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, identify mistaken payments, and reduce 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.
It starts with the proper preparation for better, fact-based procurement decisions that benefit both your organization and your career. As a Data-Driven Procurement Specialist, you have a comprehensive set of analytics skills to improve data-driven decision making for procurement. The waiting list closes soon.
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:
- Step 4 – Spending vs Budget – This metric tracks the realization of procurement spend. It compares the spend with the actual budget spend of the company. This is the foundation for efficient spend management and it ensures that it is in line with what the key stakeholders of the company want.
- Step 5 – Cost Avoidance – Cost avoidance is used to describe an action that helps a company avoid absorbing accidental additional costs. These costs could be inflation, shorter payment terms, requirements for additional features or services, and many others. This is one important metric that should be checked to measure procurement performance.
- Step 6 – Cost Savings – The polar opposite of cost avoidance, cost savings is the total amount of savings gained from the procurement. Each is then broken down per category for focused management.
- Step 7 – Total Cost of Ownership – Total cost of ownership is the cumulative cost for all spend purchases. It takes into account all costs that are done during the procurement phase. This includes transaction fees, warehouse fees, and other incidental costs.
- Step 8 – Number of Supplies – The number of suppliers shows how many suppliers are used in the procurement organization. By reducing the number of overlapping suppliers, it can sometimes result in creating an efficient procurement process.
- 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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