- October 15, 2021
What is Procurement Analytics for Strategic and Sustainable Sourcing?
Procurement analytics is the process of collecting and analyzing procurement data to form meaningful insights and aid effective business decision-making. Examples range from historic procurement spend analysis reports to advanced analytics to predict and budget future decisions.
Procurement analysis typically involves collecting data from a number of different source systems such as ERPs, classifying data to standard or use-case specific taxonomies, and displaying data in a visualization dashboard or within business intelligence tools.
The need for procurement analytics has developed from many organizations’ desire to get a consolidated view on procurement spend. Initially offered through one-off projects such as spend cubes, procurement analytics has evolved to encompass several specialized solutions, dashboards, and types of automation software.
For many businesses, analytics is about much more than data visualization. One way to think about procurement analytics is that it’s like refining oil. It’s about collecting, cleansing, and enriching large amounts of data from disparate systems to create business value. In procurement analytics, value comes from more timely, accurate, and actionable insights, and the ability to measure procurement’s contribution to the bottom line.
Procurement organizations can utilize analytics to describe, predict or improve business performance. When utilized effectively, procurement analytics can enable data-driven decision-making, where purchasing decisions and supplier relationships are managed more effectively.
CBX Software’s Supply Chain Management Software harnesses the power of Microsoft Power BI to visualize data for retailers in the private label development space. CBX Cloud allows retailers to collaborate with their supplier partners to refine every last detail around a product’s specifications.
Varieties of Procurement Analysis
The field of procurement analytics has emerged from the need to understand past procurement performance and guide future decision-making. Common types of analysis in procurement include:
- Descriptive Analytics – where procurement data is analyzed to describe what has happened in the past.
- Diagnostic Analytics – where procurement data is interpreted to understand why something has happened in the past.
- Predictive Analytics – where trends and patterns in data are used to forecast future procurement performance.
- Prescriptive Analytics – where predictive models based on procurement data aid decision making.
The Evolution of Procurement Analysis
Historically, procurement analytics has focused on understanding past procurement spend and supplier performance, but increasingly focus is shifting towards automated and prescriptive decision making. Over time the functionality and service models of spend analysis solutions have evolved to meet the growing needs of procurement organizations facing digital transformation.
Because every procurement organization has the interest to analyze and manage spend, a broad field of solutions has emerged to cater to different needs and maturity levels. You can imagine the change as four different generations of solutions.
Generation 1 (1990 – 2000): analysis done in Microsoft Excel by consultants or business analysts largely focused on past spend analysis.
Generation 2 (2000 – 2010): desktop spend analysis software bought under license with data hosted on-premise or within the company firewall.
Generation 3 (2010 – 2015): browser-based spend analytics dashboards providing business intelligence level visualizations and usability. Licensed or bought as Software-as-a-Service.
Generation 4 (2015 – today): AI-powered, automated procurement analytics solutions combining many data sources. Encrypted and hosted on the cloud. Bought as Software-as-a-Service.
Even today, different generations of procurement analysis solutions co-exist to meet the needs of different types of businesses. Some procurement organizations retain their Excel-based reporting, while other organizations may continue to use their self-built or configured business intelligence solutions long into the new decade. Some procurement organizations can skip entire generations through the process of digitization if the procurement leadership has a clear mandate to drive data-driven transformation.
How Analytics Impacts Procurement
Analytics is widely regarded as one of the most important resources and disruptive forces in procurement. According to a recent survey by Deloitte, most Chief Procurement Officers (CPOs) view analytics as the technology area with the most impact on business. What’s more, Ernest and Young identified analytics as the most disruptive force in procurement over the next decade.
Why is analytics so important for procurement?
A common misconception is that analytics in procurement only relates to spend analysis. In reality, analytics touches all activities from strategic sourcing to category management and procure-to-pay processes. Here are just some key reasons why analytics is important across different procurement functions.
Analytics in category management
When effectively used, analytics gives category managers superpowers. Procurement analytics allows category managers to identify savings opportunities, segment and prioritize suppliers, address supply risk opportunities and facilitate innovation.
Analytics in strategic sourcing
The best business strategies are informed by data. In strategic sourcing, analytics helps identify the best times and areas to run sourcing events and requests for proposals. It can identify which suppliers to include in sourcing projects and provide rich information into suppliers’ quality and risk positions.
Analytics in contract management
Analytics provide value across contract lifecycle management. It can alert when contracts need to be renegotiated, or provide data for supplier negotiations. What’s more, analytics can identify eccentric spend to help compliance and improve contract coverage.
Analytics in procure-to-pay
Procurement analytics can also provide much value in the transactional side of procurement. With analytics, you can measure purchase order cycles and improve payment terms. You can evaluate payment accuracy, discover rebate opportunities, identify mistaken payments and reduce fraud.
Analytics in sustainability and CSR
Increasingly, companies are realizing the value of analytics in assessing sustainability and corporate social responsibility, and related risk within the supply chain and procurement. Analytics can uncover the environmental or social impact of procurement decisions and identify opportunities for more sustainable alternatives.
CATS: a quick method to diagnose Procurement Analytics needs
The common goal of most procurement analysis solutions is to be a ‘single source of truth’ where procurement teams can make informed decisions with data they can trust. If the data is not reliable, you may run into a “bad data in, bad data out” situation, where costly mistakes are made based on unreliable analysis.
While most procurement organizations have similar aims for reliable data visibility, they all have unique resources and challenges to achieve the goal.
You can assess the complexity of your needs on four key dimensions:
- Connectivity – do you need to bring together multiple sources of data from within and outside of your procurement organization?
- Adaptability – can the solution fit into your team’s sourcing processes, culture, organization structure, and workflows?
- Transparency – do you need to see and understand how spend is organized? Can you trust the data?
- Speed – how often do you require updated analysis and how actively is it used in your organization?
As a rule of thumb, the higher your needs for connectivity, adaptability, transparency, and speed (CATS) the more likely you are to need procurement analytics.
If you don’t require many connections between different source systems and a high level of transparency to the analysis process, you may be able to start with a one-time analysis done in Excel or with help from a consulting partner.
If you have a complex organization or global supplier network, or you require regularly updated data, you may benefit from dedicated procurement analytics software.
Sources of Procurement Data
Procurement organizations often face the challenge of heterogeneous data landscapes. As many businesses are formed from more than one business unit, financial processes may vary on a regional or international basis or across businesses. Increasingly, procurement analysts are starting to leverage data from outside of their own procurement organizations, combining the most valuable aspects of internal and external data.
Internal data assets are hosted or originated within corporate applications. It is common for businesses to utilize more than one transactional database, such as enterprise planning systems (ERPs) or accounting software. Procurement analysts may also utilize data provided directly by suppliers or different business units through Excel, or tap into data from the general ledger or other financial records.
External data assets are any data sources that come from outside of the companies own financial databases. These may be public systems, such as information on suppliers, commodity prices or currencies readily available on the Internet. External data sources also include 3rd party proprietary sources, such as supplier industry codes, credit ratings, or supplier risk profiles.
In the past, independent analysts working with Excel have been limited with the ability to utilize external data sources. Cloud-based procurement analytics software and application programming interfaces (APIs) have enabled more automated, faster, and more flexible uses of procurement data.
Examples of Procurement Analytics
Across different procurement organizations, there may be different applications of procurement analytics. Some of the most common examples include:
- Spend analytics– the analysis of procurement spend data from internal or external data sources.
- Contract analytics– the analysis of supplier contracts and their meta-data, such as payment terms and expiration dates.
- Supplier analytics– the analysis of individual supplier’s performance, comparison of supplier performance, analysis of supplier risk, sustainability or diversity, or analysis of supplier base.
- Savings lifecycle analytics– the analysis of savings projects and their impact on the financial bottom-line.
- Spend forecasting– the forward-looking analysis of procurement spend data and its impact on profitability.
- Procurement benchmarking– the comparison of a procurement organizations’ performance to peer or market benchmarks.
Analytics and data are the driving forces allowing the best retailers to branch out and take educated approaches to roll out new products that make sense financially. With CBX Cloud’s Supply Chain Management Software, tier 1 retailers have the ability to improve upon their current processes by examining their historical data and making adjustments as needed.