Procurement cost analysis: A guide to reducing hidden spend

Finance leaders are increasingly focused on reducing procurement costs and improving visibility. A 2025 report found that 78% of procurement professionals are under pressure to cut procurement operating costs in the coming year, and 58% have a specific reduction target they need to meet.

The first step to lowering procurement spend is identifying cost-saving opportunities. A procurement cost analysis can help you understand your organization's cost drivers and find areas to reduce waste.

If you’ve never performed a procurement cost analysis before, the practical framework below can help you get started.

What is procurement cost analysis? (and why it matters)

A procurement cost analysis is the process of examining all expenses related to your organization’s procurement activities. It goes beyond the purchase price of goods and services to account for both direct and indirect costs associated with the procurement lifecycle, such as:

• Transportation

• Storage

• Handling

• Future maintenance

   

A thorough cost analysis process gives your team a clearer view of total spend and cost drivers. It can help you improve forecasting and cost modeling, identify areas for cost reductions, and reduce waste. Understanding the true cost of goods and services can also lead to better budgets, more strategic supplier negotiations, and improved financial health.

As business spend analysis tools evolve, using procurement data to make informed decisions is becoming less of an innovation and more of an expectation. According to a survey by The Hackett Group, procurement professionals ranked data analytics as their top priority for improvement initiatives in 2025. 

Organizations that embrace data-backed decision-making are better positioned to improve financial planning and optimize procurement performance.

Key components of procurement costs

To gain a comprehensive view of the total cost of your organization’s procurement strategy, it’s important to understand and account for three types of costs:

1. Direct costs

2. Indirect costs

3. Strategic opportunity costs

    

Direct costs

Direct costs are expenditures directly tied to the production of a specific product or service. For products, this includes expenses like raw material costs, packaging, tools, and labor costs for workers directly involved in production. For services, it covers contractor fees, materials used during the service, equipment rentals, and wages for service staff.

While direct costs may seem straightforward, certain variable expenses can complicate cost analysis, such as:

• Unit prices: Some materials, like fencing by the foot or concrete by the cubic yard, are sold in units. Projects involving these materials may begin with an estimate that ends up shifting based on the final quantity of units used.

• Shipping costs: Shipping charges are prone to price fluctuations driven by fuel costs, carrier changes, or global events.

• Tariffs: If your goods or services depend on imported materials, tariffs can significantly increase prices. Even if you source goods locally, higher demand and shortages can drive up production costs.

   

Indirect costs

Indirect costs are expenses your organization incurs for goods and services that aren’t directly related to the final service or product sold. Instead, they typically support the organization’s overall operations. Examples of indirect costs include office supplies, software licenses, and utility expenses.

When doing a cost analysis on indirect spend, consider things like: 

• Unmanaged spend: This type of spend refers to purchases made outside of your organization’s standard procurement process. It's often associated with smaller purchases, but those small costs can quickly add up. Be sure to include unmanaged spend in your procurement cost analyses. 

• Invoice duplication: Invoice duplication occurs when the same invoice is submitted or processed more than once, leading to duplicate payments.  It can negatively impact cash flow, introduce compliance issues, and complicate financial reporting.

   

Strategic opportunity costs

Strategic opportunity costs represent the potential value your organization misses by making procurement decisions that are strategically inferior to others. Though they aren't traditional expenses, they still impact your bottom line. 

These costs can manifest as:

• Missed supplier incentives: Overlooking a potential supplier relationship may mean losing out on discounts, rebates, or other negotiated benefits. 

• Lack of compliance: Prioritizing quick wins to meet strategic procurement goals may tempt teams to bypass standard policies, increasing compliance risk.

• Failure to act on market trends: Ignoring industry shifts or emerging technologies can leave your organization behind more agile competitors. 

How to perform a procurement cost analysis

Performing a comprehensive and accurate procurement cost analysis requires using the right tools and taking the right steps. Here’s a practical guide that can help you turn actionable insights into potential savings.

1. Collect spend data

Begin your procurement cost analysis by collecting as much cost data as possible. This includes information from:

• Purchase orders

• Invoices

• Contracts

• Expense reports 

• Transportation expenses

   

Next, look at key aspects of procurement like supplier performance, procurement cycle time, and inventory levels. This gives your team a bird’s-eye view of expenses related to storage space, process bottlenecks, and order accuracy.

While you can track many of these expenses within your e-procurement system, you may find it challenging to stay on top of ad hoc or tail spend. Integrating an additional smart buying solution, such as Amazon Business, can help you keep track of all types of spending. 

Amazon Business Analytics collects and analyzes data on tail spend, ad hoc spend, and category spend to help uncover compliance issues, find savings opportunities, and track key metrics and trends. This makes it the perfect complement to full-stack e-procurement software.

2. Categorize and benchmark

Now compare your organization’s costs with industry benchmarks to determine where your spending is higher than average. Leverage market pricing data and analyze your historical spending trends to uncover what's driving any variances. 

You can also conduct a should-cost analysis, which examines the ideal price of a good or service based on the sum of its parts. Start by creating a cost breakdown of each individual component, then add everything up to determine a final cost estimate. 

To make these types of comparisons easier, Amazon Business offers custom reporting templates that allow you to adjust columns and include or remove information based on what you need to see.

Insights, a feature available to Business Prime members, also lets you break down spending by supplier to drill deeper into data variances. 

3. Analyze by supplier, team, and cost center

Look at data for individual teams and suppliers to better understand the cost drivers influencing procurement expenses across your organization. Knowing which teams purchase the most can improve resource allocation by letting you assign overhead costs to departments that generate them.

Amazon Business offers integrated dashboards that compile all relevant data from multiple systems in one centralized location. This helps ensure you’re making decisions based on complete information. 

Additionally, features like Amazon Business’ Monthly Spending Summary Email keep you updated on organizational spend without manually checking, helping you stay more in tune with purchasing trends. 

4. Identify cost-reduction opportunities

Once you analyze all the data, you can identify areas where you could cut back on costs. This could mean changing or consolidating vendors, optimizing a part of your procurement process for greater efficiency, or sourcing materials elsewhere. 

One way to help control costs is to provide guardrails for employee spending. For example, you could use Amazon Business’s Guided Buying feature to steer employees toward preferred suppliers that offer your organization lower prices. You can also implement purchasing approval workflows that require purchases to be approved by each cost center director, who can ensure ad hoc spending aligns with the team’s budget.

5. Monitor results and adjust

Each time you make changes following a procurement cost analysis, you should continuously monitor them to see whether they have the intended result. If not, you may want to adjust sooner than later. 

For example, if a process change intended to optimize your procurement process led to a steeper learning curve than expected, it might be best to change course. What you thought would speed the process could actually hinder it. This is why real-time reporting is crucial. 

Once you have the right flow in place, you can start taking advantage of discounts with services like recurring deliveries from Amazon Business. The Subscribe & Save feature lets you set up recurring deliveries with automatic discounts. The more orders you schedule to arrive on the same day, the greater your savings.

Common challenges and how to solve them

Performing a cost analysis isn’t always easy. It’s common for organizations to run into challenges, especially when conducting their first spend analysis. Here are a few difficulties to watch for and ways to work around them.

Siloed procurement data

Problem: Procurement data is often spread across multiple systems. Your organization may have relevant data housed in financial databases, accounting systems, procurement software, or even in emails and spreadsheets. This information needs to be consolidated into one place for the most accurate analyses.

Solution: Consider implementing procurement software that integrates with outside systems, such as accounting software, contract management systems, and other procurement tools to create one source of truth. While this requires some work up front, it will make all subsequent analyses much quicker and more accurate. 

Lack of standardization

Problem: A lack of standardization for how you store or enter data can also be a challenge. When information isn’t in a consistent, uniform format across systems and datasets, it’s harder to compare, analyze, and integrate.

Solution: Create an internal policy for where and how teams store procurement data throughout each stage of the procurement lifecycle. Make sure everyone uses the same system to record data to enable reliable reporting. You may need to put historical data through a one-time standardization process so it matches your new standards. 

Low visibility across teams

Problem: Teams within some organizations may operate like mini entities, which means they might handle their own purchasing and budgets. This makes it hard for a central procurement team to access their data and ensure they're recording it accurately. This issue is often compounded by a lack of tracking software for organizational spend.

Solution: Centralize all procurement activities under a procurement department that can effectively track spending for your whole organization. Teams can still manage their own purchasing with tools like Amazon Business’ approval workflows, but all data will be visible to your procurement team to help them improve your organization’s procurement strategy. This approach creates a good balance of autonomy and oversight.

Using procurement tools to improve cost visibility and control

Performing a regular procurement cost analysis replaces guesswork with data-driven insights that can save your organization money, mitigate cost-related risks, and improve overall financial health. Procurement tools that help you track data, identify trends, and increase visibility are key to conducting these analyses accurately and meaningfully.

Amazon Business fills in the visibility gap that often prevents procurement teams from seeing the full picture. With features that support compliance, automate workflows, and centralize data from across departments, it enables teams to reduce hidden spend, improve forecasting, and make more informed business decisions.

Contact sales to see how Amazon Business can help you modernize procurement cost analysis and unlock new savings opportunities with detailed insights and intelligent automation.