Four Ways Procurement Analytics Identifies Savings Opportunities
Understanding and analyzing your company’s spend structure is often the first step towards laying the foundation of a data-driven procurement organization. But for many companies who have jumped into the analytics bandwagon, translating analytics to fact-based actions that enable realizing procurement savings is a tough nut to crack. This article will discuss some promising cost-reduction strategies enabled by analytics that can grow your procurement savings exponentially.
Procurement plays a vital role in developing and implementing business strategies, such as expanding organically, introducing new products/services, and managing risk. However, cost reduction is still the number one priority for most CPOs in today's tumultuous times.
The procurement function is constantly under pressure to reduce costs and realize savings throughout the business. Unfortunately, to fulfill this demand, most organizations lack an end-to-end view and understanding of their spend - a prerequisite to enable a structured and disciplined analysis of procurement data. The lack of a spend management system conceals savings opportunities and results in decisions based on intuition and thus prone to risks. On the other hand, many organizations struggle to incorporate the spend analysis output to their strategic decision-making and hence, fail to realize their full cost-saving potential.
A recent study by Accenture, based on a survey of more than 1,000 senior executives mostly from large global companies, found that most companies have high expectations for Big Data analytics, but many have had difficulty adopting it.
How to Identify Cost Savings Opportunities and What Points to Consider While Realizing These?
Adequate insight into your data through procurement analytics is absolutely crucial to identifying opportunities for cost reduction. The analysis gives you the insight you need to make smarter decisions and priorities. Procurement teams worldwide have to deal with enormous amounts of data - internal and external - each day. Still, a huge proportion of procurement data remains inaccessible and idle because procurement teams cannot convert this data into actionable insights. For that matter, focusing on enhancing the analytical capability is necessary for companies that want to boost their cost savings dramatically.
Spend and procurement analytics - the basis for smarter decisions and priorities.
It does not matter if you have already begun your analytical journey or are still thinking about it, our selected strategic measures will help you identify and take the right actions for realizing potential savings for your business.
Procurement Cost Reduction Strategies
Below we have provided some strategies with examples that will help you identify and understand potential opportunities for your business.
Reducing Costs Through Bundling
There are several strategic levers to reduce procurement costs - bundling, or consolidating spend, is one of them.
Consolidating spend usually results in significant savings (A. van Weele, Purchasing and Supply Chain Management, 1998). In short, bundling refers to securing standardized contract terms with the same supplier across the business, or consolidating spend with one or fewer suppliers than the status quo. The Deloitte Global CPO Survey for 2019 shows that consolidating spend is the most important procurement strategy for CPOs in 2020.
1. Example of analysis: Spend and number of suppliers by category
To identify bundling opportunities, you should analyze the number of suppliers used across spend categories and total spend per category. See analysis example in the figure above.
In some cases, it may be appropriate to use multiple suppliers per category, despite the fact that the products or services are relatively standardized across the supplier market. But this is certainly not always the case. For example, if you use 10 workwear suppliers with an annual spend of 50 million, there is probably a considerable potential in consolidating spend.
2. Example of analysis: Contract loyalty (or maverick spend) by categories and departments
Analyzing contract loyalty or maverick spend across categories and the organization (e.g. departments, business units etc.) can also highlight savings opportunities. See analysis example in the figure above.
Many companies have supplier contracts in place to meet all their needs in the different categories, but often have challenges related to maverick spending. If contract loyalty is low per category, and throughout the organization, you must take actions to ensure that spend is consolidated with your priority suppliers.
Please note that this type of analysis can also be used to identify categories where you do not have sufficient contract coverage today.
Renegotiate Your Existing Contracts
One commercial strategic lever, often referred to as a "quick win", is to renegotiate your existing contracts. A negotiation can yield significant savings through improved contract terms.
3. Example of analysis: Spend growth by supplier
To identify possible renegotiation candidates, we recommend analyzing spend growth for the various suppliers. See analysis example in the figure above, where spend growth is measured by CAGR (Compound Annual Growth Rate).
Higher spend growth will, all other things being equal, indicate greater opportunities to negotiate better contract terms. The insight must, of course, be validated in the context of the underlying contract terms, if a contract exists. Nevertheless, your bargaining power is probably better if you can showcase a solid growth, especially if the actual volumes are significantly higher than at the conclusion of the contract.
4. Example of analysis: Share of wallet and supplier profitability
Combining external data sources with your own spend data often provides additional perspectives on savings opportunities. In the analysis above (the "Ignite Matrix"), we analyze our share of the supplier's turnover (share of wallet) and the supplier's profitability (EBIT margin).
A larger share of wallet says something about your importance as a customer, which in turn can indicate a more solid bargaining power. If the supplier also enjoys high margins, for example compared to its industry peers, you need to ask yourself; Is the collaboration well balanced? All else being equal, we are better suited to negotiate with suppliers that we are important to and/or who benefit from higher profit margins.
Planning, Prioritization and Follow-Up
Fact-based and structured processes are critical to ensuring significant and sustainable results. To maximize the chances of realizing savings, you need to have a structured plan and establish the appropriate follow-up procedures. If you work ad-hoc without the necessary data and a concrete plan, you will never be able unlock your full potential.
Important Criteria to Consider in the Procurement Cost-Saving Process
Six Practical Steps to Realize Savings Through Bundling
In short, bundling involves securing standardized contract terms with the same supplier across the organization or pooling purchasing volume with one or fewer suppliers than the status quo. PS. If you want to learn more about how
How to Identify Savings Opportunities: Transaction Costs
Minimizing Your Transaction Costs When we talk about purchase-to-pay, we often refer to it as operational procurement. While strategic procurement relates to identifying and creating value through upstream activities, operational
How to Identify Savings Opportunities: Renegotiation
PS. In case you need a refresher of what spend and procurement analytics is, take a look at this article. Reducing costs by renegotiating existing contract terms At Ignite Procurement, we apply a framework containing eight