Use of Analytics in Procurement

Did You Know

Use of analytical tool increased demand forecast accuracy by 55% - leading to increased contract negotiation power and decreased chances of stocks-outs!

© 2010 Accenture. All rights reserved.

Raj Dhawan, PhDSupply Chain Management

Accenture

The CIPSA Special Interest Forum

Use of Technology in Procurement - Sydney

PROCUREMENT ANALYTICS


AgendaAgenda

What is Procurement Analytics

1

Why should it be used2

How can it be implemented3


Overview – AnalyticsOverview – AnalyticsThe process of using quantitative methods to derive actionable insights and outcomes from data.

Involves the capture and use of data to support fact-based decision making and gaining competitive advantage

Typically reporting on what has happened in the past

Using predictive analytics based on historical data to ascertain what will happen in the future

WHAT WHY HOW


Applications in ProcurementApplications in Procurement Vendor Evaluation

Factoring complete and timely deliveries, quality of materials, and time and effort to resolution on problematic orders in addition to lowest cost

Spend Analytics Examine multiple types of data sets (e.g., A/P

data, supplier-provided invoice data, tax data), Results in an entirely different look at data elements decrease maverick spend, of spend economies of scale

Demand Forecasting Average cycle volume, Maximum demand peaks

Contract Management Optimise discount levels, Forecast financial

liabilities

WHAT WHY HOW


Applications in ProcurementApplications in Procurement Supplier Relationship

Management vendor score, purchase order value, PO

volume

Other examples vendor consolidation, reducing duplicate

orders, increasing contract orders while reducing open market transactions

WHAT WHY HOW


Source: Competing on Analytics: The New Science of Winning (Davenport / Harris)

What?

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Sophistication of Intelligence

Optimization

Predictive Modeling

Forecasting/extrapolation

Statistical analysis

Alerts

Query/drill down

Ad hoc reports

Standard Reports

“What’s the best that can happen?”

“What will happen next?”

“What if these trends continue?”

“Why is this happening?”

“What actions are needed?”

“What exactly is the problem?”

“How many, how often, where?”

“What happened?”

Predictive Analytics

Descriptive

Analytics

Analytics Sophistication LevelsAnalytics Sophistication Levels

WHAT WHY HOW

Analytics Maturity for OrganisationsAnalytics Maturity for Organisations

Stage 5Analytical

Competitors

Stage 4Analytical

Companies

Stage 3Analytical Aspirations

Stage 2Localized Analytics

Stage 1Analytical Novice

Routinely uses analytics as a distinctive capability, takes an enterprise-wide approach, has committed and involved leadership, and has achieved large-scale results.

Has established analytical capabilities, and has a few significant initiatives under way – but progress is slow and missing critical elements.

Organization lacks one or several of the pre-requisites for serious analytical work.

Applies analytics regularly, and realizes benefits across the organization.

Pockets of analytical activity, but they are uncoordinated and not focused on strategic targets.

WHAT WHY HOW


WHICH STAGE OF PROCUREMENT ANALYTICS IS YOUR ORGANISATION IN?

AgendaAgenda


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- Growing at a terrific rate (a compound annual 60%), speeding up all the time.

- Around 1,200 Exabyte of digital data will be generated this year

- Information created by machines and used by other machines willprobably grow faster than anything else. This is primarily ‘databaseto database’ information. People are only tangentially involved in most of it. �

Increase in computational power will facilitate operations on data thus leading to

“fact-based decision- making”

Why Analytics is now importantWhy Analytics is now important

WHAT WHY HOW


Procurement Analytics StudyProcurement Analytics Study

Based on an analytical (modeling and simulation) technique – Systems Thinking

“a holistic approach to analysis that focuses on the way that a system's constituent parts interrelate and how systems work over time and within the context of larger systems.”

Motivation for this study

To study the effectiveness of Systems Thinking in supply chain scenarios by comparing decisions made with and without the use of the technique.

WHAT WHY HOW


Basic SetupBasic Setup

Tasks

Participants

Experiment

1. Practitioners provided context and background information on tasks

2. Practitioners divided in two groups – random allocation, 40 each

3. A group of practitioners solve tasks based on their knowledge and information provided

4. The second group is first trained in analytical method (systems thinking). This group uses the analytical tools to solve the tasks.

5. For both the tasks compare the accuracy of resultswithout vs. with the use of Systems Thinking tools

WHAT WHY HOW


Simple TaskSimple Task

The Task

• In which quarter did • the Contract Manager have maximum number of

contracts on hand?• largest number of contracts expire? • Contract Manager work (signing/expiry) on the least

number of Contracts?

Context• Inflow of contracts – signing • Outflow of contracts – expiry • Details of inflow and outflow provided for

time periods• Manual vs. Visual

Solution

• Active contracts in any quarter = expired – new contracts from previous quarters + those in current quarter

WHAT WHY HOW


Total active contracts

Simple Task - ResultsSimple Task - Results

Procurement

• How many contracts

• Current state of contracts

• Expiry/renewal• Reporting

WHAT WHY HOW

• Even simple, routine tasks can sometimes get overwhelming or not given sufficient attention…

• Electronic capture of data, visual representation and alerts go a long way

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Complex TaskComplex Task

The Task

• Forecast sales of mobile phones over next two years

Context• Telco operating in a new market• Uncertain demand• Historical information• External factors• Sales drives procurement, impacts

inventory

Solution

• Sharp increase in product demand in first 8 months, followed by sharp decrease in the following 10 months and then gradual decline

WHAT WHY HOW


Complex Task - ResultsComplex Task - Results•Naïve mental models

• Not taking into account all factors• Not capturing the right causal

relationships• Not being able to compute affect of input

factors to forecast

Out of stock – rush orders, higher purchase price, unhappy business units, unhappy customers, loss of market share

Excess stock – inventory holding costs, extra resources for maintenance, increased cost decrease in profit

Accurate Forecast

GUT FEEL

WHAT WHY HOW


Complex Task - ResultsComplex Task - Results

Procurement• When to order and how

many• Accurate information on

volume leading to better negotiating power

• Lesser chances of going out of stock or having excess

• Improved communication with business units and vendors

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FACT BASED

Improved understanding of stocks and flows


Summary of ResultsSummary of Results

WHAT WHY HOW


Native ability to comprehend complex

procurement issues is limited – too many variables to process

Fact-based decision making leads to better results –

accurate, measurable, resulting in lower costs and greater savings.

Analytical tools improve our ability to capture right information,

process it and help in informed decision making.

AgendaAgenda


1




How will Analytics support a Procurement Organisation

How will Analytics support a Procurement Organisation

Internal Customer

Management

Training & Development

Supplier Relationship Manageme

nt

Procurement Shared

Services

Requisition to PaySystems

Source to ContractSystems

ENABLERS

Other Analytical Tool

Source to Contract

Requisition to Pay

Contract Lifecycle

Management

Organisation Structure

Governance/ Compliance

Proc. Performance

DEMAND MANAGEMENT

SOURCING SUPPLIER MANAGEMENT

PROCUREMENT STRATEGY

Capture information, generate reports and provide insight

Use information and insight for day to day activities – operationalise analytics

Use information and insight -monitoring, continuous improvement , one-off decisions

WHAT WHY HOW


1

3

2

Corporate Funcitons

Where does the analytics role fitWhere does the analytics role fit

Category Managers

Category Managers

Category Managers

CPO

Procurement Manager

Procurement Manager

Procurement Shared Services

Procurement Manager

Human Resources

Legal

IT

Contract Managers

Finance

WHAT WHY HOW


Vendor Managers

Recruitment, training

Financial master data sharing, AP, budgeting

Contracts data sharing

Data capture, systems support, shared resources, systems integration

Strategy and Governance

2. Procurement Analytics Manager• Part of Strat & Gov• Reports to CPO• Makes sense of

analysed data, benchmarks

• Supports Procurement, Category and Contract managers

• Liaises with business units

1. Data Analyst• Part of PSS• Potentially shared

/ outsourced • Supports

Analytics Manager

• Ensures data is captured, and joined

• Models data, generates forecasts

Focus on value and not on math!Focus on value and not on math!

Focus on business benefits What is the issue, hypothesis and

realistic solution. How will this benefit business, help in improving efficiency or add value

Using the right tools BI, scorecards, what-if scenario

analysis, predictive analysis, optimisation

Using the right skill Business trained analysts, not only

from IT

WHAT WHY HOW


Implementation ChallengesImplementation Challenges Organisation Top leadership awareness and support Partnership with business units Skill-set not available

Processes One-off versus Operationalised

Systems Right technology not available; antiquated Technology not usable

Data Data in multiple systems Data not captured; existing data not

analysed

WHAT WHY HOW


Next StepsNext Steps Organisation

Leadership – gain support BUs – collaborate, share Skills – develop, hire or share Culture – fact-based, not just gut-feel decisions

Process Embed analytics in processes

WHAT WHY HOW

Systems Short-term – integrate, consolidate & fully utilise existing systems

Long-term – invest in an eprocurement suite and specialised analytical tools

SummarySummary Procurement Analytics is the use of data to gain insight

into what has happened, and more importantly – what may happen – to better manage spend, contracts, vendors and internal customers.

There is now ample data, and technology that is usable by procurement staff, to gain such insights.

Evidence suggests that, analytical tools, when used appropriately by skilled users, are able to facilitate fact-based decision making.

Procurement leadership needs to instill a culture of fact-based decision making at all levels of procurement.

Procurement staff needs to be provided support via appropriate tools and skills to fully leverage Analytics.


WHAT WHY HOW

[email protected]

0402 925 505

rajatdhawan.com
