Procurement has become an integral part of corporate performance and is drawing increased attention from senior management. At the same time, procurement is becoming increasingly complicated. Globalization, increasing delivery costs and outsourcing are further complicating an already complex process. While the landscape is changing the objective is not: Management in any company must master the art of obtaining high quality products and services at sustainable costs.
Regardless of size, every organization spends significant amounts of money buying products and services. Whether you are procuring raw materials, goods, utilities, office equipment or services such as legal advice, advertising and facilities management, you are affecting the business’s bottom line. To mitigate these costs, businesses need insight into every step of the procurement process. Whether you have an entire procurement department or this is one of the many “hats” various staff members wear, procurement analytics is an essential tool.
The Procurement and Supply Lifecycle
The complicated nature of the procurement and supply lifecycle is one of the reasons procurement analytics is imperative to sustainable business practices. Regardless of company size, there are various phases to the procurement process. These phases are often viewed as part of the overall procurement and supply cycle. Different consulting firms and experts have developed various frameworks for the procurement cycle that you can apply to your procurement processes.
Columbia University has created a high-level overview of the procurement lifecycle stages. You can dig further into each stage on their website.
The Chartered Institute of Procurement and Supply (CIPS) has created another particularly robust framework that highlights 13 different key steps along the procurement and supply cycle.
The 13 CIPS steps are: Understand Need and High Level Spec, Market/Commodity and options (inc make or buy assessment), Develop strategy/plan, Pre procurement/market test and market engagement, Develop documentation, PPQ/detailed spec/combine with 1, Supplier selection to participate in ITT/RFQ/negotiation, Issue ITT/RFQ, Bid/Tender Evaluation and validation, Contract award and implementation, Warehouse logistics and receipt, Contract performance review and continuous improvement, SRM and SC management and development, and Asset management/end of life and lessons learnt.
Yes, that is an overwhelming amount of steps. Regardless of what model or homegrown system your procurement practices follow, properly managing each and every procurement phase can easily raise anyone’s blood pressure. Don’t worry, we aren’t going to test you on the steps listed above. Just take note of this, the prescription for procurement-induced high blood pressure is Procurement Business Intelligence.
Business Intelligence for Procurement
Before we delve deeper into why you need Procurement Business Intelligence let’s discuss Business Intelligence in general. Business intelligence (BI) is the use of analytics, various technologies and software to retrieve and extract raw data from enterprise resource planning (ERP) systems, data warehouses and other data sources. This data is then converted into applicable information. The extraction part is of the process is important but turning it into the intelligence you need, that is where the real value lies.
BI enables businesses to summarize large amounts of data into meaningful, real-time and fact-based information. This information facilitates decision making and helps companies solve longstanding information-related problems.
It is time to take the guessing game out of procurement. Let’s take “my gut tells me” out of the board room. Let’s replace it with “the data shows that….”
Progressive companies are capitalizing on the rise in big data and business intelligence (BI) software to ensure they are strategically sourcing their goods and services. A quick glance at either of the models above immediately highlights the need for procurement analytics. Both models have various complex steps that affect the rest of the procurement cycle. As with any business process, more steps means more room for increased costs and decreased transparency. It is easy to see how pre-big data procurement management has been a historically convoluted and murky practice.
Proper procurement and supply management is essential to ensuring cost containment. This management should include around the clock collection, tracking and analysis of every part of the procurement cycle. What is great about the CIPS model is that it includes analysis at various points along the cycle. Data is being analyzed and collected at each stage to ensure optimum cost and maximum profit. This is a procurement best practice! Throughout any procurement cycle, each activity, transaction, movement and event is generating data that you should be capturing and analyzing.
It is easy to see how procurement is one of the biggest ongoing challenges of any business. Let’s look into a couple ways business Intelligence for procurement is crucial.
Consolidate Real-Time Data and Quickly Identify Savings Opportunities
Innovative self service analytics software allows organizations to integrate spending and transaction data across diverse departments into a single system. By blending these diverse data sources, procurement staff can gain timely insight into spending patterns and trends and take rapid corrective measures.
Even better, true business intelligence allows procurement staff to be proactive instead of reactive.
“The emergence of Intelligent Data — procurement has spent the last three decades looking backward — at money spent or supplier performance in the past. The future procurement professionals will be working with information, data and models that look forward.”
Traditionally, procurement has relied on historical data looking backward to see what has worked in the past, but this retroactive strategic approach is evolving. Procurement expert Gerard Chick predicts that intelligent data will allow procurement professionals to work with data and models that look forward. By using intelligent analysis to proactively develop strategies, procurement can stay ahead of the game.
Create a Data Driven Culture
You may have had a gut feeling about various ineffective processes, but without proof, it is hard to enact change. Interactive dashboards provide procurement staff with the hard data to back up their decisions. Aggregating this data over time can positively influence cross-organizational procurement strategies. This aggregated and trended data can then be used to set key performance indicators (KPIs) so that you can continually evaluate factors that are crucial to the success of your organization.
Analyze and Improve Supplier Partnerships
Let’s be honest, working with suppliers is often a difficult and tedious task for procurement professionals. This frequently murky process can create strained partnerships and less than transparent processes. A deficit of data and insights from both sides has further added to this lack of trust and transparency.
Former supply chain executive, Jonathan House, doesn’t think it has to be this way. He sees a shift occurring in the sourcing strategies between suppliers and businesses. While the strategies historically have been based mainly on reduced price and acquisition cost. House says they the relationship between a company and its suppliers is becoming much more symbiotic. “The buyer needs quality goods and services by a required delivery date (RDD) and at the best possible price. The strategic suppliers, meanwhile, would like more business and they want to receive advance notice of purchases and demand patterns.”
House further states because of this changing landscape the new procurement trend, is towards optimizing value, over purely price, in order to determine the total cost of acquisition and operating costs. in other words, the total cost of ownership (TOC).
To calculate TOC suppliers and businesses need data and insights. Procurement Analytics can provide these insights and further the growing symbiosis between businesses and suppliers.
Monitor supplier performance
Real-time business intelligence allows for easy access and data based decision making. Web-based dashboards and reports enable managers and procurement staff to easily analyze cost, quality and delivery performance by supplier. These analyses enable quick identification of the most efficient and reliable trading partners. They also provide data to support communication with suppliers. If in the unfortunate occurrence, a supplier has breached contract, for example, with untimely deliveries, you now have the data to support any related discourse. Even better, by utilizing data visualization best practices, you don’t have to review highly complicated spreadsheets to reach these conclusions. With data visualizations, you can view and compare supplier performance in minutes.
Increase transparency and ensure the optimal supplier is used
Data is crucial for transparent and productive negotiations between organizations and their suppliers. BI Dashboards are a great tool for effectively organizing this data and telling the appropriate data story. These dashboards show how suppliers are performing compared to other suppliers. They can easily show suppliers:
- How they are being evaluated?
- How they are performing against the criteria?
- How they are performing vis-à-vis their competitors?
- Is the data by which they are being measured accurate, unbiased and up-to-date?
Historically, it’s been difficult to learn about this data, leaving suppliers and companies in the dark. This led to decisions being made based on “gut feeling” and many times also led to strained relationships. Now, executives can take advantage of dashboard software and data analytics tools to provide actionable intelligence based on data. This intelligence can improve negotiations with suppliers. Improved procurement analytics can also expand what is included in supplier evaluations. In the past, the only tangible data point was lowest price. Currently though, decisions can be based on a wide range of significant metrics including price, quality of product and timely delivery.
Whether you are integrating business intelligence software into a formal strategic sourcing process or simply looking to pinpoint savings opportunities, you need dashboards. Business dashboards are effective tools for a systematic and fact-based approach to improving your organization's purchasing activities and optimizing your supply chain systems. They provide procurement staff with easy access across various platforms to real-time data. So, with all of this in mind, get out of the weeds and save money with business intelligence for procurement.