Procurement Analytics — 8 Things Every Procurement Manager Should Track

How do you Track Procurement?

First, you’ll need to gain an understanding of how your procurement analytics tool works. It also depends on what type of company you have. While there are fewer companies that employ Generation 1 tools, the majority of middle-sized to enterprise-level companies often rely on Generation 2 or Generation 3 tools.

If you are working for a start-up company, then chances are, you will be working with a Generation 3 or Generation 4 analytics tool.

Once you’re familiar with your analytics tool, here are the three important steps used by the tool for tracking procurement:

• Step 1 – Data Extraction – This is where your software shines. All data are extracted from all possible sources and are consolidated into one central database. Once extracted, all data is then enriched and cleaned. Simply put, data extraction is where all unneeded or irrelevant data are purged from the system. 
• Step 2 – Data Cleansing, enrichment, and categorization – Once data extraction is done, the data is then classified into defined categories. This is because the software needs each data categorized to speed up its analysis. The process also combines all purchasing transactions into a single taxonomy so customers can gain visibility on their global spending.
• Step 3 – Reporting and analysis – Once step 2 is done, data is finally ready for analysis. Procurement spends analysis gives you the needed spend visibility to deliver clear analysis for the user to spot smarter sourcing solutions, faster identification of business opportunities, and full control of your company’s spending.

Once data is analyzed and ready, it’s time for some human intervention.

Yes, despite having a multi-million software tool at your disposal, the procurement manager has to do the final check of data through procurement KPIs and metrics. Together with the analyzed data, you can check it with the following procurement metrics:

1. Key figures (Cost of Goods, Volume, etc)
Every analysis starts with the basics, so does the forming of a clear Procurement Plan.
Total Cogs of Goods Sold (COGS) is the cumulative cost of all spend purchases. Make sure you take a decision whether to take or not take into account all cost that are incurred during the procurement phase and include all direct and indirect costs of a product or system. It’s not limited to just the purchase price but includes transaction fees, warehousing, and other incidental costs. Volume is the total amount of pieces that you are buying. If needed, make a clear distinction between cost of goods sold & volume bought against regular and promotional prices.

2. Spend under management
Spend under management is the total amount of spend that is actively managed by you as a procurement manager. This figure can include every product group, category, or supplier that you are working with, or can be divided into separate metrics that represent a specific region or category. Spend under management is an important metric for a procurement organization because it reflects maturity and controls overspending. For example: “as a procurement manager, I have increased my span of control over my spend from 70% to 80% over the past six months.”

3. Value chain analysis
A value chain is a concept describing the full chain of your business’s activities in the creation of a product or service — from the initial reception of materials all the way through its delivery to market, and everything in between. The value chain concept was first described in 1985 by Michael Porter, in his book Competitive Advantage: Creating and Sustaining Superior Performance. The value chain framework helps organizations understand and evaluate sources of positive and negative cost efficiency. Conducting a value chain analysis can help you to diagnose points of ineffectiveness for corrective action, understand linkages and dependencies between different activities and areas in your business and create a cost advantage over competitors.

4. Cost price breakdown
The cost price breakdown is the process of identifying the individual elements that comprise the total cost of your bought goods or services. It assigns a specific value to each element. Alternately, the value of the individual elements are expressed as a percentage of the total cost. A good cost breakdown structure provides insight on overspend, or underspend, against your original plan. Having a good structure makes it straightforward to understand deviations. When you see a deviation from the plan within a cost category early it is easier to make the right decisions for improvement

5. Number of suppliers
The number of suppliers tells you how many distinct suppliers are being used in your procurement organization, or in a specific category. Reducing the number of overlapping suppliers in a category can result in efficiencies or cost savings. Increasing the number of suppliers in key categories may be advantageous to reduce supply risk.

6. Cost Savings
Cost savings is measured by the cumulative amount of savings gained. You could break them down per category and/or supplier for focused measurement. They are followed over a time period to see how cost-saving targets are met. Cost savings could be achieved through aggregating spend, taking out longer-term contracts or introducing more competition, ordering in larger quantities, standardizing and rationalizing the spend, or using combinations of these different levers.

7. Payment terms
Average payment terms measure the average time (in days) invoices are paid by, calculated using every single instance of payment term information. Improving payment terms among suppliers is a perfect way of improving your company’s working capital. While the improvement in working capital will not be reflected in financial statements, you can calculate savings based on proxies such as the cost of borrowing. For example: by increasing average payment terms from 0 to 45 days across your supplier you are able to save 20.000 dollars in interest charges.

8. Contract coverage
Contract coverage measures the amount of spend that is covered by a contract. Increasing the amount of spend that is covered by contracts (or procurement approved purchase orders) can result in savings, while also reducing compliance risk.

9. Exchange rate
This only applies if you buy and sell goods or services outside of your own country. Exchange rate exposure measures the changes currency fluctuations and conversions have on the overall spend. The long-term impact of exchange rates can be measured and isolated from realized savings measurement. For example: Over the last financial term, the procurement team’s contribution of €3m euro spend reduction was offset by an increase of €900K euro costs from the increasing value of the US dollar.

10. Supplier Rating
The unhappier you are with the performance of your supplier, the higher the need to reduce dependency. Supplier accountability measures suppliers’ performance and how they are responsible for handling deliveries, quality issues, errors, and claims. The goal of vendor accountability is to ensure that the overall best product or service is delivered, and the development of more strategic supplier relationships.

And that’s a wrap on procurement analytics! In this article, you have learned about the impact that your organization’s data has on your deals. First, you discovered some of the most important ways to look at and use the data of your own company to your advantage. Finally, you learned about the most common analytics that will likely impact the outcome of your deals.