Why you need to build your procurement analytics “muscle”
More than ever, companies need actionable insights from their data to improve performance in every part of the organization. It’s especially critical when it comes to the procurement organization. Procurement is rich with data that leading organizations are just now beginning to tap into to impact the business in ways it couldn’t before. For instance, they’re using new insights to create the most effective category plans; fair market pricing evaluation to maximize savings; analysis of consumption patterns to reduce overall spend; and analysis of preferred supplier compliance, contract usage, and buying channel distribution to address savings leakage.
By applying analytics to the millions of data points they already have, these leaders are equipped to make vastly better business decisions through intelligent augmentation and do so more quickly through intelligent automation. In turn, they’re increasing cost savings, decreasing operating costs, and reducing risk—something all companies are keen to do.
However, we’ve found procurement organizations that truly benefit from analytics are the exception, not the rule. Most still struggle to deploy more mature analytics capabilities to drive business impact. In fact, many are just beginning the analytics journey—which typically starts with descriptive analytics and progresses through diagnostic, predictive, and, finally, to prescriptive analytics (Figure 1). With each step in the journey, analytics become more sophisticated and difficult to perform. But the payoff in value delivered is commensurate with the increase in complexity.
Figure 1: The analytics journey
The impact and benefits of analytics
Companies can benefit in myriad ways from procurement analytics. In Figure 2, we illustrate some of the key areas across the source-to-pay process in which you can apply a combination of the four types of analytics to unlock valuable insights. But to use analytics effectively, you should first define and prioritize the problem you want to solve. Doing so will determine the kinds of data you need as well as the type of analytics required to generate the appropriate insights from that data—and, ultimately, the business impact you’re looking for. Let’s look at two such problems that procurement commonly grapples with—category intelligence and compliance—that the astute use of analytics can solve today.
Category intelligence: How do I drive additional savings and value across more of my spend?
Answering the category intelligence question involves leveraging historical information, infusing external information, and implementing predictive algorithms that enable you to become more strategic in those categories. For example, by using category and supplier analytics, intelligent augmentation can help you improve price points based on market knowledge, identify best-in-class suppliers, create negotiation strategies specific to suppliers, and identify and avoid risk through more effective supplier qualification. Furthermore, analytics-driven intelligent automation can help you reduce the effort and cost involved in assessing supplier responses and choosing the right suppliers. It can ingest supplier responses, normalize and enrich the data, and deliver scorecarding results direct to procurement—cutting what typically takes 40-plus hours of data manipulation and analysis by procurement resources to two hours of value-added supplier evaluation.
Figure 2: Using analytics to gain deep insights across the source-to-pay process
When combined, these analytics present a holistic view that marries internal data and external market information. By building on a strong foundation of descriptive analytics, category managers can begin to leverage diagnostic, predictive, and, eventually, prescriptive analytics to make fact-based sourcing decisions and more effectively execute their category sourcing strategies.
Predictive analytics is already providing value in labor rate prediction. Because wages are one of a typical company’s biggest spend categories, optimizing what the company pays for labor can have a significant impact on the bottom line. With analytics, you can leverage rich descriptive information on wages—i.e., market pricing information you have acquired from specific sourcing events or RFPs—integrated with external information such as labor statistics and census data. You can then use advanced analytics techniques to build an algorithm to predict fair market pricing for certain types of labor in specific markets in which you had no sourcing activity to date. In other words, analytics is actually creating data for you, giving you intelligence you can use when going out to bid in new markets.
Compliance: How do I increase my view of compliance to enhance savings and mitigate business risk?
Compliance insights is a key lever for organizations to increase control and reduce risk. Most organizations track some level of compliance; however, the definition of compliance varies for each business. In our experience, most have a very narrow view of compliance, and that means companies are leaving money on the table. In fact, a recent Accenture Operations study found that companies miss out on 30 percent of improvement opportunities by doing a poor job with compliance. A set of analytics that includes those in Figure 3 can provide a much broader view of compliance by monitoring and tracking it beyond just preferred suppliers.
With such analytics, you can gain visibility into whether your company’s actually using the deals it has in place with preferred suppliers. From there, you can expand into buying channel compliance—ensuring the requestor is using the right channels and contracts to minimize operating costs. Once you have these under control, you can start to dig into other areas in which you think there might be an issue—one of which is PO policy compliance. For instance, you may have a certain spend threshold—say, $5,000—above which a person needs a supervisor’s approval. Analytics can identify pat\terns in which employees may consistently be issuing requisitions for $4,990 to get around that policy—and call out those instances for investigation. Additionally, analytics can take a detailed look at invoice-line pricing and, if a contract is in place with that supplier, highlight any discrepancies between the contract and invoice price.
Figure 3: Key analytics that can drive greater compliance
Predictive analytics now enables procurement to proactively improve compliance by implementing analytical models during requisitioning and invoicing processes. Predictive models that analyze requisitions identify the correct buying channel, and predict the supply base and fair market value—thus enforcing preferred supplier selection and contract pricing where it exists. By inserting analytics upstream in the buying process, a company can prevent savings leakage and prevent risk from occurring.
Compliance analytics can pay off in sizable financial benefits—as one oil and gas company discovered. The company identified $200 million in noncompliant purchase order spend and, by subsequently eliminating loopholes, reduced spending by 10 percent. It also generated more than $300 million in benefits by detecting and recovering over-payments across 183 contracts.
It’s time to strengthen your analytics muscle
Millions of data points are locked within the typical procurement process. Some of it’s your own data, and some may come from external sources more commonly used in the category planning and sourcing process. But most of this data remains inaccessible and unused because procurement teams struggle with how to turn it into the actionable insights they need. That’s why it’s critical for companies to focus on increasing the maturity of their analytics capabilities.
If you haven’t yet begun the analytics journey, now’s the time to start. If you’re already on your way, it’s time to consider what you need to do to move to the next level. Regardless of where you are, strengthening your analytics muscle will help you dramatically boost procurement’s performance and enhance the organization’s strategic impact on the business.