Developing Analytics and Tools for Your Procurement Team

Developing Analytics and Tools for Your Procurement Team

When developing analytics and tools for your procurement team, the chief procurement officer (CPO) usually designates a senior-level executive to oversee and optimize the corporation's external spend. Many large enterprises establish global procurement organizations to support the procurement team. Commodity purchases aggregated across all operating units and geographic regions help negotiate the best value and leadership direction and reporting of procurement results provided centrally for worldwide operations.

A common vision

A shared goal with finance to achieve Procurement to Pay (P2P) transformation describes a common P2P strategy for both the purchasing department and accounts payable department. Examples of this common direction include supplier requirements to accept e-invoicing to help AP reduce costs, charge-backs to suppliers for invoices not properly submitted to expedite accounts payable processing, joint responsibility for cash discount capture to ensure cash optimization, and the implementation of scorecards that incorporate supplier ratings for the quality of invoices submitted.

Key analytics for the procurement team

The implementation of a global spend database designates a centralized data warehouse or database of procurement and AP data that captures 100 percent of contract and disbursement activity across the global enterprise. This database accommodates the key analytics for the procurement team.

Typically, the analytics for the procurement team can be organized into one of two categories: 1) Spend Management and 2) Contract Assurance.

Spend Management

  • Strategic Sourcing Savings Targets represent cost saving goals committed by procurement to deliver part of the annual budget cycle. These targets outline expected cost savings from smarter supply management, increased purchasing leverage, and enhanced demand management.
  • Measure ROI on Procurement Dollars Invested indicates a metric communicated to senior management that measures total costs of the procurement function versus the total cost savings identified.
  • Industry Standard Commodity Codes (NAICS, UNSPSC) describe commodity codes that are available in the public domain. This is contrasted with internally created commodity codes or general ledger accounts that are often used to summarize spending. Industry standard codes are highly objective, very granular, available in the public domain, and can be readily outsourced and maintained by third parties.
  • Commodity Codes Coverage describes the proportion of spend that has been clearly identified via commodity codes. The higher the percentage, the better handle procurement has on the supply base and the easier it is to identify and control rogue spending.
  • Monitor Maverick Spend represents an ongoing mechanism to isolate, identify, and curb spending outside of negotiated contracts. An efficient organization must be able to timely address non-conformance to curb behavior. Implementing business unit penalties can assist in reducing “maverick” spend. If decentralized buying reduces overall cost, associated buyers may be better suited for global buying.
  • Corporate Linkage to the Suppliers designates codes that are maintained on the supplier master to facilitate the consolidation of multiple related suppliers into one common family or entity. Common codes utilized include Duns, TIN, or an alphabetic family designation.
  • Real-Time Spend Information assures that spend information is available on a daily basis as opposed to being made available at designated (monthly, quarterly or annual) intervals. This enables immediate identification and isolation of spending outside contracted or preferred suppliers.
  • Supplier Registration (Supplier Portal) is a mechanism to enable your suppliers to register directly on a website. Information, then, can be collected in a self-service manner regarding supplier name, addresses, phone numbers, key contacts, diversity information, corporate linkage, and other relevant information. Some procurement services and payment automation solutions offer supplier management, thus avoiding the need for self-service enrollment.
  • Cross-Functional Sourcing Teams represent teams assembled across functions and divisions to pursue company-wide purchasing leverage opportunities. Representation is desired from procurement, finance, engineering, manufacturing and other relevant functions to jointly assess current practices. In large multi-national companies, situations often arise where different prices, terms, and suppliers exist for similar or identical products across the organization.
  • Demand Management describes practices to drive reduced usage of commodities in addition to a pure focus on reduction in cost per unit. Usage benchmarks can be created internally or acquired externally to compare usage levels across similar operations.
  • Supplier Development Initiatives are programs designed to help suppliers reduce costs and compete more effectively for business. Specific initiatives can be conducted to increase diversity spend, to build viable competitors for sole-sourced products or services, and to work jointly to reduce costs of existing furnished products & services.
  • First Tier Diversity Tracking monitors the levels of direct spending with minority, women-owned, veterans, disabled, small businesses and other historically disadvantaged groups. This information may be captured to fulfill governmental requirements, to achieve diversity goals set by customers, or simply to fulfill a role as a good corporate citizen serving a diverse customer base.
  • Second Tier Diversity Tracking represents the collection and analysis of indirect diversity spending through a company’s suppliers. In many cases, the use of diverse suppliers is mandated, and specific targets are set as to the appropriate percent of costs that must come through minority, women-owned, small business and other historically disadvantaged groups.
  • Epayments represents the percentages of suppliers paid electronically via ACH and P-card. Also, consider using the ACH remittance process to avoid sending a separate remittance.

Contract Assurance

  • Standardized Contracts describe the use of standard contracts worldwide to reduce the time expended in drafting agreements. This ensures terms and conditions are reasonably consistent and incorporate best practices where possible within all supplier arrangements.
  • Over 80% of Eligible Purchases Are Contract/PO-Driven is the assurance that spending for 80+% of goods and services is supported by supplier contracts and purchase orders controlled by the purchasing department.
  • Centralized Contract Repository signifies a global contract database that captures all relevant contract terms and makes them available to users of contracts throughout the company. This ensures that the appropriate contract pricing, terms and conditions have been satisfied. In addition, a centralized contract repository enables secondary review and analysis outside the procurement function. A contract repository can be enabled by a contract management system.
  • Standardized Part Numbering ensures that unique identifiers are utilized consistently across the company, regardless of operating division or ERP system.
  • Target Costing is a technique that identifies upfront what the cost of a purchased component/assembly must be to achieve desired price points established for new products.
  • Automated RFx Tools are software programs that enable companies to electronically request and accept Requests for Proposals (RFP), Requests for Information (RFI), and Requests for Quotation (RFQ). Suppliers log into these solutions, and follow a series of screens to register for the RFx process, answer required questions, and submit proposals directly with little to no human intervention. Consider common business rules and standards to ensure a consistent onboarding process.
  • Robust Supplier Discovery Tools describe software tools and/or directories that identify prospective suppliers based upon the good or service offered. Ideally, suppliers can be identified based upon their line of business, geographic reach, quality ratings, ISO ratings, and diversity certification.
  • Supplier Scorecards represent tools used to regularly communicate with suppliers regarding effectiveness in meeting established performance criteria (lead times, inventory levels, quality control, returns & allowances, billing accuracy, and other success parameters). Scorecards are typically reported periodically but may be available through a website for review upon request by the supplier.
  • First-Time Match Rate Exceeds 90% represents that the extended purchase order (negotiated unit price times quantity received) matches the submitted invoice over 90% of the time. Lower match rates signify errors by the supplier, buyer, or receiving department regarding agreed pricing and purchasing volumes, and create significant bottlenecks in the invoice process.
  • Prevent after-the-fact POs established processes to restrict or monitor the use of “after-the-fact” purchase orders. These situations, when noted, should be highlighted and reported to financial management.
  • Measure Cycle Time from PO Invoice indicates statistics are tracked regarding overall lead times from purchase order date to invoice date. This critical metric influences the satisfaction of customers within business units. If lead times are too long for PO-driven disbursements, there will be a tendency to circumvent the purchase order negotiation process and buy directly from the supplier.
  • Contracts Evaluated Versus Market ensures key commodities are routinely compared to market indicators for assurance that negotiated prices are appropriate for the size and purchasing volumes of the organization. This is crucial in minimizing the opportunity for procurement fraud and ensures that weak buyers are weeded out or given the necessary training to be successful.

Validation of effectiveness

Performing contract compliance audits designates that after-the-fact audits are performed internally to verify that negotiated contract terms are carried through to actual prices paid and delivery terms verified. Significant errors can happen in the procure to pay process, including supplier error, buyer error, keying errors, mathematical inaccuracies, a misunderstanding of terms between the negotiating parties, and more.

Additionally, depending on the industry, there may be a significant number of non-price-related terms to be verified (ISO certifications, inventory levels, quality control standards, staff qualifications, financial condition, etc.). Contract compliance audits can also validate how well your analytics programs are working for your procurement process. Many times an audit can also uncover many process improvements within your procurement process which can often result in the improvement of your analytics process.

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