Why Spend Analytics Should Be Used to Support Procurement Transformation

Transcription

1 Why Spend Analytics Should Be Used to Support Procurement Transformation A Rosslyn Analytics White Paper Writen by Gerard Chick, Chief Knowledge Officer Optimum Procurement

2 Synopsis Procurement transformation is an evolution. Procurement leaders that use data to base decisions on why, where and how to change will stay at the forefront. Insight used to identify team skills, improve business processes and much more is required and this can only come from a range of datasets. Read this paper to learn how you can use spend analytics to assess and formulate a strategic procurement transformation that will future-proof your team and your wider organization. You will also read real-world examples of how self-service spend analytics can be applied to improve operational inefficiencies the first step to complete procurement transformation. Introduction In his seminal book 1, Clayton Christensen, revealed two types of technological change, each with very different effects on industry. The first consists of technologies which sustained an industry s rate of improvement in product performance and ranged in difficulty from incremental to radical. An industry s dominant firms always led in developing and adopting these technologies. By contrast, innovations of the second sort disrupted or redefined performance trajectories - and consistently resulted in the failure of the industry s leaders. Christensen s book suggests that successful companies can put too much emphasis on customers current needs, and fail to adopt new technologies or business models that will meet customers unstated or future needs; he argues that such companies will eventually fall behind. Christensen calls this disruptive innovation. These disruptions make it possible to see a broader system in a new way. The traditional business perspective of procurement has tightly restricted the parameters within which the function operates. Often short term goals are the immediate focus. Business decisions seldom consider the power of supply side management and its impact on economic, social and environmental systems. Smart procurement in modern businesses can ensure that resources are in place to absorb the growing demand portended by globalization. 1 The Innovators Dilemma: When New Technologies Cause Great Firms to Fail 2

3 Today an alternative perspective on business is emerging. It is one that is informed by an understanding of the dynamics of modern business in global markets with global consumption. This paper reveals early signs of efforts to operationalize a new perspective within businesses. The cases detailed below show the enormous opportunities for innovation and demonstrate that transformation in procurement and business is already taking place. Big Data and Analytics We might liken the transformation we are seeing today to Henry Ford s game changing innovation, the mass production of affordable cars and that faster horse quotation often cited regarding potential drivers reaction. Whether the quotation is folk lore or not - sometimes people simply cannot see the opportunity in the introduction of a new technology. To that end and to avoid falling into Christensen s trap, procurement organizations have got to begin to grasp with both hands the biggest opportunity in spend and supplier management for some time the use of big data and analytics. The world s ability to generate and store data has roughly doubled every three years since the 1980s. By 2020, analysts estimate that we will have 300 times more data than we do today. Of course, that data will do little to enhance our lives or help our businesses unless we can effectively capture, manage, and analyze it. Despite the explosion in data and greater access to that data one in three business leaders 2 say they don t trust the information they use to make business decisions. That may explain the current hubris around Big Data and analytics. The potential in the use of analytics is that it can address a multitude of business problems and create a multitude of business opportunities. The insights gleaned from data analysis can help businesses deepen customer engagement, optimize operations, mitigate risks, and capitalize on new sources of revenue. According to an article in the Wall Street Journal, earlier this year nearly two-thirds of businesses have already invested in analytics technology or plan to begin doing so within the next year. But how does that promise translate to spend and supplier management? 2 Doug Macdonald, Procurement Product Marketing Leader at IBM. Big Data: The Big Opportunity in Spend and Supplier Management 3

4 Analytics in Procurement Among highperforming companies, 83% excel at leveraging real benefit from the use of analytics in their procurement function. Procurement is an ideal business function for the application of analytics technologies. There is an increasing realization that a good procurement function is critical to the business with more than 50% of the value of an organization s products being derived from suppliers and outsourced service providers, according to the ISM 3. Procurement is increasingly, via its operations, objectives, variables, and processes, producing massive amounts of data; and that data is often widely dispersed across disparate systems. In 2013, IBM s Institute for Business Value (IBV) conducted a large scale survey of procurement organizations at global companies published as The IBM Chief Procurement Officer Study 4. The goal of the study was to understand the links between procurement and business performance and profitability. The study found a strong correlation between performance and technology, reporting that 94% of top performing organizations are highly effective in their use of technologies, as compared to just 44% of average or below average performing organizations. More particularly the study also detailed specific programs and actions that enable procurement organizations to achieve greater results than their peers. One of the prominent areas was the use of data analytics. Among high-performing companies, 83% excel at leveraging real benefit from the use of analytics in their procurement function. The use of analytics in procurement offers an opportunity for organizations to consolidate, cleanse, and connect spend and supplier data across the enterprise. The use of analytics can provide CPOs with greater visibility and unlock insights; helping them to reduce costs, drive compliance, mitigate risks, improve business intelligence, and manage and develop suppliers. In fact the potential of analytics in procurement is so great that the higher level value proposition sought by so many working in contemporary procurement 5 becomes a real possibility. Be it tackling complex spend categories, proactively mitigating supplier risks or effectively monitoring the performance of suppliers. Today s technology solutions can effectively and comprehensively consolidate and connect all forms of supplier data across an organization are rapidly becoming a core area of technology investment for procurement organizations. Supplier Information Management (SIM) as this emerging area is being termed is profoundly transforming the way businesses collect what they need to know about their suppliers; and analysts anticipate that this area will grow at triple the rate of any other supply technology by The Institute for Supply Management in the United States 4 IBM Institute for Business Value, Chief Procurement Officer Study Improving Competitive Advantage Through Procurement Excellence 5 Procurement Leaders, Bi-modal procurement September/October

5 That s understandable, considering what some leading procurement organizations have already accomplished as many businesses are using real time data and improved analytics to mitigate and manage risk while simultaneously capitalizing on other opportunities that reveal themselves along the way. In a study published by Gartner in May this year, improving Business Intelligence (BI) was considered the second most important supply chain initiative for Many businesses are considering the application of analytics in procurement. In doing so they need to look at what they are currently doing, what they ought to do next, what is interesting, and what they currently are unable to see. The reality for practitioners is the need to prioritise these areas of consideration. That priority will dictate the specific objectives that will drive procurement s adoption and use of analytics. Without clear objectives, data collection and analysis will be ineffective and overwhelming. There is a marked difference between haphazardly trying to get an organization s data in order and trying to apply it to a targeted purpose. In a procurement specific context, data and analytics have to grow beyond spend analysis. CPOs must spend as much time creating new data assets as they do harness existing ones. In a study published by Gartner 6 in May this year, improving Business Intelligence (BI) was considered the second most important supply chain initiative for The issue was selected by 81% of respondents as being important, and is undoubtedly connected to the current high focus on Big Data and advanced analytics. Because traditional methods for reducing costs are fast evaporating, CPOs should increase the time and effort invested in total cost modelling. In doing so they will not only inform internal decisions, but deliver to procurement an opportunity to impact strategy, thereby developing the top line impact modern businesses desire. When it comes to the practicalities, building an analytics capability has to start with a definition of the problem and a clear understanding of the boundary conditions. Limiting procurements scope by simply working with the data that is easily available is not a good idea. CPOs need to contemplate the relationships between data sources and data points, and look for indications of likely trends without direct access to proof data. 6 The seventh annual SC Digest-Gartner Supply Chain Study, May

6 Skill Sets Must Change Of great importance here too is that CPOs can t afford to limit their thinking about analytics to solutions. There is a huge skills issue here. Perhaps the chief concern of business and procurement leaders today relates to the scarcity of talented procurement people. There is a great deal of debate regarding the profile of the modern procurement skill set, typically about depth and breadth of knowledge. Commercial skills feature highly as do a need for people to be more visionary, flexible, agile and resilient. Finally there is a heavy emphasis on a need for procurement people to have more scientific skills sets. These people are termed bi-modal procurement professionals 7. There is a real and immediate need for people with the ability to handle and analyze data. These people must have strong quantitative fluency and be competent in developing and deriving solutions from data sets. It is well understood that internal and external data quality issues are a major pain point for procurement and businesses as a whole. Future goals for procurement and their use of analytics should include better internal integration of systems, predictive analytics, and stronger ties between internal data and intelligence from external markets. Examples of what can be achieved Spend Matters, one of the most influential commentators in the procurement sector, recently reported in one of its blog posts the following case studies which demonstrate quite clearly just how impactful the use of analytics in procurement can be: Audit your own purchase ledger regularly to extract that extra value by picking up on instances of duplicate payment and investigate them.the first, a global 2000 mining company sought to more effectively identify savings opportunities and leverage its economies of scale. The company saw that its main challenge was their ability to use the spend and supplier data, generated by their procurement function which was considered to be unreliable. The company established a centralized system for spend and supplier data, integrated with 18 different ERP systems. The platform and resulting business intelligence they developed was responsible for driving $1 billion in savings at the company. 7 Optimum Procurement Group, The Dawn of Procurement s new Value Proposition: Innovation, Collaboration and Focus 6

7 Another company, this time a global 2000 consumer packaged goods (CPG) manufacturer, had grown through acquisition and sought to engineer more efficient procurement operations and consolidate its supply base and spending. It was hampered in its efforts to achieve global procurement goals by its diverse legacy systems employed by business units and heritage companies around the world. The company established a single, global platform for spend and supplier information and, as a result, significantly consolidated its supply base and put $3.5 billion under active spend management. With its improved supplier intelligence and visibility, the company was able to save between 20 and 50 percent in key spend categories. Finally a leading global auto parts manufacturer sought to improve visibility into the financial health of its core suppliers in the wake of the global recession and financial crisis. Supplier components represented, on average, between 60 and 80 percent of the value of its end products. As many as 30 of its core suppliers actually became insolvent during the crisis, with most of these insolvencies directly impacting the company s production. The company implemented an endto-end solution to automate and manage all the data and business processes associated with supplier management. The result is deep visibility into their global supply base that is used to mitigate risk and develop suppliers. In its first y year of implementation, the company reduced suppliers with financial difficulties by 35 percent and proactively screened 1,500 core suppliers for financial health. Conclusion For many businesses today their ability to develop a holistic view of corporate spending and supplier data, remains elusive. This may be because many are simply unaware of the availability of self-service spend analytics or how they can be applied to improve operational inefficiencies. These affordable systems will accelerate value and deliver on the key issues of cost, risk and sustainability. Service providers such as Rosslyn Analytics have developed self-service spend analytics solutions and are putting forward a strong case as to why CPOs (and their companies) should embrace this potentially disruptive innovation. Rosslyn s solution opens up new possibilities and highlights the fundamental differences between traditional spend analysis tools and spend analytics as accelerators of value creation and innovation. The reality is that most organizations no longer need to invest in huge upfront IT costs; instead they can procure an analytics tool which enables them to become intelligent enterprises, thinking for themselves, along rational lines, hypothesising and testing against real evidence. 7

8 CPOs can at last adopt these new analytics solutions, delivering competitive advantage, sophistication and evidence based decision-making, cost effectively. That starts with gaining control over data collection and quality: from there, the opportunities are endless. About The Author Gerard Chick Chief Knowledge Officer, Optimum Procurement Gerard Chick is Chief Knowledge Officer at Optimum Procurement, a specialist procurement outsourcing and advisory company based in Manchester, UK. Prior to this he was head of research and knowledge management at CIPS (the Chartered Institute of Purchasing and Supply). He has significant experience working with the keenest minds at the most senior level examining the broad issues facing corporate procurement in a wider business context. He is a regular TV, radio, newspaper and industrial journal commentator on procurement and supply management issues, and is also an accomplished speaker on the subject globally. He has recently completed writing a book on the mutable role and value proposition of supply management in modern business. 8