Procurement analytics is the method through which companies collect, extract, audit, and evaluate the data obtained from the procurement process so purchasing processes can be improved. The data collected through procurement analytics is converted into meaningful insights that can help in the decision-making process.
The data is usually obtained and collected with the help of e-Procurement solutions and software. After the collection of the data, it is classified as per the standard followed by the company or the user-defined taxonomies. The data is then displayed on the dashboard or distributed among other software and intelligence tools as per the classification.
With the need for businesses to view and evaluate their procurement spend, the need for procurement analysis has risen. Today, it has evolved into a separate entity that requires its own specialized solutions and different types of automation software.
The process of analyzing information provided through procurement analytics is different from data visualization. In the case of procurement analysis, the essential aspect is that the insights obtained are timely, accurate, and actionable.
Thus, procurement analytics should contribute to the enhancement of the bottom line of the company. Using these insights, the organization can make decisions that are supported by the data, thereby ensuring effective management of purchasing decisions and supplier relationships.
Types of Procurement Analytics
Analytics that are obtained from procurement are varied in their nature and aspects. Procurement analytics are divided into the following four types to help the businesses better understand the nature of the analytics and how past performances can be used to make better decisions.
- Descriptive Analytics
When the past performance is evaluated, recounted, and reported from an informed perspective, the study describes why the event occurred in the past.
- Diagnostic Analytics
Diagnostic analytics are those that are derived from the history of things. It evaluates the cause of problems that occurred during the procurement process and evaluates the situation to find the nature of the problem. Under these analytics, the aim of studying the data is to better understand the events that occurred in the past.
- Predictive Analytics
The trends and patterns that are observed in the data collected from the past procurement processes are recorded and evaluated so that future procurement fulfillment can be forecasted and predicted. Thus, predictive analytics helps in determining the upcoming procurement performance.
- Prescriptive Analytics
Prescriptive analytics deals with the adoption of predictive models. The models are obtained from the procurement data that can enhance the process of decision-making.
Why is Analytics an Essential Part of Procurement?
It was previously considered that analytics derived from the procurement process only deals with spend analysis. However, with the growth of procurement analytics, it was found that the data obtained from such analytics cover an expansive range of activities from strategic sourcing to procure-to-pay process and category management.
The following reasons have established the importance and influence of procurement analytics in the decision-making process of businesses.
- Category Management
Procurement analytics allows the managers to identify the opportunities where they can save and optimize the category management. With the help of the data obtained from the analytics, the suppliers can be categorized into different segments and prioritized according to the needs of the business. Giving space for innovation in the category management system and helps to address risks.
- Strategic Sourcing
Strategies should always be based on data to ensure that they are accurate and provide measurable results. Procurement analytics can aid in the process of strategic sourcing by identifying the most suitable and profitable time and area when the sourcing events can be carried out. The data can help point to the best time when the request for proposal can be made to the supplier.
Procurement analytics also helps in evaluating the suppliers that should be included in the future or current sourcing project. Analytics provide information such as the supplier’s quality of products and services, risk positions, and other such aspects.
- Contract Management
Procurement analytics can help businesses enhance the value of the contract lifecycle by enabling better management of all the contracts the company is engaged in. Analytics can improve the expanse of the contract and improve the terms that are mentioned in it. Also, the data obtained can be used to identify the spaces in the contract which can be renegotiated and at what time.
The managers can better outline the timeline of procure-to-pay to identify the time when the company needs to release the purchase order. It also helps in the improvement of the management of payment terms. The analytics can help identify improper payments and rebate opportunities that occur in the purchase order cycle. The data can also help in the reduction of fraud during the payment process.
The contribution of procurement analytics in corporate social responsibility has also been established with the growth of analytics and the accuracy of insights obtained from this data. With the evaluation of analytics, businesses can understand their impact on the environment and society, thereby enabling them to make better and more sustainable decisions.
Sources of Procurement Data
Various financial processes encompass a single business unit. The processes vary based on the type of industry, the region where the business is based and working, along with various other factors. Such variations cause the development of a varied data landscape that can complicate the process of collecting and analyzing the data related to procurement inside a business unit. The data analysts have divided the source of data into the following two broad categories.
- Internal Data Assets
The procurement analytics can be obtained from the data assets that are originated and related to the corporate itself. Various applications such as enterprise planning, accounting software, strategic sourcing software, etc., can be used to acquire the data. For the procurement analytics, the data can be obtained from the suppliers as well as the data recorded in the general ledger and financial records that are maintained by the business unit.
- External Data Assets
The data sources that are not hosted by the company and are not available in the financial databases managed by the business unit are referred to as external data assets. Public systems such as information that is readily available on the internet can be classified as external data assets. Data such as information regarding the suppliers, prices of the goods and services, currencies, etc., are obtained through external assets.
Along with that, third-party sources also come under external data assets such as supplier risk profiles, credit ratings, industry codes of the supplier, etc.
How to get more Value from Procurement Analytics?
The aspects and variables related to the procurement process create an extensive amount of data that an employee cannot possibly manage. However, the models used for procurement analytics can simplify this data such that the businesses, managers, and suppliers can understand and implement it much easier.
With the help of procurement analytics, you can not only quantify and evaluate the cost drivers but also find new insights that can be implemented in the next business plan to better trace the upcoming procurement cycle. Following are the three areas where the advanced statistics obtained from procurement analytics can be implemented to gather better results for the business.
Negotiations can be more effective when they are based on the facts that are derived from previous purchases. The algorithm that the businesses can develop with the help of procurement analytics can deduce various factors that affect the prices of products and services that are acquired by the company. The business can analyze these factors with the help of the information to identify the product vendors and suppliers.
The procurement analytics can also create clusters of data highlights such as the average price of a particular supplier, the quality offered, a relationship maintained, etc. The quantitative base facts thus obtained can help the business negotiations with the supplier based on the historical data.
- Vendor Management
The sector of vendor management is purely based on the relationship that is developed between the vendor and the business. Therefore, it becomes important that the decisions that are related to vendor management are not based on feelings. Rather, the decision-making process should be driven with the help of the data obtained from procurement analytics.
With the help of the advanced algorithm used under the procurement analytics, the vendor performance can be isolated within a cluster of applicable and suitable vendors. This method of isolation can help eliminate the biases and personal feelings during the process of evaluation.
Based on the factors that drive the cost of products and services, the performance of each vendor can be evaluated and rated so that the decision can be made based on the score obtained by the vendor on the scale set by the business manager.
- Yearly planning
The data provided from the procurement analytics can be especially helpful to support the decisions that are made during the formulation of a comprehensive sourcing strategy. Based on the analytics, the vendors can be classified as per the prices offered by them, quality of their services, speed of delivery, etc. Along with this, aspects are measured through which the cost of products and services can be minimized.
The managers can explore new clusters so that they can acquire new sources for their products and services. A model can be created to analyze the vendor performance such that the procurement team can make data-driven decisions.
Different Examples of Procurement Analytics
As the businesses differ based on their location, industry, and working methods, the ways that procurement analytics can be used can also vary from one company to another. There can be various procurement analytics applications based on the business requirements and the data they need to formulate their next business plan. Here are some of the common examples of procurement analytics that can be observed in various forms and sizes of businesses.
- Spend Analytics
Spend analytics includes the analysis of the resources that are spent throughout the procurement process. The data is obtained from both external and internal data sources.
- Contract Analytics
Contract analytics deals with the data that is related to the contracts that are created or signed by the company within a procurement cycle. The metadata, payment terms, expiration dates, and other components of the contracts provided to the suppliers are analyzed to extract relevant data.
- Supplier Analytics
Supplier analytics refers to the performance of a single supplier. The analysis is done based on various predetermined factors. The analytics help to compare the pros and cons of various suppliers. It also helps the business to maintain sustainability and diversity in the suppliers procured by them. Supplier analytics can also be used for the analysis of supplier risk and base.
- Savings Lifecycle Analytics
The savings projects are evaluated to obtain the savings lifecycle analytics. Along with the aspects of such projects, their impact on the business’s bottom line is also recorded.
- Spend Forecasting
The procurement analytics that deals with the spend data and how it may affect the profitability of a project or the company is classified as spend forecasting.
- Procurement Benchmarking
The analytics that help to compare the performance of the organization with the analytics of the peers or market benchmarks comes under procurement benchmarking.
Procurement analytics can prove to be extremely beneficial to the operational efficiency of the complete supplier management lifecycle of a business. It can help manage the supplier risks while also providing opportunities to adopt new strategies based on the historical procurement data. The method can efficiently improve cash flow and reduce the costs of measuring the performance of the business and the savings projects.