This is the third in our series of four major procurement trends: digging into the data.
One of the major changes that’s taken place in business is the placing of greater emphasis on data and analytics. That holds true for every function within the enterprise, including procurement. Companies today gather data from so many sources, from social media to buyer behavior. High-quality data is a prerequisite to enable managers and senior executives to consistently make decisions with much greater confidence. This is made easier due to the fact that many of the available software solutions have robust analytics and reporting functions that will give senior executives the data necessary to make decisions, not just for their specific areas, but throughout the enterprise.
Being able to gather huge volumes of data (big data) allows companies to integrate any historical or geopolitical data that could imply greater risk. This collection of data and analytics can provide a source of information that will allow procurement the ability to make supply chain decisions and sourcing changes that could mitigate various types of risk.
I’m talking specifically about the risks on targets and savings. Procurement traditionally has yearly savings targets. Without hard data and analytics, those targets are essentially based on prior years’ activities and recent competitive sourcing results. Access to data from multiple sources will enable procurement to quickly recognize which current prices (and ultimately targeted savings) are at risk due to any of a number of issues, from natural disasters that limit the availability of raw materials and thus could increase prices to geopolitical issues that result in a glut of a commodity that could mean a reduction in pricing.
Besides recognizing and either capitalizing on or ameliorating risk; data enables spend analysis for trend identification; optimized performance; policy generation and management; and improved decision making. As an example of trend identification, data may show that raw material prices are going down, indicating it may be the right time to consider switching sourcing strategies, i.e. supplier consolidation, supplier switching, or a product/material change. Should your organization operate on a single source or multi-source supplier strategy? Are you using the data gathered to optimize your suppliers’ performance? In order to answer these questions, procurement should take great care in establishing KPI’s in the supplier agreement as a baseline for supplier performance. Throughout the year, analytics and real-time data will enable you to measure whether or not a supplier is performing to contractual terms. This will give you the information you need to make sure you get the right product at the right price with the right quality at the right time.
One area where data can supply the greatest benefit is that of demand forecasting of indirect spend. Demand forecasting for indirect materials has always been a major challenge for any organization. Many companies simply look at the historical spend when demand forecasting for items like office and cleaning supplies, IT, uniforms and other non-core materials and services. But forecasting based on events occurring within the company (especially for companies that have multiple locations), can lead to significant savings and relevant category strategies. The more data you have for the company overall, the better your forecasting will be. For instance, a drop in FTEs should lead to a drop in demand for a wide array of goods and services. This greater accuracy in demand will allow the company to utilize those savings for more strategic purposes.
As new technologies and applications enter the market, the ability for procurement to play a more strategic role in the company will grow.