Procurement Analytics: A Powerful Step Every Leader Should Take
You have all heard about procurement analytics and the enormous gains it can bring to your company. You also know how important it is to acquire data analytics skills and bring them into your decision-making for being an efficient leader. Still, there is something that blocks you from taking that first step towards your procurement analytics journey. If it is so, then you are in good company. This article will share procurement expert Kjetil Istad's views on what straightforward steps leaders can take to substantially outperform their industry and competitors.
The pandemic shook the foundation of many businesses, and in an interconnected world, none of the sectors were spared by the domino effects it brought. If we talk about perspectives, leading through a global crisis looked different to different leaders. And whether they liked it or not, the pandemic also proved to be a litmus test for business leaders worldwide.
In 2020, the world watched various sectors grappling with pandemic impacts. While some leaders downplayed the severity of the virus with severe consequences, many moved heaven and hell to cope with the extraordinary challenges this deadly virus brought upon. Kjetil Istad, Senior Advisor at Ignite Procurement, is one such leader who effortlessly and admirably managed the hospital procurement for Norway in the face of COVID-19.
It is no secret that of all the sectors, the COVID-19 pandemic has hit healthcare the hardest. At a time like this, making sure the processes function effectively and sourcing the equipment and materials needed for healthcare management is arduous. But as it is said, there is no instruction manual that you can replicate as a solution to your problem. So, let us learn from Istad how he managed to keep his organization's system up and running through the shock of COVID-19.
Throughout the breakout, the demands were enormous and often critical. The ripple effects of an overwhelmed supply chain were apparent across Europe. When asked what helped you pass the crucial test of COVID in such a complex scenario, Istad stated,
"In Sykehusinnkjøp - specialist Norwegian health service's purchasing company - we managed billions of NOK in Excel sheets. And we all know manual processes leave a lot of room for errors and risks. For us, they unavoidably brought the entire system down every now and then. Despite lacking the tech muscle, what worked in our favor was a team that knew the marketplace, suppliers, and products extremely well and hence, we were able to source products on time.
"We all talk about digital transformation and its impact in procurement but still, most of the public procurement organizations and big businesses use spreadsheets to haphazardly and manually manage their procurement processes. These outmoded methods, however familiar, makes it impossible to ramp up procurement processes and make organizations prone to numerous risks.
"It is inevitable to mention here the wonders technology could bring to procurement organizations battling with digitization inertia. Having a great technology platform helps procurement teams to get accurate and timely information at their fingertips which further leads towards an agile, safer, and comfortable enviornment."
Analyzing COVID's Impact on Pharma Sector
The "big pharma" of the world are European and American. Yet, these big companies and the pharmaceutical industry as a whole rely on China and India to supply both APIs or active pharmaceutical ingredients and finished drugs. Whether it is the vaccine for COVID, emergency treatment drugs, or generic medicines, the over-reliance on supplies, specifically from China, has been a topic of concern and criticism across the globe.
But, during the darkest hours of COVID, pharma supply chain vulnerabilities got exposed. And the most pertinent question arose: what happens when reliance on a region is cut off?
Time for pharma to be agile and resilient
To rise in the midst of chaos, companies cannot count on just their strengths. To face uncertainty without anxiety, companies must deploy technology to build an agile and innovative ecosystem.
For many years, the pharma and life science industry has been experiencing rapid growth because of the emergence of new products and demands. But now, post-covid, the competition has surged to new heights, all thanks to the cry for cost-cutting and faster product launch cycles. As a result of these developments, an industry that was reluctant to upgrade its procurement now believes the solution lies with analytics.
Covid-19 has reshaped the way the pharma industry had been visualizing its procurement capabilities.
COVID-19 pandemic caused massive disruptions and upheaval across a wide range of industries, forcing some of them to temporarily or permanently shut their doors.
From supply chain delays to travel bans, closed stores, and dissatisfied customers, these shakeouts forced companies to learn the bitter irony of the pandemic in a hard way: an event like this will spotlight the flaws we have been hiding in our closet for years.
On the contrary, pharma companies who were already on the way to initiating and scaling up their procurement transformation were able to gain significant advantages in their cost and risk management.
According to a 2016 report by Bain & Company, sourcing and procurement are the largest single expense category for most ﬁrms, averaging 43% of total costs. In biopharma, that figure has surpassed 50% of the revenues today. For obvious reasons, the visibility of procurement and in life science and healthcare has grown like never before.
From support function to a strategic dam-breaker
Procurement should be an integral part of any business. To make this thought a reality, companies striving for peak performance should set a procurement standard for themselves. This helps experts see the value procurement can deliver and set payment and other terms based on milestones and outcomes. In addition, well-defined roles and responsibilities are also essential to take these strategies forward. It also means aligning responsibilities and incentives with internal stakeholders to secure the best business outcomes.
In pharma, procurement leaders have well-defined KPIs aligned with internal stakeholders to secure the best business outcomes deliver value. Despite this and with precise roles and responsibilities to take the strategies forward, the following issues make the procurement process burdensome for pharma companies:
Lack of spend visibility and control, especially over massive indirect categories
Regional and siloed category management
No real-time view of spending results in missed opportunities
Flawed supplier management strategies
To overcome these challenges and set a roadmap for procurement transformation, Istad mentioned that leaders should utilize procurement analytics's ultimate enabler.
Integrating Procurement Analytics in Pharma
Applying digital to your procurement processes can yield significant competitive advantages. 9 of the top 20 Fortune 500 companies indicate that digital technologies are crucial for their procurement operations in their annual reports. Yet, too many and diverse tools in the market make it difficult for companies to select the right technology to fit their needs. Again, connecting your digitization efforts to overall procurement and business goals gives you a way ahead by pointing out the right technology for your endeavor.
Procurement analytics brings the elements of insights and more to upgrade procurement functions and equip the leadership with informed decision-making. Using AI and algorithms, procurement analytics recognize patterns in complex data sets to determine the statistically significant drivers of price and cluster data as per those drivers. These clusters also portray a set of purchases without substantial differences in cost drivers, thus displaying the differences in supplier performances.
But there are many other ways procurement analytics can use data to uncover insights pharma companies need.
Successful negotiations always start assessing the information on previous purchases. But going through and analyzing millions of dollars worth of transactions is a complex task.
Here, procurement analytics comes to the rescue. Using AI-based negotiation algorithms, companies can analyze hundreds of suppliers on various parameters and group them into strategically significant clusters. This highly meaningful categorization helps companies identify and cluster suppliers based on upcoming purchases and the prices they are offering.
This activity brings quantitative and fact-based information to the negotiation table to choose not just good but the best vendor for a particular situation. It subsequently results in decreasing the overall spending as well as the time spent on negotiations.
Supplier segmentation and management is a skill that requires both personal touch and data to deliver the kind of results we seek. That said, the human element here tends to make this relationship viable to biases. So, to avoid that, the conclusions about supplier performances should be based purely on data. Advanced analytics uses third-party and internal data to help companies isolate vendor performance within a cluster and eliminate biases from the equation.
For instance, take a pharmaceutical manufacturer who buys activated pharmaceutical ingredients for its new product. This manufacturer has 100 vendors in 150 statistically significant clusters, with each vendor in multiple clusters. Procurement analytics can give this manufacturer a panoramic view of each supplier's aggregated performance in terms of points like pricing, quality, sustainability, and risks.
Formulating a Sourcing Strategy
Data and analytics are foundational to any procurement strategy. Companies use analytics to detect patterns in historical data and predict future developments— the result: insights that enable buyers to make much more intelligent business decisions than in the past.
To understand this better, let us look at an example: A chemical manufacturing company identifies 40 clusters for a single raw material. It has a good idea of pricing within each cluster and the vendors that routinely offer the best deal. The company decides that to minimize cost, it needs to shift volume among clusters. From a strategic planning viewpoint, the procurement organization of this company might explore adding new clusters from previously untapped sources. Because analytics from cluster data will tell them which clusters offer the best value to guide their strategy, and vendor-performance data analysis will help them identify the top vendors for increased volume.
To use procurement analytics effectively, companies must first decide what insights they need: savings, quality, innovation, or risk.
How Does Bringing Advanced Analytics to Procurement Look Like?
Luckily, every organization has the necessary resources and abilities to make procurement transformation a reality. If you have your historical purchase data, all you need is a cloud-based spend management tool to ingest this data from multiple sources, transform it, and present it to you on a dashboard with compelling visuals. Furthermore, this tool's embedded intelligence and insights will deliver dynamic decision-making and highlight the spend-related risks at the right time.
Clearly, advanced analytics has a lot to offer to boost procurement value. But only leaders who choose their digital procurement tools strategically will be able to take their procurement performance to new heights and help their companies meet their goals.
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