Gone are the days of manual purchasing processes and guesswork. Global expansion and increasingly complex supply chains make digitalization essential. This is especially true as procurement teams handle day-to-day purchasing and constantly collaborate with teams from other departments.
However, a lack of clarity on cost and long negotiation cycles entail time-consuming and opaque pricing. This is why we need a more efficient and transparent way to review contracts and plan future purchases.
Procurement analysis handles these challenges with data-driven insights and helps strategize, analyze spending, and maintain operational stability.
Read on about the fundamentals of analytics for procurement and the potential benefits for your company:
- What is procurement analytics?
- Why is analytics so important for procurement?
- Types of procurement analytics
- How to implement procurement analytics successfully
- Procurement metrics and KPIs to track
- Benefits of procurement analytics for businesses
- Challenges of procurement analytics
- Wrapping up
What is procurement analytics?
Procurement analytics is the practice of examining the data involved in the P2P process. In short, it helps extract and refine spending. Procurement or cost-based data includes purchase information, accounts payable, credit card expenditures, and other information related to finished products or services expenses.
Armed with interpreted procurement data analysis, organizations can identify trends, track performance, and predict future needs. In most cases, purchasing analysis results in more favorable supplier terms, robust risk control, and substantial cost savings.
Why is analytics so important for procurement?
Procurement analysis goes beyond simple spend analysis. In fact, it allows category managers to identify savings opportunities, segment and prioritize suppliers, identify sourcing potential, address supply risk opportunities, manage sustainability performance, develop supplier relationships, and facilitate innovation.
- Category Management
Analytics helps companies manage different procurement categories to prioritize and segment suppliers, find opportunities for savings, and improve sustainability efforts.
- Strategic Sourcing
Sourcing analytics evaluates supplier performance alongside market fluctuations to identify the best times for sourcing products and issuing RFPs, optimizing procurement strategies.
- Contract Management
Managing contracts can be complex. With analytics, organizations can receive reminders for contract renewals and renegotiations, get a clear view of the necessary terms, identify non-compliant spending, and take action to improve policy adherence.
- Source-to-Pay (S2P) Process
Purchasing analytics helps optimize payment terms and monitor purchase order cycles. It uncovers rebate opportunities, corrects payment errors, ensures accurate payments, and reduces fraud risks.
- Sustainability and CSR
With analytics, organizations can pinpoint gaps in any procurement practices and transition to more eco-friendly and sustainable sourcing.
- Risk Management
Analytics makes it easier to handle uncertainty. Companies can better manage risks and keep operations running smoothly by understanding the connections between price, supply, and other factors.
- Performance Measurement
Analytics helps businesses see the direct effect of procurement activities on your company’s financial health, improving performance tracking and financial reporting.
Note!
These are just a few ways procurement analysis can be used. Other procurement strategies are better forecasting spending and demand, assessing suppliers, managing contracts, reducing unapproved spending, evaluating supplier performance, etc.
Types of procurement analytics
Basically, there is no one-size-fits-all solution when it comes to analytics for procurement. It varies and depends on the purpose, from describing and diagnosing to predicting and prescribing.
- Descriptive analytics shows past events and hugely focuses on finding patterns.
- Diagnostic analytics examines causal relationships, the circumstances of events, and why they happened this way.
- Predictive analytics traces patterns and forecasts future trends.
- Prescriptive analytics helps procurement teams to map out goals, manage risks, and foresee future performance scenarios.
How to implement purchase analysis successfully: Step-by-step guide
Procurement analytics comprises various key pieces, each vital to the overall process. This guide will help you apply procurement analysis, gain actionable insights, optimize processes, and achieve strategic goals.
Define Objectives
Establish clear objectives first. Identify specific goals to reduce costs, improve supplier performance, or improve risk management. Well-defined objectives guide the focus of business analytics efforts and help measure success later on.
Evaluate Existing Processes
Assess the current procurement opportunity analysis process, data sources, and analytical capabilities. At this point, pinpoint challenges and opportunities for improvement. In the future, analytics strategy could align with organizational needs.
Collect and Integrate Data
Pull data from purchase orders, invoices, and supplier contracts. Make sure it’s accurate and organized. Then, combine info in one central system to get a complete view of business procurement operations.
Visualize Data
Create dashboards and reports that make the analyzed data easy to understand. Good visualizations help your team and stakeholders quickly spot trends in procurement opportunity analysis and make better decisions.
Set Key Performance Indicators (KPIs)
Pick KPIs that align with your goals to measure how well procurement analytics work. Common KPIs include cost savings, supplier quality, on-time delivery, and inventory turnover.
Evaluate Supplier Performance
Regularly assess suppliers based on price, quality, delivery, and risk factors. This helps build strong partnerships and ensures the organization chooses the best suppliers.
Test Analytics Solution
Before fully implementing the purchasing analysis, try it out in one department or for a specific project. Gather feedback, make adjustments, and fine-tune the approach based on what you learn in real use.
Metrics and KPIs to track analytics for procurement
Procurement KPIs are scorecards for any company, but not all data should be treated equally. Basically, metrics show how well your procurement team performs based on the company’s goals and objectives. When you focus on all relevant procurement KPIs, stakeholders can make better decisions with clear and actionable data. By tracking daily procurement cost analysis and comparing them to these KPIs, companies can identify areas to improve, save money, manage risk better, and benchmark themselves.
Some of the procurement data analysis KPIs you should have on the radar include:
- Spend Under Management (SUM) — the percentage of total organizational spending managed by the procurement team.
Why it’s important:
A higher SUM indicates better control over spending and improved negotiation leverage. Aim for at least 70-80% of total expenditure under management.
- Spend vs. Budget — the comparison of actual spending against budgeted amounts.
Why it’s important:
Tracks spending patterns to spot overspending or underspending, making financial planning easier. Aim to keep actual spending within a 5-10% range above or below the budgeted amount in the purchasing analysis to manage fluctuations and maintain budget controls effectively.
- Total Cost of Ownership (TCO) — provides a complete breakdown of expenses, factoring in acquisition, operation, maintenance, and disposal — not just the initial price.
Why it’s important:
For better investment decisions, regularly analyze TCO. Strategic sourcing can help organizations reduce TCO by 10-15%.
- Total Spend — the total amount spent on purchase analysis within a specific period.
Why it’s important:
Understanding total spending helps evaluate procurement efficiency and identify cost-reduction opportunities. - Cost Savings — the amount saved through effective procurement strategies compared to previous spending levels or baseline costs.
Why it’s important:
Directly impacts profitability and reflects the effectiveness of sourcing analytics. Organizations often target a minimum of 5-10% cost savings annually. - Cost Avoidance — the costs that are prevented through strategic decisions or negotiations that would have otherwise occurred.
Why it’s important:
Highlights the proactive steps driven by procurement analytics to control costs. Tracking cost avoidance can yield savings equivalent to about 3-5% of total Spend. - Inventory Turnover shows how often inventory is sold and replaced over time, indicating inventory management efficiency.
Why it’s important:
A high inventory turnover means your inventory management is effective, while a low turnover could indicate overstocking or products that aren’t selling quickly. Ideally, aim for an inventory turnover ratio of 5-10 times per year, though this can vary by industry.
Benefits of purchasing analytics for businesses
Procurement analytics doesn’t solely span the procurement team. From marketing to finance departments, various teams within organizations thrive on timely, accurate, and actionable business insights of purchase analysis. And a good one enables procurement to measure its contribution to the bottom line.
Procurement analytics helps procurement professionals describe, predict, and improve business performance. In fact, automation of repetitive tasks in procurement frees up time for strategic decision-making and supplier relationship management.
Other benefits include:
- Better forecasting and budget management
- Stronger risk management
- Improved quality control
- Performance benchmarking across categories, units, and countries
- Identification of opportunities to group purchases for greater efficiency and cost savings.
Challenges of procurement analytics
While procurement analysis is essential for a business, it is not always easy to implement. The enterprise has to overcome certain challenges, such as:
Manual operations
Manual procurement is riddled with data inconsistencies, loss of information, and no accountability for errors. For example, with purchase orders in shared spreadsheets, it’s not always clear who’s making the changes. Additionally, asking suppliers for info via email can be time-consuming and prone to human error. With modern automation solutions like PO systems, it’s getting easier every day.
Skill gap
Data analysis and business intelligence are not evergreen. Knowing how to use business intelligence tools for purchasing analysis and working with data visualization apps like Power BI and Tableau is an undeniably precious skill.
Mid-sized companies can strengthen their operations with AI and data analytics training. Meanwhile, larger firms might consider hiring a team of AI and ML developers. They could build custom data models from scratch, which could be a much more strategic investment.
Unstructured data
At the beginning of the journey into procurement analytics, your data will be messy and take time to make sense of. For example, when procurement is managed by multiple departments manually, document formats are often inconsistent.
Some organizations create templates and specify data entry and extraction workflows to solve the problem. To ensure better readability of information, consider implementing employee training alongside regular data reviews over time.
Lack of right tools
Choosing the right tools for procurement cost analysis can be tricky. Depending on transaction volume, industry, and competition, what works for one business might not be right for another. Using the wrong tools can lead to wasted time and money. Better choose a trusted analytics partner like Precoro to be sure the right technology is selected.
Budget
Small businesses may not have the budget of large multinational companies, but they still need to compete. Instead of building purchasing analytics from scratch, small companies can work with offshore providers to develop and customize tools. This gives them access to expert skills without the high costs of hiring and training new staff.
Larger organizations can benefit from Precoro, a cloud-based procurement platform that automates processes like purchase requisitions and RFP management, offering integration options that could yield 7% in annual savings.
FAQ
1. What is procurement analytics?
Procurement analytics refers to comparing and reviewing purchasing data. With data on accounts payable, credit card spending, and finished products or services, it helps to track buying trends, supplier issues, and risks.
2. What are the four types of procurement analysis?
The analytical toolkit for procurement professionals includes four types of analysis: descriptive, diagnostic, predictive, and prescriptive. Each serves a unique objective.
3. What are the procurement analysis steps?
To analyze purchasing patterns, procurement teams extract raw data. They then merge, clean, categorize, and enrich it. As a final step, they perform analysis and create visualizations.
4. What tools for procurement analytics do organizations use?
Organizations typically use ERP systems to centralize financial data and manage procurement processes. They opt for predictive analytics software to forecast future trends based on historical data. Finally, businesses turn to specialized procurement analytics platforms such as Precoro, Basware, or Coupa for effective procurement data analysis.
Wrapping up
Waiting for the perfect system or time to implement purchasing analytics will only delay progress. A study from NC State University found that executives need to work on building reliable purchasing analysis due to inadequate systems, and only some organizations have high data integrity across all units. The takeaway: build analytical insights with the data you have.
Procurement analytics can improve strategy, control, cost management, risk reduction, savings, and ROI. When used across departments and integrated into daily operations, purchasing analytics merges historical and real-time data to tackle complex issues like risk management, supply chain optimization, and demand forecasting.
Organizations using purchasing analysis effectively already see improved productivity, efficiency, and profitability.
Don’t fall behind.
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