Procurement and financial decision-making go hand-in-hand. Every dollar spent must be accounted for. And it needs to bring the organization value. Purchasing goods and/or services is a complex task.
But one of the best ways to simplify it is through accurate data. This is where procurement analytics enters the scene, helping procurement managers make more accurate decisions while maximizing the value of expenditure.
Here, we offer you a detailed guide on procurement analytics so that your financial strategy can take an upward swing. Let’s explore in more detail below.
Defining Procurement Analytics
Procurement analytics is a process through which you use all types of available data—both qualitative and quantitative, internal and external—to help enrich your financial decision-making process.
Procurement analytics goes beyond pretty bar graphs and pie charts. It’s a means to making sound decisions by exploring your spend, identifying trends and patterns, and optimizing your procurement processes for organizational gain.
Advantages of Analyzing Procurement Data
Apart from helping to optimize your procurement processes, analyzing procurement data comes with many other organizational benefits. With such data and insights at your fingertips, you can:
- Enjoy greater accuracy in forecasting and budgeting
- Identify cost-saving opportunities
- See real-time insights into market trends
- Get a bird’s eye view of your suppliers’ performance
- Monitor cost fluctuations
- Enhance risk management by identifying potential disruptions in the supply chain
- Allows you to implement proactive contingency plans
- Fosters collaboration between stakeholders (internal and external)
- Builds stronger partnerships
- Optimize your sourcing strategies
- Improve contract negotiations
- Compare prices across products, markets, and suppliers
- Streamline your financial reporting and regulatory compliance
Types of Procurement Data
With so many sound reasons to use procurement analytics to identify cost reduction strategies and engage in stronger financial management, it’s important to consider that you already have a lot of information you can tap into. You simply may not know this yet. Examples of the different types of procurement data you can use include:
- Internal: This is data that is produced by your organization. It can include ledgers, balance sheets, spend analysis, quantities supplied, etc.
- External: This data is external to the organization and can include market-driven prices, exchange rates, transportation costs, costs of warehousing and logistics, etc.
- Structured: Structured data is usually well-organized and easy to read, such as numbers and figures that represent quantitative data.
- Unstructured: Unstructured data is usually messy and disorganized. It is often not numerical and can be considered qualitative data, such as sentiment analysis.
The Process Involved in Procurement Analytics
So, having access to both internal and external data as well as structured and unstructured data, what is the process involved in ensuring you can read this information to your organization’s advantage?
The process starts with data collection and extraction. Everything must be put in one database while ensuring you eliminate any inaccurate or outdated information. The process of data consolidation is then followed by data cleansing, categorization, and enrichment.
This is where you group the data collected into categories or into different taxonomies. Once the data has been thoroughly grouped together, you can start “reading” it. You can filter your database so that you extract relevant metrics to produce the reports you need at the right time.
For example, you can use metrics to give you a description of a certain procurement situation through descriptive analytics. You can also carry out diagnostic analytics. Predictive analytics is also possible as you use data to make predictions about future scenarios. And lastly, prescriptive analytics can be used to prescribe what steps should be taken based on the information you are dealing with.
What Metrics Should You Track?
Knowing which metrics to track is the first challenge in procurement analytics. That’s because not all data is created equal. Some of the key performance indicators (KPIs) you should have on your radar include:
- Spend under management (SUM)
- Spend vs budget
- Total cost of ownership (TOC)
- Total spend
- Cost savings
- Cost avoidance
- Average payment terms
- Number of suppliers
- Contract coverage
- Contract compliance
- Exchange rate exposure
- Vendor accountability
- Vendor performance
- Price competitiveness
- Inventory turnover
- Maverick spend
- Defect rates
- Order delivery cycle time
Use Cases of Procurement Analytics
So, in which cases can procurement analytics be useful? The answer may surprise you. That’s because procurement analytics is used in a variety of use cases, among which are:
- Category management: When you manage your different procurement categories, you can do a lot. This includes segmenting and prioritizing suppliers, identifying savings opportunities and sourcing potential, managing your sustainability performance, and more.
- Strategic sourcing: What’s crucial for you as a procurement manager is to identify the ideal times to source products and send requests for proposals. Often considered quite the juggling act, a rich source of information can help inform your decisions.
- Contract management: Contract lifecycles are not always easy to manage. With analytics at your fingertips, you can get alerts about when a contract needs to be renegotiated and on what terms. Plus, you can identify maverick spend that helps improve your compliance.
- Source-to-pay (S2P) process: This is all about improving payment terms and measuring your purchase order cycles. Discover rebate opportunities, rectify payments made in error, ensure more accurate payments, and minimize the risk of fraud.
- Sustainability and corporate social responsibility (CSR): This is about identifying gaps in your procurement efforts which can earn you more environmentally-friendly opportunities such as identifying more sustainable source alternatives.
- Risk management: Risk management is a major aspect of procurement analytics. It takes the unpredictable and makes it more manageable. It’s about looking at relationships between price, supply, the environment, and others to mitigate risks and ensure smooth sailing for your organization.
- Performance measurement: With procurement analytics, you’ll be able to directly see the impact of your efforts on your organization’s profit and loss statements while directly impacting your financial reporting responsibilities in a positive way.
These are just some of the use cases of procurement analytics. Others include evaluating and more accurately forecasting spending, forecasting demand, analyzing purchase orders and payment terms, suppliers, sustainability, contracts, savings, bottlenecks, contract management, reducing rogue costs, and evaluating supplier performance, among others.
Conclusion
Because we understand how critical procurement analytics is for effective financial decision-making, here at StorsenDigital, we bring you all the right tools and people together to help you reach finance optimization.
It’s time to address your financial risk management with a group of experts at your side. From financial analysis to the right finance technology, we are here to help you. Contact us today and explore strategic finance that helps your organization through powerful finance operations outsourcing.
