Procurement intelligence

In today's economic climate, characterised by more than ever uncertain factors such as price volatility, inflation, changing market conditions, Chief Procurement Officers (CPOs) and procurement teams are facing a double challenge of sourcing commodity and high-value products and services with reduced budgets. Procurement teams cannot just rely on the least-cost suppliers to be competitive, but instead they must develop comprehensive sourcing strategies, optimize supplier relationships and proactively plan risk mitigation.

While assisting the CPO in tackling the current challenges of the procurement function, business intelligence serves as a tool for managers that will help them to understand, evaluate and forecast procurement performance and improve financial results while delivering the highest possible level of service quality.

PROCUREMENT: FROM TACTICS TO STRATEGY

Traditionally, procurement has long been a function dedicated to primarily drive costs down. Today, procurement is no longer aimed exclusively at reducing cost, but applies improved sourcing strategies to achieve improved financial performance.

Strategic sourcing goes beyond the role of traditional procurement to the extent that it does not only focus on cost management but expands the scope of procurement to other areas such as revenue growth (e.g. new products/services, first to market) or asset utilization (e.g. cash velocity, inventory management, etc.). Such extension of scope can have a significant impact on the company bottom-line and return on capital employed, thereby influencing its market value and benefiting directly to shareholders.

Converted into a strategic capability and becoming a long term competitive advantage for the company, procurement performance should be measured, reported and planned upon to deliver its full benefits.

KEY CONSIDERATIONS

Procurement intelligence aims to provide managers with useful tools allowing them to systematically follow up on performance indicators and to pro-actively take actions where needed to continuously improve procurement performance.

The objectives relate to five key impact areas; each area can be covered by specific indicators reported in the dashboard.

• Cost savings

The first objective of procurement intelligence is to reduce the Cost of Goods Sold (COGS). There are different types of savings (hard, soft, one-off or repetitive) that can be realised by supply negotiation (bundling volumes), process optimization (change in internal process), reformulation (change specifications), by adding extra free products with significant value to the business, etc.

• cost savings

To prove the relevance of the KPIs, they have to be checked against baseline figures based on an agreed and shared methodology.

• Cash savings

Cash savings is the "talk of the town" matter regarding procurement intelligence as it directly contributes to improve the ROCE (Return On Capital Employed). For instance, savings from longer average payment terms or savings from shorter 'in-inventory' levels can result in drastic reductions of required working capital, therefore positively affecting the cash position and the balance sheet of the company as a whole.

Indicators such as DPO (Days Payables Outstanding) or DOI (Days Of Inventory) can support management decisions to optimize their asset management strategy. However, the use of KPIs to track cash savings performance will only be relevant if done in close collaboration with the finance department, to link savings with procurement actions in order for CPO's to clearly understand the impact of their strategic and tactical decisions and ensure repeatable success.

• Compliance

Another objective of procurement intelligence is to improve the management of business expectations in terms of budget, quality, services, reliability, etc. This can be assessed at both internal and external (mainly suppliers) levels: KPIs such as '# automated PO' give an idea of the internal process performance, while '# of products delivered on time' reflects the supplier's capacity to respect the purchasing agreements.

While KPIs for internal compliance are quite straightforward to define, those for external compliance can be divided in two distinct categories: facts and attitudes. Whereas the first category is rational, the second allows for objective tracking of 'subjective' performance by taking into account the collaborative and interpersonal relationship of buyers from the procurement teams with the supplier without risking tracking performance based on the buyer's emotions.

• Risk management

Risk management has become a major concern inside procurement, as it is first in line to manage some of the important company risks such as supplier failure, supply chain break-up, commodity price volatility, etc.

To address the growing challenge of managing these risks, procurement intelligence must deliver trustworthy and actionable information that helps procurement teams to identify, assess and minimize their exposure to risks.

• Value creation

Last but not least, innovation from suppliers can contribute to top line growth by bringing market innovation inside. Measuring R&D time and efforts of key suppliers for instance can help managers in selecting those who detain the most "state-of-the-art" goods.