Procurement Analytics – Making Procurement Powerful and Agile
Big Data and Data Analytics have become big buzzwords today. They are touted as solutions to the most complex of problems in the supply chain or really any other industry or sector. Whether it is sustainability or risk management, the answer seems to be data analytics or procurement analytics.
So, what are those complex problems, and what are those innovative solutions that data analytics professes to provide? Here is a breakdown of the benefits of procurement analytics and the challenges it faces today.
What Challenges Does Procurement Face Every Day?
As the business ecosystems become more complex, the variety of challenges procurement teams have to face increases. Below are the key ones that procurement meets:
a) Visibility of Spend and Suppliers’ Performance
Spend analysis is a must-have tool to determine the value of cost reduction opportunities. It also helps prioritize procurement optimization initiatives, while tracking results and monitoring procurement efficiency. However, getting clear visibility and understanding of spend is still challenging. Without it, identification of optimization levers, taking advantage of internal benchmarking or cracking down on a tail spend or maverick purchases is practically impossible.
Procurement needs to get a clear image of the importance of each supplier. Monitoring supplier performance is crucial to risk management and getting a better sense of the areas to focus on the most. Still, integrating spend and performance data from different sources, such as data on goods received and purchase orders from ERP systems, and supplier assessment information, remains a challenge.
b) Precision in Procurement Strategies
Strategic sourcing continues to become more data-driven and collaborative. The need for a solid strategy is evident to understand the implications of each step, not just for better profits. An organization needs to know how to implement procurement strategy across all the functional units of its business, and then establish a system to measure its success. All this should be done based on standardized and commonly understood metrics. This is a huge challenge within itself.
c) Risk Management
There is a variety of risks associated with procurement and deliveries. Legal issues, market dynamics (availability of products, price volatility), quality, on-time service and deliveries, frauds (theft or invoice fraud), and procurement policy adherence are all ever-present threats. All these risks may exert a significant impact on the bottom-line.
Identification of the best suppliers to ensure stable and quality deliveries of goods or services, then continuous monitoring of their performance, as well as efficiency of procurement processes, is crucial in risk management. However, it can be a tedious task for businesses without the right tools for the job.
Although maintaining compliant procurement is part of the broader risk management concept, this problem is a challenge in itself and requires special attention as such. Compliance issues arise when maverick purchases take place, in other words, the standard procurement procedures are not followed, or official supply arrangements are omitted. Businesses pay the price for such uncontrolled spending habits and noncompliance. Each good or service purchased has to be justified using capital outlay and made in accordance with the company’s policy regarding the terms of purchase, the vendors, the objects of purchase and their origin. When this is not the case, revenue loss follows. Besides policies and procedures, companies must establish relevant metrics and implement technology to monitor them. This is a significant challenge for all organizations to overcome.
Why is it so Difficult for Procurement Controlling to Meet these Challenges?
Business reporting on procurement with access to insights and clear understanding, especially on a global scale, was virtually impossible before the advancement of data analytics. There are several reasons for this:
- Not easily downloadable data from multiple sources, ERP systems, procurement platforms, and business data providers made it difficult to collect and process information.
- The downloaded data was not cleansed or structured in a standardized way – it contained lots of gaps, typos, or redundancies, often more than one alphabet was in use, nor was it all translated to one language.
- It required a lot of effort to find and arrange data to prepare business reports, and at the end of the day only a higher level of aggregation was achievable.
- Contrary to financial controlling, procurement controlling has always been an issue – no dedicated department nor personnel was assigned for it. Procurement reports were prepared by procurement at late hours.
How Does Procurement Analytics Address These Issues?
Procurement analytics effectively overcomes the above-mentioned challenges. For starters, data scientists can automate the extraction and preparation of all necessary data.
The data is then uploaded to a cloud to feed the dashboards, so the reported metrics are standardized across the entire organization. Moreover, the reporting is automated and updated in real-time.
The data is accessible to many employees, not just restricted to procurement teams. Well designed (UX) dashboards are easy to read and make drilling down to the smallest details very simple.
Once the descriptive analytics is arranged based on well-managed data – we have a good starting point to develop predictive and prescriptive analytics – which is the real future.
5 Top Benefits of Procurement Analytics
1. Driving Effective Sourcing Processes
Having in-depth and cross-sectional insights, that are based on historical data and data from the present, integrated with external data on suppliers and markets, it has become possible to put into action multi-parameter sourcing strategies. Suppliers can be identified and chosen in the context of strategic challenges, sustainable practices, risk management or changing customer demands, not just
based on the lowest price. As more and more data is accumulated and tied from the entire sourcing area, this process becomes more optimal. Finally, it can result in building and training a model that allows for the derivation of greater value from the sourcing process.
2. Integrated Effective Supply Risk Management
The supply risks can be perfectly managed with procurement analytics based on centralized, efficiently collected, and managed data on deliveries, suppliers’ performance, capability, and condition as well as market environment. Instead of regurgitating conventional wisdom, companies can design supply risk mitigation actions backed by data and embed it in overall company risk management architecture. In essence, risks can be cut down based on variable dependence, statistical analysis, and cause-effect relation. No ‘gut feeling’ or hunches need to be involved as you have a data-backed and low-risk strategy for risk management.
3. Powerful Supplier Relationship Management
The backbone of strategic sourcing is to ensure stable supplies in accordance with quality and regulatory requirements, while reducing costs with continuous improvement and innovation. It requires identification of highly effective top performing suppliers to develop long-term relationships. Deployment of analytical tools with accurate, real time information on supplier performance and condition cannot be overestimated in this regard. Driving higher efficiency, proactivity, and competitiveness through collaborative actions with strategically identified suppliers has never risen to such a high level.
4. New Controlling Dimensions in Procurement
Nowadays, procurement managers are required to deal with the social impacts of procurement arrangements. Therefore, monitoring of measures related to sustainability, diversity, and economic inclusion becomes a must. It requires the collection of further, largely external data, which must be converted into quickly updated, understandable management reports. Once built, analytical foundations allow for quick integration and expansion of procurement analytics in any of these directions. Such extended procurement analytics facilitate managers to identify and address the social challenges and minimize all management glitches and shortcomings.
5. Data-driven Decisions and Fostered Cross-Functional Collaboration Around Procurement Data
Management decisions in the organization must instantly translate to procurement decisions and vice-versa. Better understanding between procurement and other functions ensures consistent realization of strategic company goals outlined by the top management. Deployment of procurement analytics, available across the entire organization and based on a single source of truth, contributes to cross-functional collaboration in a degree unattainable, so far. Procurement ceases to be a solitary island and can directly and interactively support other functions within an organization. As a result, the entire organization becomes compact and agile at the same time.
A Brighter Future
In today’s reality, business models are being revised to consider redefined markets, increasing speed and necessity for greater resilience. Organizations are adapting to these new challenges by accelerating digital and analytics adoption and transforming to agile operating models. Consequently, procurement teams rethink category strategies, reassess opportunities and build capabilities needed to work in new ways. In this context, the above-stated procurement challenges are even greater.
By implementing innovative analytical tools, Lingaro enables executives to quickly overcome difficulties and achieve new purchasing goals. Our dedicated teams of experts support the development of procurement analytics, both in the technological and business layers. We empower procurement to become a generator of immense value to companies.
Visit our dedicated procurement analytics website and discover how we can help your business.
Didn’t find the information you are looking for?
Ask our experts.