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Measure and increase Procurement Performance

Which benefits of procurement performance analytics do you expect?

It is challenging to keep oversight of all processes procurement manager have to handle. Jahani and colleagues (2021) show in their recent study that CPOs and Supply Chain Managers are aware that dedicated procurement performance solutions/software reduce complexity and help to optimize Procurement Performance. Predictive analytics provide insights into business strategy problems and indicate where immediate action is required. The surveyed CPOs and SCM see the main advantages derived from an investment in procurement analytics as shown in Figure 1.

Benefits of an investment in procurement analytics
Figure 1: Benefits of an investment in procurement analytics, study with CPOs and Supply Chain Manager 2021

In this article we show how procurement processes and transparency are improved by using a Procurement Performance Management tool, like smartPM’s PPM solution. Best-practice workflows, automation and procurement analytics help to get the most out of procurement management and reduce time-effort and costs.

Procurement Performance Management - Which key areas to focus on?

To assess how well an organization undertakes procurement activities, it needs to measure performance in the following areas:

  1. spend forecasting
  2. spend analysis (monitor direct & indirect spend, maverick spending etc.)
  3. supplier, vendor lifecycle & risk management (evaluation, (re)negotiation, monitoring etc.), contract management (negotiation, monitoring etc.)
  4. savings management (precise forecasts, initiative tracker)
  5. collaboration with other departments, e.g. S&OP (translate production targets into raw materials via BOM)
  6. monitoring of key cost driver (prices)/price development
  7. ensuring that goods and services are properly acquired, so that company’s strategic objectives are fulfilledy

Now let us get straight to the point: In this post we focus on the areas 1-4: spend forecasting & analysis, contract and supplier management, and savings management. In our next blogpost we will shed some light on the collaboration with S&OP/other departments, monitoring of price development and the role of procurement in the integrated planning approach. You can’t wait for the next post and want to learn more about the embedded Procurement PM Workflow including role concepts? Check out our Procurement PM Whitepaper >>

Improve Procurement Performance
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1. How to close the gap between spend forecasts and P&L impact?

Spend analysis is an ongoing journey based on the company’s objectives. It starts with careful planning and analyzing all relevant data points. Accurate forecasts are key, but we often see gaps between what procurement forecasts and what finance can measure impacting the P&L. This is not only a problem of credibility, but also results in missed opportunities to cut costs.

For precise forecasts, smartPM’s Procurement Performance Management solution uses both statistical and AI methods. The different forecast outcomes are clearly visualized, automatically suggesting the forecast with the best fit (see figure 2). Machine Learning (ML) algorithms, e.g., Neural Networks, learn from the past and improve their efficiency over time. In combination with our Machine Learning (ML) algorithms (e.g. Neural Networks), the tool connects to external online sources to include price forecasts and simulate future market developments in scenarios. As an add-on, the price tracking module can be connected to external (macro-economic) data and set in relation to certain cost drivers (more in the upcoming post). This gives Analysts a predictive foresight to initiate the procurement process at the ideal time and save financial resources.

Figure 2: Forecasting method

2. How efficient is your monitoring & analysis of direct and indirect spend?

A professional Procurement Performance Management solution supports spend analysis and forecasting with 100% reliable information in one centralized system. Procurement teams do not only gain a complete picture of the company’s overall spend structure but also real-time insights in direct and indirect spend, certain spend categories and particular suppliers. Leveraging these insights, initiatives can be started and monitored to correct strategies and generate additional savings. The smartPM initiative tracker helps to monitor and realize planned initiatives. This allows to switch gear – from ‘analyze data’ to ‘manage savings and spend mode’.
Rolling forecasts estimate the volume of the organization’s total spend that the procurement department manages.

 

In the smartPM Procurement Performance Dashboard (see figure 3) spend can be analysed across several dimensions, including the spend category tree, region, legal entity / business unit, initiative owner and many more. The dashboard is accessible from all browsers and mobile devices and can be easily adjusted without technical system expertise. Spend data can be derived either from any ERP system or specialized spend analysis software.

Procurement Performance Dashboard
Figure 3: Procurement Performance Dashboard

Do you have an eye on Maverick spending?

More often than not, management focuses only on regular, confirmed spend, large suppliers and internal approval processes, whilst Maverick spending can account for up to 80% of spending in companies. With the Procurement Performance Management solution in place, Maverick spend can be easily identified and eliminated.

3.Which suppliers/vendors and contracts are at risk?

Furthermore, risks can be reduced by professional contract and supplier management. Underperforming suppliers can be determined and renegotiated or replaced, collaboration with trusted supplies can be intensified. Risks can be easily anticipated, and risk alert draw the attention to problematic processes or relationships. Therefore, all key variables like product quality, vendor reliability and customer satisfaction are monitored continuously. Processes become transparent and reports easily accessible for all relevant departments and the management. This provides you with valuable insight into how your business’s procurement strategy can be adjusted and optimized.

4. How to increase future savings?

To optimize savings in an organization, CPOs require 100% reliable data to decide for the ideal initiative mix. The built-in initiative tracker not just prioritizes projects according to a transparent and adjustable scoring method, but also keeps you updated about the progress of the respective tasks. To reduce difficulty and complexity of planning saving projects in a supply chain, processes and administrative routines have to be streamlined. Therefore, smartPM’s Procurement Performance Management System integrates online communication tools (e.g. MS Planner and Teams) to enhance in-house collaboration.

All departments involved in the procurement process are seamlessly connected, e.g. sales, production and finance. Processes become agile, and objectives can be achieved efficiently. Clear progress reports are shared automatically, and all departments involved increase future savings by focusing initiatives and tracking results using the built-in initiative tracker (see figure 4).

Initiative Savings Tracker
Figure 4: Initiative Savings Tracker

In our next post on Procurement Performance Management, we will show you how to:

  1. improve collaboration with other departments, e.g. S&OP (translate production targets into raw materials via BOM)
  2. analyze & monitor key cost driver (prices)/price development
  3. improve management information and basis of decision-making by fully integrating Procurement and S&OP into overall corporate performance and strategy

You want to take the Procurement Performance Management ‘deep dive’? Check out our online-training ‘How to optimize procurement performance’ on our online-training platform.
Or let’s have an expert talk. You can schedule a meeting directly in our online calendar.

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