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3 Reasons Procurement Can Immediately Benefit From Reviewing Its Approach To Spend Analytics

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We are increasingly living and doing business in a data-driven environment. This trend has affected the procurement sector as much as, or in some cases even more so, than any other business activity, and has brought with it tremendous opportunities for increased efficiency.

Vast amounts of information about suppliers, commodities and purchasing activities are now available via digital sources, both within companies and from external service providers. However, there is generally very little or no merging of these information sources with procurement analytics and management systems. If an integrated approach to all of this data and internal systems is taken, it will deliver automated, high-quality insights in the following three areas critical to any procurement function.

1. Supplier Intelligence

In the past, procurement professionals were often required to manage supplier relationships based on their knowledge and understanding of their businesses, and most took great pride in having this insight.

At the time of establishing a new supplier relationship, procurement and financial professionals usually investigate and perform due diligence checks. However, many businesses now deal with far more suppliers than ever before, and these suppliers may well be located far away from the company, often in a different country.

This makes it very difficult for procurement professionals to manage supplier relationships based on their personal knowledge and even keep up with details about the current status and potential risks and problems of each supplier’s business. For this reason, many companies are finding it useful to make use of external, often web-based, services that track and update information on supplier activities, governance, reputation and financial health.

Few companies actually merge this external market information with their internal spend data to derive better insight. Doing so would allow companies to assess supplier risk as part of all procurement decisions. An external data-driven approach to supplier monitoring means that significant supplier events — such as a quality, compliance issue or liquidity crisis — are automatically surfaced to the appropriate business owner for rapid response. Further, by enriching supplier information, executives can see a complete picture of their company’s exposure to geopolitical risks and create fact-based continuity plans. Finally, the latest developments in mergers and acquisitions can be leveraged with full visibility to increase savings opportunities.

2. Commodity Price Monitoring & Predictive Modeling

Tracking the price of commodities is not a new practice, and price-tracking services have been widely used by procurement professionals over the last few years. However, most of these services treat pricing information as a separate entity, when combining it with predictive data modeling and spend data would make it a far more powerful tool.

Procurement professionals using this type of combined data would be able to accurately predict spend values over a given time frame and be able to have the latest overall cost of goods and services at their fingertips, making them more efficient and giving them a major competitive advantage.

Having the right information easily available in real time allows for far better cost and budget planning, helps to identify and prevent overspending and gives sourcing managers significant bargaining power when negotiating with suppliers.

 3. Tail Spend Management

Many sourcing managers across industries still rely on using manual analytics. Although not advisable, this practice can be made to work when the total purchasing budget handled is small or made up of relatively few items and categories, or when one is only focusing on a small, selected portion of the company’s overall spend.

However, when it becomes necessary for the organization to analyze more spend categories, it can either assign more manpower to the task (which may be hard to achieve and justify from a financial and operational perspective) or implement an automated spend analytics system.

Using an automated spend analytics system:

  • Allows sourcing managers to free up some of their time, allowing them to effectively manage more spend, and
  • Provides sourcing managers with factual information to use in discussions with colleagues and negotiations with suppliers.

Using technological solutions and applying data science has become so vital in the modern marketplace that using them properly gives businesses a major competitive advantage. This makes it possible for senior procurement professionals to sell the concept internally and get the go-ahead to implement spend analytics tools and programs that save the business money.

While it may not always be logical or practical to apply the same principles and depth of effort to tail spend purchases as top-level, strategic spend items, optimizing and better managing sourcing in the “tail spend” categories can still lead to significant cost savings. In order to do this, though, sourcing managers need to learn to rely less on their expertise and experience and rely more on analytics. This will allow them to react quickly and optimize tail spend wherever it makes sense — where the potential cost saving exceeds the cost of implementing and using a spend analytics system (including the manpower cost of utilizing the system, although this is usually far lower than the real costs incurred by allowing sourcing managers to perform analysis exercises manually).

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