Procurement Analytics – 8 Things Every Procurement Manager Should Track
For the professional procurement manager, procurement analytics is a very important process that always seems taken for granted. Today, that will change.
In this article, you are going to learn more about the importance of procurement analytics. You will understand how the whole process works and how each of its metrics will define how your procurement process will fare.
After reading this article, you will understand procurement analytics metrics, how to track procurement, and the different generations of procurement programs.
Procurement Analytics – What is it?
Procurement analytics is the process of collecting and analyzing procurement data to aid important business decision-making.
It is also a process that gives you and your office important insights into the whole procurement process.
There are many forms of procurement analytics available; some may range from historical data from actual purchases while others are advanced programs that can predict and create budgets for future purchases.
In the past, procurement analytics meant documents upon documents of data, usually printed out in Microsoft Excel and they all bring in reports of past purchases done by the company in the past.
The newer form of procurement analytics is powered by AI that has automated procurement analytics that can combine many data sources.
Procurement Analytics – Why is it Important?
When you have multi-billion companies that invest in procurement spend analytics with millions of dollars, then you know that the process is serious business.
A procurement manager can sort and recognize data that is important for his/her company’s growth. Data such as supplier costs, analysis on past and present spending, and even forecasts for future procurements are a really big help for creating a smooth procurement process for the future.
Here are other important reasons why procurement analytics is important:
- Analytics help in contract management – Analytics provide the procurement manager with information on contracts that need renewal. Many procurement analytics tools help remind you what contracts need renewal and what contracts need ending.
- Analytics help in category management – Imagine having to go through each supply and then having to check each for inventory purposes. Procurement analytics can help in category management; the software can categorize all supplies and information so that you or your category manager can check data with ease.
- Analytics help in strategic sourcing – If you need to source for a new supplier, there are new procurement analytics tools that can help you with that. Because analytics data are stored online, the program itself can run a search for potential new suppliers for your company. Once you’ve picked a supplier, the analytics can also provide you with invaluable data, such as pricing, supply quality, and others.
- Analytics help in the procure-to-pay system – On the transactional side of procurement, analytics can track how much each procurement spends. A procurement manager can measure purchase order cycles and receipts. The tool can also help the procurement manager come up with better payment terms.
Other uses also include checking payment accuracy, identifying mistaken payments, and reducing fraud.
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Procurement Performance Analytics – How to Track Procurement
Before we talk about tracking procurement, it is only right that we start talking about the different generations of procurement analysis tools that are currently being used. By recognizing these tools, the procurement manager is also able to identify how to use each tool and when to use these tools.
- Generation 1 (1990-2000) – These are procurement performance analytics done in Microsoft excel by business analysts and/or consultants. It largely focuses on past procurement spend analysis. While crude and often has less information, it is still reliable than simply counting fingers and basing each purchase order on memory.
- Generation 2 (2000-2010) – These are procurement analysis software often installed on a desktop computer. Often paid for as legitimate software and with a license, procurement data is often stored inside an in-house data center or the company firewall. Often used by small or middle-sized businesses.
- Generation 3 (2010-2015) – Browser-based analysis software often used and bought by start-ups. These are the type of tools that use analytics dashboards to provide business intelligence level visualizations and usability.
- Generation 4 (2015-present) – The future of procurement performance analytics, this AI-driven software is often automated and combines many data sources. Sometimes used by start-ups to project future procurement insights.
Once we’ve already determined the different procurement performance analytics tools that one can use, then it’s time we talk about the actual process.
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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.
What is procurement analytics?
Procurement analytics is the processing of collecting and analyzing data that is needed for important decision-making.
How to set up procurement analytics?
A business needs an automated procurement system to set up its procurement process. It is an AI program created to study and analyze data from different sources.
What are important procurement metrics?
These are metrics followed by the automated procurement system and the company in determining important procurement decisions.
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