales of final products. These variations can’t be controlled through ordinary cost management. So the Procurement Department should weigh the pros and cons of setting up purchasing contracts that take into account the possibility of significant fluctuations in volumes, also with an eye to cost compression.

• More generally speaking, spending analysis enables companies to make an in-depth assessment of various factors that can generate variance between their budgeted costs and their actual costs. At an organizational level, measuring and evaluating these costs are activities that must be properly incorporated into decision-making processes and mechanisms that fall into the sphere of budgeting and incentive schemes.