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What is Procurement Analytics? Procurement Metrics and KPIs

  • Vrinda Mathur
  • Jun 14, 2022
What is Procurement Analytics? Procurement Metrics and KPIs title banner

For the professional procurement manager, procurement analytics is a critical procedure that is frequently overlooked. That will change today.

 

This post will teach you more about the significance of procurement analytics. You will grasp how the entire process works and how each of its indicators will determine how successful your procurement process is. You will grasp procurement analytics metrics, how to track procurement, and the different generations of procurement programs after reading this article.


 

What is Procurement Analytics?

 

Procurement analytics is the act of gathering and analyzing procurement data in order to provide useful insights and help in better corporate decision making. Examples range from historical procurement cost analysis reports to advanced analytics for forecasting and budgeting future decisions.

 

Procurement Analytics often entails gathering data from several source systems such as ERPs, categorizing data into standard or use-case specific taxonomies, and displaying data in a visualization dashboard or inside business intelligence tools.

 

The need of many firms to have a comprehensive perspective of procurement spend has resulted in the demand for procurement analytics. Procurement analytics, which was first given through one-time initiatives such as expenditure cubes, has expanded to include a variety of specialized solutions, dashboards, and forms of automation software.

 

There are several types of procurement analytics available, ranging from historical data from actual purchases to advanced algorithms that can forecast and set budgets for future purchases.

 

Previously, procurement analytics meant pages upon documents of data, generally produced in Microsoft Excel, and they all brought in reports on previous purchases made by the firm. AI-powered automated procurement analytics that can incorporate several data sources fuel the newest kind of procurement analytics.

 

Analytics is about much more than data visualization for many firms. One way to think about procurement analytics is to compare it to oil refining. It entails gathering, clearing, and enriching vast volumes of data from diverse systems in order to provide economic value. 

 

Procurement analytics adds value by providing more rapid, accurate, and actionable information, as well as the ability to quantify procurement's impact to the bottom line.

 

Also Read | Types of Data Visualization


 

Why Is Procurement Analytics Important?

 

When multibillion-dollar corporations invest millions of dollars on procurement expenditure analytics, you know the process is serious business.

 

A procurement manager can filter and recognize data that is critical to the success of his or her organization. Data such as supplier costs, research of historical and current spending, and even estimates for future procurements may all assist to create a seamless procurement process in the future.

 

Other key reasons for the importance of procurement analytics include:

 

  1. Analytics aid in contract management - Analytics alert the procurement manager about contracts that need to be renewed. Many procurement analytics solutions can assist you remember which contracts need to be renewed and which need to be terminated.

 

  1. Analytics aid in category management - Consider going over each supply and then checking each for inventory purposes. Procurement analytics may aid in category management by categorizing all supplies and information so that you or your category manager can easily examine data.

 

  1. Analytics aid in strategic sourcing - If you need to find a new supplier, modern procurement analytics tools can assist you. Because analytics data is maintained online, the application may conduct a search for prospective new suppliers for your business. Once you've chosen a supplier, analytics may offer you vital information such as pricing, supply quality, and so on.

 

  1. Analytics aid in the procure-to-pay process – Analytics can measure how much each procurement spends on the transactional side of procurement. Purchase order cycles and receipts can be measured by a procurement manager. The application can also assist the procurement manager in negotiating better payment conditions.

 

Analytics, which goes beyond simple expenditure analyses, is an essential component of processing purchase data. In practice, companies use analytics to optimize everything from sourcing to procure-to-pay procedures and category management. 

 

Managers may find savings possibilities, innovate, handle risk opportunities, and prioritize suppliers when analytics is applied effectively in procurement.

 

Also Read | What is Procurement Process? Advantages and Steps


 

Metrics and KPIs to be tracked for Procurement Analytics

 

Procurement metrics, often known as key performance indicators (KPIs), give quantitative values for businesses to use to monitor performance and steer procurement strategy. 

 

Metrics can also be used to compare procurement's performance to that of peers or to demonstrate procurement's contribution to company-wide objectives and targets.

 

One issue with procurement metrics is that they may be applied inconsistently within a procurement organization or have various meanings for different important stakeholders, such as finance.

 

Procurement metrics, often known as KPIs (key performance indicators), give quantitative indications that may be used to properly assess performance. The following are the top procurement indicators and KPIs that firms should monitor: 


KPI and Metrics to be tracked for Procurement Analysis :-1. Management of spending2. Rate of compliance3. Budget vs Spend4. Supplier deficit rate5. Total ownership cost6. Cost saving7. Cost Avoidance8. Lean time from supplier9. Payment period on average10. Contact Prediction

KPI and Metrics to be tracked for Procurement Analysis


 

  1. Management of Spending

 

The total amount of spend actively handled by the procurement organization is referred to as spend under management. This number can contain every location and category with which procurement is involved, or it can be separated into individual metrics representing each region or category. 

 

Expenditure under management is a critical measure for a procurement organization since it demonstrates maturity and spend control.

 

  1. Rate of Compliance

 

Compliance with contracts and policies is critical to ensuring legal security. If these compliance rates fall, they have the potential to increase indirect and maverick spending. A failsafe purchase contract with clearly stated penalties might help increase compliance.

 

  1. Budget vs. Spend

 

Spend vs. budget examines procurement spend realization and compares it to budgeted spend overall or by business unit. The core of expenditure management is tracking realized spend against budgets, which provides alignment with key stakeholders such as finance. When comparing expenditure to budget, success is assessed by budgeting accuracy rather than expense reduction.

 

  1. Supplier Defect Rate

 

The defect rate of a provider is used to assess the individual quality of a supplier. Measuring supplier failure rates and segmenting them by defect type will provide meaningful information regarding a supplier's dependability. Supplier defect rates are often expressed as faults per million.

 

Supplier defect rate = Number of substandard products/Total number of units tested

 

  1. Total Ownership Cost

 

Total cost of ownership (TCO) is the sum of all expenditure acquisitions. TCO considers all expenses spent during the procurement phase, including all direct and indirect costs of a product or system. 

 

It includes transaction fees, warehousing, and other incidental expenditures in addition to the purchase price. TCO is an important procurement indicator because it gives a cost foundation for the entire economic value of an investment.

 

  1. Cost Savings

 

The total amount of money saved is used to calculate cost savings. These are then subdivided by category for more precise measurement. They are monitored throughout time to assess how cost-cutting goals are reached. 

 

Cost reductions might be realized through aggregating expenditure across business divisions, entering into longer-term contracts or increasing competition, buying in bigger quantities, deploying vendor controlled inventory systems, standardizing and rationalizing spend, or a combination of these various levers.

 

  1. Cost Avoidance

 

The term "cost avoidance" refers to any efforts that help a corporation avoid incurring unavoidable additional expenditures. These expenses might be the result of inflation, shorter payment periods, currency changes, the need for extra products or services, and so on. 

 

Negotiating cost-cutting initiatives helps to keep future expenses low. Cost avoidance will not be shown in the budget or financial statements, but it can be used to evaluate procurement success.

 

  1. Lead time from the supplier

 

The length of time that elapses between the time a supplier receives an order and the time the order is dispatched is referred to as supplier lead time. This KPI is frequently quantified in terms of days. Vendor lead time begins with availability confirmation and ordering and concludes with product delivery.

 

Supplier lead time = Delivery time (delivery of goods and receipts) - Order time (PO acceptance)

 

  1. Payment Periods on Average

 

Average payment terms compute the average time (in days) that invoices are paid by considering every occurrence of payment term information. 

 

Improving or standardizing payment terms across and among suppliers is a critical step toward increasing working capital. While the increase in working capital will not be shown in financial statements, savings can be calculated using proxies such as the cost of borrowing.

 

  1. Contract Protection

 

The amount of spend covered by a contract is measured as contract coverage. Maverick buying, on the other hand, emphasizes the potential loss of value that comes when purchasing off-contract. 

 

Increasing the amount of spend covered by contracts (or procurement authorized purchase orders) can result in cost savings while lowering compliance risk.

 

Also Read | Top Growth Metrics to be Tracked


 

Challenges of Procurement Analytics

 

Exciting advances such as machine learning and artificial intelligence are frequently employed. However, its use is limited to specific procurement areas such as forecasting and contract management. To use data and gain valuable insights, you must overcome the following challenges of procurement analytics :

 

  1. The kind of data collection is customized- Customized data collection instruments, such as RFQs and RFPs, come in standardized forms that may be connected to SharePoint to gather data. 

 

Data collecting, on the other hand, proves to be a serious difficulty for businesses whose forms cannot be standardized. As a result, form and data collecting automation is becoming increasingly difficult.

 

  1. Internal Organizational Alignment on a Database- Key Internal reporting tasks vary depending on whether a product or category, a G/L account, or cost centers are used. Alignment throughout the organization is the solution to cost reductions, baseline expenditure, KPIs, and budgeting targets.

 

  1. Procurement Personnel Training Procurement- Technology is evolving at a rapid pace, altering the face of traditional supply chain procedures. Organizations may use procurement software to gather and analyze procurement expenditure, get visibility into spend areas, and achieve efficiency and cost reductions across the supply chain. 

 

Procurement professional training is critical to realizing the full potential of procurement analytics. Equipping procurement workers with the requisite skills is a critical problem for organizations trying to use procurement analytics.

 

  1. Personalized Data Analysis- An expert is required for insight production to reveal what is buried within data. Data analytics reveals hidden patterns in organized and unstructured data, giving insight into operational processes. 

 

Procurement experts with data analysis abilities will find data matching and data patterns that might otherwise go undetected.

 

Procurement analytics are required to acquire an overview of procurement costs. Although first accomplished through one-time initiatives such as spend cubes, analytics has developed to encompass a diverse spectrum of specialist solutions, automation tools, and dashboards.

 

With increasing trends in procurement procedures, procurement analytics is gaining traction. Despite the rising importance of data analytics in procurement processes, small and medium-sized businesses lack the capacity to maximize the data surrounding them.

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