Also note that data extraction, even from internal sources, is a complicated task that requires significant time, effort, and investment. Procurement activities generate vast amounts of information. Now, the fun part. If they arent up to par, investigate potential new suppliers who may be better suited to serve the business. Data is everywhere, scattered all around in various formats. Building and maintaining it is also the task of data engineers. Forecasting demand, predicting price fluctuations, and understanding market trends would allow you to identify opportunities for savings and process improvements, as well as create accurate budgets and effective strategy. If the answer to any of these questions is regularly a no, youll need to enforce terms and conditions and possibly look elsewhere in the future. vendor address that looks like residential address. To maintain these varied, and sometimes opposing goals, the procurement department must have access to data that can be used to make smart decisions quickly and effectively in an ever-changing environment. After all, suppliers are more likely to improve service, pricing, and performance if they have a history with a buyer. Its a company overhead, so if its value is high, look for improvement opportunities (such as perfecting your inventory planning or optimizing your inventory management activities). It can increase transparency and speed, giving decision-makers crucial insights for determining when, where, and how to act. Risk assessment, supplier evaluation, and strategic decision-making based on huge amounts of historic and current data would be most accurate and lead to maximum business efficiency. And its not only about text recognition, clause classification, and search functionality. is extremely important because it measures how well suppliers are fulfilling the terms and conditions of the contract. When data are stranded in siloes such as these, companies cannot create a single source of truth. unusually large transactions or invoice amounts (for example, there was 1 invoice in June and then 50 in July). If youve built a history with agile suppliers, youre likely to weather a supply chain storm with greater ease. PO accuracy refers to the number of correctly fulfilled POs, i.e., delivery of the right items at the right time. For example, you can discover the reduction of the market price for some items, while your supplier has a higher price in the catalogue. Great procurement procedures get those same goods at the lowest cost possible. KPIs are quantitative values that are used to measure success of a specific activity or to evaluate progress towards a business objective. Purchasing challenges. Whether a new or existing contract, it has to be thoroughly reviewed to ensure clear, unambiguous phrasing of all clauses and variations, compliance to current regulations, absence of hidden risks, pitfalls, or fees, and so on. Unfortunately, often procurement managers are the last to know if something goes wrong. Tapping unstructured data. Ideally, the decision-making process in procurement should also incorporate multiple perspectives, so that the company understands the full implications across the entire value chain. To analyze your procurement operations, you can use data from both internal and external sources. Similarly, if the procurement department identifies a cost-savings opportunity, top-performing companies ensure that the entire organization is able to track progress and course-correct if needed. Depending on your analytics maturity level, you can apply different techniques and get different results. However, today its much more than that. The less the difference, the better your procurement planning works. If you want to collect raw, unstructured data, youll most likely need a data lake. This aligns with additional survey findings, showing that two-thirds of organizations are planning to pursue cost reduction strategies post-COVID-19, compared to just one-third pre-COVID-19. Check a brief video explaining how demand forecasting works. Cost avoidance KPI refers to the soft savings or avoiding potential extra expenses in the future. To detect suspicious transactions, software scans documentation in search of. As you can see, strategic sourcing is fueled by data. The web browser you're using either doesn't support JavaScript, or it's being blocked. Another way to get high quality results is to implement a narrow focused software for each process, i.e., one for contract management, another one for supplier management, and so on. But before we dive in, consider reading about data engineering to get an idea of the main concepts and stages. It includes evaluating vendors, negotiating terms, managing contracts, etc. Its less obvious and harder to measure since they are not mentioned in the income statement (thats why they are often overlooked). This KPI also helps categorize your suppliers. That difference has financial and long-term relationship implications for executives to identify, quantify, and think through. Track the performance of all suppliers. Demand forecasting to define purchase amount, Tracking vendor-related KPIs to choose suppliers and monitor their performance, Contract management to review and audit agreements, Invoice and payment analytics to detect errors, compliance issues, and fraud, Procurement analytics software and its implementation approaches, Deloitte Global 2021 Chief Procurement Officer Survey, Analytics Maturity Model: Levels, Technologies, and Applications, Supply Chain Analytics: Opportunities in Data Analysis and Business Intelligence, Demand Forecasting Methods: Using Machine Learning to See the Future of Sales. Using data analytics, procurement can continually compare real-time pricing and availability from suppliersincorporating the history of order accuracy, transportation and logistics costs, and many additional variables. This helps eliminate maverick spending and increased costs. Procurement teams need to know how much is being spent, when, and where. The Engineering Department is at the heart of Celonis. In a recent webinar poll we conducted, procurement organizations reported seeing some improvement in their ability to react to disruptive events. Structured and unstructured data. In this way, youll get a list of compliant and non-compliant documents that need to be updated. According to the 2020 Report to the Nations, companies lose around 5 percent of revenue because of occupational fraud which equates to trillions of dollars at a global scale. Quite simply, too many of todays procurement and supply-chain functions are unnecessarily vulnerable. But companies face challenges in trying to implement it at scale, primarily because procurement data can be inherently messy and fragmented. And were getting to the next step. But that pragmatic practice can encourage workarounds that undermine the policys intent, such as large orders broken into smaller ones that are all below the thresholdthe $25,000 purchase that is broken into five $5,000 purchases, each one well below the $10,000 threshold. Start with a big picture analysis. Supplier defect rate = (Number of defective units / Total number of units tested)*100. A utility used this approach to consolidate procurements enterprise-resource-planning (ERP) data along with general-ledger and cost-item data. Please email us at: Coca-Cola: The people-first story of a digital transformation, Americans are embracing flexible workand they want more of it, The potential value of AIand how governments could look to capture it. Automation can significantly streamline the accounts payable (AP) process as it helps in reducing errors, reviewing consistency and compliance, increasing accuracy in matching an invoice with a purchase order (PO), and even offering self-invoicing solutions. Digitization has already greatly improved this business aspect, facilitating contract creation and editing, introducing e-signatures, increasing security, tracking expiration dates, and enabling convenient search and storage functionalities. Manual operations and/or outdated technology arent able to provide the required visibility and support your decisions. The key to strategic sourcing lies within current procurement data that can unlock even more benefits for your business. Determine what qualities are most important in your suppliers and engage them accordingly. The very best can also assist in data visualization, synthesizing immense amounts of data and delivering insights to decision-makers in a clear, intuitive format. Traditional statistical methods mainly use internal, historical data to predict trends within relatively stable markets. The main problem at this stage is the inability to see the full picture and make accurate forecasts to enable choosing the right partner, plan production or sales, and negotiate the best deal. To generate true, actionable insights, it is crucial to develop a single source of truth that incorporates all sources of relevant data, along the entire supply chain, and from all relevant functionsincluding sales, finance, product development, R&D, and operations (Exhibit 2). Strategic sourcing can also help a company secure the best pricing and service levels on goods through negotiated terms and examines the total cost of ownership of an item, not just the upfront cost of purchasing it. Learn the basics of process mining: what it is, how it works, and how to get started! There are a few more terms that wed like to clear up before we proceed to avoid miscommunication. All rights reserved. any matches in invoice information and employee details (address, name, phone number, etc.). It considers delivery time, number of delays, reaction time in case of issues, difference between the price paid and the price quoted, etc. Based on all this information, you can get way more accurate and reliable forecasts that consider more factors and scenarios. Procure-to-pay or purchase-to-pay (P2P) is a subdivision of S2P that excludes sourcing. When comparing COVID-19 to the global financial crisis of 200809, about half of organizations say they improved their spend visibility and were equipped to respond more effectively. It focuses on the immediate rewards instead of what's good for the business over the long term. If you dont have the data you need to do this kind of detailed strategic analysis, you may want to consider a procurement platform that provides you with the information you need to make your business stronger. That sort of resistance can undermine analytics initiatives right out of the gate. In a world in which uncertainty and disruption will likely remain a constant, procurement leaders will need to be even more resourceful to help their organizations manage cash, while limiting supply disruptions. (Deloitte 2020 CPO Flash Survey). This is a shame, because data offers much more potential. For procurement, the opportunity lies in combining internal procurement data assets with relevant external data assets to benchmark performance against peer groups based on real data and in real time. It can be calculated by subtracting maverick spend (which is out of your control) from the total approved spend budget. This one is crucial. For a fuller picture, you can also monitor communication time lags, price competitiveness, frequency of price changes, and other performance-related metrics. People are more likely to consume information thats been made digestible, so creating readable reports and user-friendly visualizations is important. How long are products likely to last? Finally, procurement organizations have major opportunities to automate processes and analyses. Such visibility can help you identify inefficiencies and find savings opportunities. This allows procurement to seek out opportunities to reduce spend, directly affecting the bottom line of the enterprise. Watch a short video about main data preparation steps and techniques. For example, theres always demand for major raw materials such as wood, coal, wheat, or steel and the fluctuations are mostly rather moderate. How long is it taking for products to get to the business from the time an order is placed? Emergency orders are often fulfilled at higher cost, so it might mean extra spending. PO accuracy = Number of correctly fulfilled POs / Total number of POs. Businesses need to understand what data to look at to create a strategic sourcing process. In a nutshell, to make use of available information, you have to check data quality first and then format it to make it consistent. PO cycle time refers to the PO lifecycle, i.e., from the order creation until its paid. What is procurement analytics and the opportunities it offers? However, they are less related to operational efficiency and strategic management, so well not cover them here. Cost reduction KPI is measured by comparing the old and current cost for the purchased goods and services. Purchase on time and budget = Number of correctly fulfilled orders / Total number of orders. In a competitive environment, the supply chain is constantly pressed to become more cost-effective. Was the right quantity delivered? So, implementing data aggregation and price forecasting techniques that collect the market data from various external sources (for example, you can connect to such information providers as Beroe to monitor market fluctuations) will allow you to get accurate price predictions that you can use to plan your procurement strategy and create budgets. Develop portfolios about potential suppliers, including their strengths and weaknesses. Inventory turnover ratio measures how fast your inventory is used or sold. We live in the era of big data, but many procurement organizations rely on internal views of spend. Procurement spend analytics helps assess your processes and find optimal answers to such business questions as. Its usually stated as a percentage or in terms of defects per million. If you as a business owner or manager dont know whats going on within your organization, you arent able to timely take measures in case of unplanned situations (and those are sure to happen, no doubts). Supplier availability estimates the capacity of your partner to fulfill your needs, including emergency requests. The list of terms used to describe the vast quantities of information being generated by organizationsand the methods for using that dataseems to be proliferating as quickly as the data itself. By synthesizing data related to pricing and compliance risk, geographical risk, and preventative measures, procurement teams can better anticipate future problems in their supply chain. ), and can be easily arranged in tables, a data warehouse is your choice. However, they are not industry-specific and might lack procurement-related metrics or be unable to provide the necessary granularity or analysis. A given products purchase order could be stored in the companys procure-to-pay system, while the invoice is stored in the financial system and the referring contract is stored in the customer-relationship management (CRM) system. Total cost of ownership is also called a long-term price since it takes into account both direct and indirect procurement spend, i.e., the purchase price and any related operating expenses. Dark or maverick spending refers to purchases made outside the defined procurement procedure without following pre-established policies. When securing long-term contracts, you have to be sure that youre not missing out on possible savings. So, this group of KPIs show how effective your cost and procurement strategies are and what the impact on the companys bottom line is. COVID-19 exacerbated these challenges, even as it made an even stronger case for the analytics-driven future that companies have sought to achieve for years. Its a fertile soil for all kinds of fraud and corruption schemes. Here are the principal KPIs that will allow you to evaluate and monitor your suppliers performance. The company also achieved a 90% supplier reduction and 10% hard dollar savings in overall costs. So tracking inventory metrics can also show how effective your procurement management is. In using data analytics to build a predictive model, a company can anticipate fluctuations in demand and adjust available supply accordingly., 3. At this stage, theres no way you can avoid building a machine learning (ML) infrastructure and engaging ML engineers to process all those data masses. Using existing data to achieve better prices, faster order fulfillment, and automated processing can help a procurement team to control both direct and indirect spend, adding real assets to the bottom line of the enterprise. Did the right items go to the correct location? Procurement analytics software. Except for unintentional yet often inevitable errors caused by manual handling (such as duplicate or unmatched invoices), multiple fraud schemes exist at this stage. Considering that a typical fraud case lasts 14 months before its detected, causing an average loss of $8,300 per month Well, the sooner you find out, the less money you lose (thanks, Captain Obvious). Designed and built as a part of your business workflow, its tailored to meet the unique needs of your procurement process. You can read more about why this metric matters here. For example, often negotiated prices depend on the amount of future purchases (the more you buy the bigger discount you can get). Lets briefly describe them at a high level before we get into more detail. Our Sales Department helps our customers unlock their Execution Capacity. In this way, they improve compliance and generate savings by bundling those orders and (re-) negotiating with suppliers. Also, today advanced analytical platforms are capable of conducting accurate risk assessment. According to the Deloitte Global 2021 Chief Procurement Officer Survey, operational efficiency is the priority for 78 percent of respondents, closely followed by cost reduction (76.4 percent) and digital transformation (76.1 percent). Strategic sourcing can eliminate spending outside of contracted suppliers. When these sources are not linked to each other, executives are hard-pressed to form an accurate understanding of the entire data situation. Throughout your cooperation, you also have to track such important KPIs as, Supplier assessment dashboard. Reveal and fix hidden inefficiencies, fast. Its usually used to adjust existing predictions within fast-changing markets such as innovative technology. It shows the part of unplanned orders, usually because of inventory shortages. Source: Deutz. Custom solution. All this can help you avoid risks, save time, find opportunities (such as unused credit limits), and cut costs (not to mention reducing your lawyers workload). That will make you confident you made the right choice or give you a reason to look for a different vendor. Utilizing analytical insights, Orbweaver points out, electronic component purchasing officers can be confident that they are always receiving the highest-quality product available at the best price., 4. The people who use these insights to make the most dramatic improvements in performance can become change agents whose stories help inspire the rest of the organization. Consider a chemical company that needs specific raw materials for its production processes. Differentiate with stellar customer experience. The procurement department that is unprepared for a change in demand will be unable to take advantage of the best prices available and may put a strain on supplier relationships struggling to meet short-term requirements. At basic stages of analytical development, such dashboards are included in ERP or other business systems in use, while at higher levels, various BI tools are implemented as part of a data pipeline to visualize analytics results. Deep, category-level content and experience are also notoriously difficult for many companies to develop, retain, and share consistently. You cant make contracts and build delivery schedules effectively if you dont know future demand, production or sales volumes, and the amount of goods you need. But those data give only a partial picture of whats happening. Quantify how much you stand to gain by finding and fixing the inefficiencies in your processes. Lets take a closer look at the opportunities to shine a light in the dark corners. Good procurement procedures help building operators and contractors get the materials they need to keep a commercial building or multifamily property running in a timely and efficient fashion. The objective is to ensure not only that the promised improvements actually occur, but also that they dont trigger negative ramifications elsewhere in the organization. In case you want to grow your analytical maturity level and tackle big data, youll need a custom developed data architecture. And every stage holds an array of challenges and uncertainties, kind of like walking blindfolded on a tightrope. A close look at your business' data will guide the implementation of strategic sourcing into current procurement processes. Not only does it reduce the cost of materials, it also helps building owners and managers ensure strong long-term supplier relations and avoid disruption to the supply chain in the future. Besides giving you knowledge and confidence needed for effective negotiation, its also a basis for getting favorable terms. However, the benefits are truly tangible. Supplier defect rate measures the quality of items provided by a particular vendor. Check our article about analytics maturity to identify what stage your companys at. The market is constantly changing due to a myriad of factors. This may include vendor consolidation or changing the level of open market transactions. How GE Healthcare eliminated incorrect payments in Accounts Payable and increased free cash flow by $1.3 billion. Procurement includes direct and indirect spend. In addition to these main groups of procurement KPIs, there are also such categories as employee-related KPIs and sustainability metrics. Data analytics can also help a procurement team to conduct in-depth and comprehensive vendor evaluations, taking into account disparate elements such as on-time delivery, quality of goods and services, and cost. Such data will help you choose the best and most reliable suppliers as well as negotiate future contracts. ERP or other business management software such as a. accounting system (financial information, transaction history, etc.). Inventory turnover ratio = Total cost of inventory used or sold / Average value of inventory. Advanced tools can also compare your documentation to the latest legal and regulatory requirements to ensure compliance (or identify gaps). So, knowing your future demand level, youll be able to secure the best deal for your company. You can discover documents that lack wording consistency or predefined approved terminology, contain unclear clauses, or hold variation risks for you. As a result, procurement analytics can deliver real value by taming complexity, increasing transparency, and giving managers the insights they need to make better decisions. Its difficult to predict the future, but businesses cant be successful without accurate planning. Also known as predictive analytics, its about discovering hidden patterns and dependencies, forecasting future events, and supporting decisions with data. Yes, I understand and agree to the Privacy Policy. When you work with select suppliers chosenat least in partfor their ability to pivot, it makes it easier to avoid disruptions to your supply chain. So, how can you grasp the benefits of analytics for your procurement department? It can show the effectiveness of your inventory planning and management efforts. Now, lets proceed to the next step. Meanwhile, machine learning (ML) techniques are capable of processing a wide range of both historical and current data from multiple external and internal sources. The most obvious benefit is the cost-saving associated with strategic sourcing. Procurement ROI = Annual cost savings / Annual procurement cost. So, what can you do? Supplier lead time = Delivery time Order time. Dont just migrate systems. Yet companies can take substantial steps improve their ability to respond to internal and external obstaclesespecially by staying more up to date with economic and technological developments that help create a stronger, more resilient organization. It shows how reliable and responsive the supplier is. Cost savings is one of the main objectives of your procurement management. Delays from suppliers may inconvenience a building owner or manager, but it could also end up becoming a health and safety issue. Your procurement team is central to the success of the entire company. Make sure suppliers are adhering to terms and conditions and providing the optimum level of service. Strategic sourcing focuses on finding the best fit vendors as opposed to building partnerships based solely on the lowest price. As youre informed about the change, you can approach your partner, discuss the discount, and avoid unnecessary spending. This paradigm shift may be difficult to master, Spend Matters notes, but its consequences are nothing less than revolutionary., 5. By submitting this form, you confirm that you agree to the storing and processing of your personal data by Celonis as described in our, Process Mining For Dummies, Celonis Special Edition, Using real-time data in their analytics and intelligent automation. Its the collective measure of your partners performance that helps to compare them to each other. Theres a concept known as demand sensing that also employs machine learning to analyze current fluctuations in market conditions and consumer behavior. Surges in demand could result from cyclical factors, and occur on a fairly predictable basis. Emergency purchase ratio is a reverse metric. Managing documentation properly is crucial for accurate tax handling. Diagnostic stage: As businesses realize the value of data, they start collecting more information and applying more advanced analytics methods and approaches. Consider applying this approach if you work in a less stable environment, e.g., the automotive market, fashion, or food products. Purchasing refers to actually buying the goods, i.e., issuing purchase orders (POs), receiving items, and inspecting them.