Procurement analytics is the process of using quantitative methods to derive actionable insights and outcomes from data. It involves the capture and use of data to support fact based decision making and gaining competitive advantage. It reports typically on what has happened in the past and creates estimate, using the predictive analytics based on historical data to guess what will happen in the future.

The data is playing a great role in business management. It has helped in creating the data, saving and re using it later. Even major reports of a firm are created with the help or data and so the procurement has also become data driven. From the central operations where every buyer and category manger conduct an analysis, it becomes important.

Why is Procurement Analytics important?

It is because a terrific increase has been seen in it. The information created by machines and used by other machines will probably grow faster than anything else. This is primarily database to database information. People are only tangentially involved in it.

The global Procurement Analytics Market is expected to rise from its initial estimated value of USD 1.67 billion in 2018 to an estimated value of USD 7.38 billion by 2026, registering a CAGR of 20.42% forecast by 2026. Increasing demand for cloud based analytical solutions is driving the market.

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How will analytics support a Procurement Organisation?

First, we should have a look on the challenges of implementation

Data is in multiple systems.
Existing data is not analyzed.
Skill set in an organization is not available.
Right technology is not available.
One-off versus operationalised.

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What is Procurement Analytics?

The majority of the key decisions of procurement struggle due to problems in managing the data. The future of the procurement is really big. It is becoming more important. Procurement will further need many tools, systems, capabilities and processes to ensure the usage of the data to create the best decisions related to the business.

According to a research, use of analytical tool has increased the demand forecast accuracy by 55% which has led to increased contract negotiation power and decreased chances of stock outs.

What is done under procurement analytics?

Applications of Procurement Analytics

Contract management: This optimizes the discount levels and forecast the liabilities in terms of finance.
Vendor evaluation: it factors the deliveries that have been done timely, quality of materials and time and effort to bring resolution to the problematic order including lowest cost.
Supplier Relationship management: This counts the vendor score , purchase order value and the PO volume.
Spend analytics: the procurement analytics examine multiple types of data sets like tax data, invoice data and creates a different look at the elements in the data form. This decreases the maverick spend .
Demand forecasting: Average of the whole cycle volume is generated using the data .

Why is Procurement Analytics important?

Implementation of the Procurement Analytics

Skills of the firm are developed and shared. The support of other sis gained through developing leadership qualities. The fact-based decisions are taken and are not based on gut feelings. The existing systems are fully utilized within the business. And in the long term, the investment in e-procurement suite and specialized analytical tools is done.

How will analytics support a Procurement Organisation?

First, we should have a look on the challenges of implementation

Data is in multiple systems.
Existing data is not analyzed.
Skill set in an organization is not available.
Right technology is not available.
One-off versus operationalised.

Five ways procurement analytics can deliver real value

Pricing metrics
To understand whether the organisation is paying different prices for a similar product or service across its divisions and geographies – a common problem since divisions/geographies often don’t share data and best practices. The analysis can be conducted at the following levels:

Price variance for an SKU, where the same SKU might be bought at different price points from different suppliers
Price variance by division/geography, where the same SKU might be bought at different price points within different divisions and geographies
Spend/price development, to assess whether an increase in spending for an SKU/category is resulting in a per unit cost reduction

Financial metrics
To understand how working capital can be optimised by using payment terms as a key lever. Another important element is to control spend above the budget by comparing the budget or the PO value with the actual invoicing. Various analyses that can bring insights on this are:

Payment terms visibility and optimisation to release working capital by comparing categories/geographies against external and internal benchmarks
Incoterms can be analysed to identify opportunities to switch to cost-effective incoterms
Invoice processing costs need to be minimal and analysed using a number of transactions per supplier and average invoice value
Budget/PO vs invoicing should be synced to ascertain the difference in budgets/PO vs actual invoices

Compliance metrics
To understand any variances from the defined process and agreed KPIs. Typically, these can’t be completely avoided but should be controlled as they always come with a higher price point. Ideal metrics to explore include:

Spend from unapproved and non-preferred suppliers
Maverick spend as a percentage of overall spend
Off-contract and non-PO spend
Fraud detection by analysing factors including spend near approval limits, and large spend without POs

Supplier base metrics
To understand the performance of the existing supplier base and identify opportunities to consolidate further, such as using more global contracts to secure better pricing. Procurement teams should look at the following analyses:

Supplier performance metrics to measure current performance against the SLAs and KPIs agreed in the contract
Supplier base build-up, to understand which geography/division has a high supplier base built up over years, compared to the spend in each geography/division
Spend under supplier parent company, to understand the parent-subsidiary relationship of suppliers and the potential to move to a single contract with the parent entity
Leveraging existing suppliers’ geographic reach to secure global competitive rates rather than local contracts and suppliers
Leveraging existing suppliers’ product/service offering to cover multiple categories

CPO metrics
To understand the overall procurement performance and efficiency of the procurement team at a CPO or leadership team level:

Cost of procurement per supplier
Procurement cost as a % of revenue
% spend under management
% suppliers under management
% categories/materials single sourced