How to Decide If Your Business Needs Procurement Analytics
The data in your procurement function is one of the most powerful tools you have for securing better pricing and greater efficiency. But you don’t need an elaborate analytics system to use it.
In many cases, small and medium-sized businesses can strike the right balance between budgetary control and ease of use with a next-generation procurement platform. Top platform options provide all the reporting you need while centralizing purchasing in one place for better visibility at every transaction stage.
This article covers the basics of procurement analytics, the best data sources to extract when compiling purchasing data for research, and how a procurement platform can help you gain insights and control in one place.
Download the free ebook: The Complete Guide to Procurement Management KPIs
What is procurement analytics? Does your business need it?
Procurement analytics means examining your procurement data to gain insights that produce better outcomes. Activities pertaining to procurement analytics include:
- Data collection
- Data validation and processing
- Analysis of current and historical data
Analysts use the data produced during the procurement process to improve cash efficiency, negotiate more effectively, and inform purchasing decisions and procurement strategy. Using analytics, procurement and finance teams can forecast future demand, uncover savings opportunities, improve risk management, and optimize supplier performance.
4 Types of procurement analytics
Procurement analytics as a practice breaks down into four categories: descriptive, diagnostic, predictive, and prescriptive. These analysis factors are important for identifying past activity and determining the best future course of action.
Descriptive analytics: This form of analytics outlines past procurement events by analyzing historical data. It helps teams understand past procurement performance, spending patterns, and supplier history to identify trends and anomalies.
Diagnostic analytics: Diagnostic analytics digs deeper into procurement data to understand the causes behind past events or performances. It helps procurement and finance teams find root causes for events within the procurement process by identifying their correlation to observed outcomes.
Predictive analytics: Predictive analytics uses statistical modeling and forecasting techniques to better illuminate the financial future. It helps businesses predict upcoming trends, estimate demand for materials, identify potential supply chain disruptions, and consider price fluctuations based on historical data patterns.
Prescriptive analytics: Prescriptive analytics provides recommendations on what actions a company should take to achieve goals or mitigate risks. It answers "What should we do?" with ways to optimize processes. It uses simulation algorithms similar to “what if” scenario planning to advise on decision-making for procurement strategies.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
6 Places to find procurement data for analysis
Taking a comprehensive view of procurement spend and associated data is essential for businesses to make informed decisions. It provides a full accounting of spending patterns, a list of potential cost-reduction opportunities, and insight into supplier relationships. By gathering data from every avenue, businesses can gain a holistic view of their procurement activities and improve the bottom line.
But without a procurement platform that brings together data for analysis, collecting everything can be a bit of a treasure hunt. To get the most accurate picture of the procurement landscape in your organization, you need to find all sources of data.
When compiling procurement data, look at these six common data sources:
Invoices and receipts: It is crucial to collect data from both electronic and paper invoices and receipts. This includes purchase details such as supplier names, amounts, and dates. Digitizing paper documents through scanning or using optical character recognition (OCR) technology can streamline this process.
Online vendors: For purchases made through online vendors such as Amazon, eBay, or company websites, downloading transaction histories or using application programming interfaces (APIs) to integrate these expenses with your procurement system can automate data collection.
Enterprise resource planning (ERP) systems: ERP systems are a goldmine of procurement data. They house details regarding purchase orders, supplier contracts, inventory levels, and payment records. Ensure your analytics tools are compatible with your ERP to facilitate seamless data integration.
Credit card transactions and expense reports: Corporate credit card statements can be used to track ad hoc purchases. Financial software that categorizes and imports credit card transactions can help consolidate this data with other procurement information. Be sure to include employee purchases on expense reports, whether they were placed on a company or personal credit card.
Supplier portals: Many suppliers offer portals where you can directly access transaction histories, order statuses, and shipment tracking. Integrating these portals with your procurement systems can provide real-time data updates.
Electronic data interchange (EDI): EDI systems facilitate the exchange of business documents in a standard electronic format between business partners. This automated exchange serves as a rich source of procurement data for procurement analysis.
How to select procurement KPIs
Selecting the right procurement key performance indicators (KPIs) helps finance and procurement teams monitor and enhance the procurement process. It’s easier to identify strong KPIs if you know what the company wants to accomplish and how stakeholders can help move the business in the right direction.
Use these steps to help you choose the most relevant KPIs for your analytics:
1. Identify business objectives: Start by assessing the organization's immediate needs and defining goals to improve them, such as increasing operational efficiency, reducing costs, enhancing supplier relationships, or improving product quality. Consider which operational and strategic objectives will move the business forward most.
2. Assess procurement processes: Review your current procurement processes to identify areas of improvement, possible efficiency gains, or opportunities for cost savings. This assessment will highlight which aspects of procurement need close monitoring.
To evaluate your current procurement process and data collection practices, map out the end-to-end procurement cycle. Identify bottlenecks involving manual activities like invoice processing and payments. Take a look at how you measure supplier performance. From here, you can make changes to your process and establish KPIs to keep track of outcomes.
3. Consult stakeholders: Engage with key stakeholders within your organization, including those in finance, operations, supply chain, and procurement teams, to gather insights on what metrics they feel are most valuable. Meet or communicate with them to discuss specific metrics’ relevance and performance. Bringing fresh eyes into the selection process ensures KPIs align with dynamic business objectives and stakeholder expectations.
4. Look at industry benchmarks: Consider industry-wide performance as part of your KPI selection process. Take time to research and understand the standard performance metrics most competitors expect to meet. Benchmarks provide a comparative baseline, allowing you to set realistic and competitive KPIs for your procurement process. Aim to align with or exceed these standards to ensure best practices.
5. Select aligned KPIs: Once you know which activities will directly support your organization's strategic objectives, you’ll have the insight necessary to set procurement KPIs. The proper procurement analytics metrics will focus on areas that contribute to overall business success and individual business goals, such as cost savings, efficiency improvements, and supplier performance. Regularly review the metrics to ensure business activities are helping you meet your KPIs and that the KPIs continue to reflect your business aims.
Examples of critical procurement KPIs
Having the proper procurement KPIs in place simplifies growth and cash management by providing clear benchmarks for success. They enable businesses to closely monitor efficiency, cost savings, and supplier performance to ensure optimal resource allocation. This strategic approach facilitates better decision-making, leading to sustainable growth and improved financial health.
The following list includes some of the most insightful KPIs for tracking procurement performance and efficiency:
Cost savings: This metric measures the reduction in costs achieved through procurement activities compared to previous periods.
Supplier on-time delivery rate: This represents the percentage of orders delivered on time by suppliers, highlighting reliability and efficiency in the supply chain.
Purchase order (PO) cycle time: PO cycle time is the average time from raising a purchase order until goods receipt or service completion, indicating process efficiency.
Quality defect rate: This is the percentage of goods or services received that do not meet predefined quality standards. Quality defect rate can be contextualized with other supplier management KPIs such as issue resolution or time to resolution.
Procurement ROI: This calculation considers the financial return on investment for procurement activities by comparing savings achieved versus costs incurred.
Contract compliance: Contract compliance measures the degree to which suppliers adhere to the terms and conditions outlined in their contracts, ensuring legal and ethical practices.
Spend under management: This KPI looks at the percentage of total spend managed and controlled by procurement professionals.
Supplier diversity: This metric highlights the representation of diverse suppliers or minority-owned businesses within a company's supply chain, promoting inclusivity and opportunity.
Costs avoided: This tracks cost avoidance thanks to effective procurement strategies, such as negotiating better prices or reducing waste. These savings can contribute significantly to the overall financial return on investment.
Supplier risk rate: This number examines the potential risks in the supply chain as a way to select strategies to mitigate or eliminate them. Managing supplier risk rate is crucial for ensuring continuity of operations and preventing disruptions that could impact it.
By carefully selecting and monitoring these KPIs, organizations can gain valuable insights into their procurement operations, driving strategic decisions and achieving operational excellence.
Do you need procurement analytics software?
Procurement data analytics software may benefit companies facing complex supply chains, diverse spending categories, and the need to optimize procurement processes for efficiency and cost savings. These organizations may deal with a large volume of suppliers, operate in multiple markets or currencies, or have a significant portion of their budget tied up in procurement activities. Using data analysis, this type of tool can help identify spending patterns, supplier performance issues, and potential cost-saving opportunities.
However, for many small to mid-sized businesses (SMBs), the complexity and cost of full-scale procurement analytics software might not justify its benefits. Instead, SMBs can often effectively manage their procurement needs through a streamlined spend analysis and purchasing platform. This alternative balances advanced analytical capabilities, including procurement AI features and user-friendly interfaces, without overwhelming users with unnecessary complexity. Such platforms enable businesses to control their spend costs efficiently while maintaining high product quality and service levels.
Procurement platforms like Order.co provide actionable insights into purchasing trends and supplier performance across all vendors and spend categories, offering recommendations for improvements without the need for extensive data science expertise. Order.co offers an accessible method for businesses to harness the power of procurement analytics while getting a solution tailored to their specific scale and scope of operations.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
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The pros and cons of 5 procurement analytics software choices
Thinking of adding procurement analytics or a purchasing solution to your procurement process? Here are five great options to consider:
Order.co
Order.co is the first procurement platform to deliver comprehensive procure-to-pay functions, spend analytics, and on-platform purchasing and payments in one place. It offers users a curated catalog of items from a company’s most important vendors and access to thousands of other high-quality options.
Order. co's reporting and analytics capabilities make it possible to streamline procurement activities and improve spending without extensive research and procurement analysis. It also allows users to pay all invoices across multiple vendors with just a few clicks.
Pros:
- Order.co offers a curated catalog of items in a vendor-agnostic platform that ensures you get the best product prices and terms without the burden of manually crunching the numbers.
- It centralizes all vendor and supply information into a single platform where you can request, procur