How Smart Companies Are Bringing Big Data to Procurement
Procurement has come a long way from the “materials men” of the industrial revolution.
What was once considered a transactional function carried out by clerical workers has morphed into a transformative one.
Today’s procurement pro is part data analyst and part relationship-builder. They’re able to make strategic decisions about how their company spends the largest share of its budget, and they’ve got big data to thank for it.
In this article, we’ll take a look at the key benefits (plus a few challenges) of bringing big data into the procurement strategy.
A Boost for Forecasting
One of the biggest benefits of big data, regardless of industry, is that accurate forecasting makes everything so much easier and less time-consuming. Procurement’s main role is to obtain the goods and services needed to keep your business running smoothly, and big data helps you achieve this goal as efficiently as possible.
It might seem straightforward, but in reality, this process is a lot more strategic than simply shopping on behalf of the company.
Global regulations are constantly changing and supplier risk factors—ranging from market swings to wars, climate change, and shortages—can severely handicap your business if you’re not careful.
With all that in mind, it’s clear that big data and procurement are a natural fit. In fact, supply chain success depends on bringing together data sets from multiple sources.
We’re talking contract data, performance metrics, and market insights coming together to reduce risks and increase profits. Deloitte’s 2018 Chief Procurement Officer Survey found that only 3% of respondents felt that their organization had the capabilities to maximize digital procurement strategies.
Budgeting and Cost SavingsFar too many procurement organizations don't do a great job when it comes to spotting the savings opportunities within their supplier network. Click To Tweet
Over time, too many missed opportunities impact your budgets and hinder your ability to grow.
The ability to combine, report and analyze data across systems, using both internal and external sources, can transform how you do business.
Spend Matters put it well, noting that the goal is to “get better at explaining the unexplainable.”
What they mean by “unexplainable” is anything that falls outside of what’s expected. That means you’re watching for patterns that suggest a new trend or shift. It could be declining supplier performance or a subtle increase in freight costs.
Or you might realize that your dealings with a consistently late or unresponsive supplier have resulted in delays, with your end customers receiving their products late.
The challenge here lies in gaining a deeper understanding of which factors are directly linked to opportunities and risks.
Beyond that, you’ll need to understand what happens when any one variable breaks down.
What happens if you need to order from a different supplier at the last minute? How much will a slightly higher per-unit cost impact your budget? If it’s significant, will you lower costs in other areas or take a temporary hit?
Big Data solutions can certainly make all of these “what ifs” easier to map. However, no matter how much you spend on technology, organizations still need to know how to interpret data if they want to remain competitive.
Big Data Brings a Better Approach to Sourcing
In the past, many organizations felt that it was “good enough” to award contracts to the lowest bidder. While the unit price is important, savvy teams know that there’s a lot more to consider.
By benchmarking, collecting, and monitoring vendor performance alongside current market pricing and risk assessments, procurement can base their decisions on actual evidence, not some sales pitch or commitment to a long-standing arrangement.
Our new Supplier Portal is one example of how you can easily track supplier performance metrics and any documents related to those relationships. This includes contracts and price sheets, as well as shipping and carrier data.
Keep in mind that transformation takes time. This graphic from McKinsey paints a picture of how your sourcing strategy might progress over the next few years:
In a procurement context, compliance is all about making sure that the organization meets all predetermined rules, both in terms of regulations and the terms of your contracts.
Compliance typically includes the percentage of spend on a given contract, as well as supplier performance metrics, and how well everyone in the organization sticks to the controls laid out by procurement.
Within the procurement department, you can make sure that your team follows sourcing guidelines or that AP pays your vendors on time. However, the challenge is magnified when you factor in every department in a large company.
Data has made compliance far easier to achieve than it has been in the past. Teams now have the tools needed to answer the following questions, measuring their ability to stick to budget and meet contract terms while monitoring supplier performance.
- What percentage of company spend goes toward procurement?
- How much of your spend is managed through contracts?
- Is the organization hitting goals and following best practices?
- Does the organization meet on-time payment standards?
- Are there opportunities to save with strategic vendor partnerships?
- Are there departments or categories that don’t meet compliance standards?
The key to managing compliance lies in the ability to add controls—like, say, controlling which vendors you order from and tracking everything using cloud-based tools. When you put that barrier between employees and unapproved vendors, you’ll cut down on rogue spending.
With big data comes an increased ability to monitor and manage supplier behavior. According to Deloitte’s 2018 Chief Procurement Officer Survey, 65% of procurement leaders say that they have limited visibility into their supply chain. Respondents reported they could not see past their first tier of suppliers.
According to an earlier report from SCM World, risk management hinges on upstream visibility; in other words, procurement should be able to track their supply chain beyond the second tier. This allows procurement leaders to spot risk factors like raw material shortages or potential shipping disruptions early enough to change direction if needed.
As of 2016, SCM reported that procurement pros felt less concerned about the risks facing their supply chain than in the past, suggesting that access to data is improving transparency.
However, if you look at the graphic below, you’ll notice that regardless of transparency, risks are everywhere.
Visibility into Indirect Spend
Procurement deals with these huge volumes of data about potential risk factors every day.
But the real challenge lies in understanding how that data lines up with the KPIs that signal success.
Ideally, you’d be able to review your PO history, accounts payable systems, as well as forecasts, budgets, and supplier details in one central hub.
Now that cloud-based SaaS tools are the norm and tearing down silos has almost become a cliche, unifying disparate data sets has never been more achievable.
As such, there’s no excuse for procurement teams to skip out on big-picture reporting. Take our software, for example.
Users can set budgets by department or project and closely track all spending activities in real-time. They also have the capability to sync spending activity to other programs like their ERP and accounting software, so everyone from procurement to accounting to the C-Suite, sales, and marketing can all get on the same page.
With that said, when it comes to fighting issues like indirect spend, one of the biggest challenges is getting everyone up to speed.
Procurement leaders need to know what data is needed, what tools can gather and analyze that data, and from there, be prepared to train internal stakeholders on these new processes.
Unfortunately, gaining total spend visibility isn’t always easy. According to McKinsey, the process involves way more than taking data from various systems and comparing the results to the initial budget.
It also involves a ton of data cleaning and translation. Meaning, if you’re working with multiple ERP systems (which happens in larger companies), accounting tools, and other pieces of software, you can’t just pool the data and analyze it without taking steps to integrate the different sources.
Big data is changing procurement on the whole. However, you don’t need to have a head for facts and figures or a budget rivaling Amazon’s to make data-driven decisions. ProcurementExpress.com is an affordable, approachable solution that any business can use to manage spend, speed up the purchase order process, and regain control over your finances.
Sign-up for a free demo to see just how easy digital transformation can be.