Procurement teams are able to make smarter decisions when they have more than just price and buying history to go on. Procurement intelligence consolidates data about spending, suppliers, markets, and risks, allowing procurement teams to assess their choices in light of that information. Procurement will be proactive in planning its sourcing strategy in response to information.
This is important since purchasing decisions impact not only cost but also resilience, regulatory compliance, quality of service, and continuity of business operations. For instance, a low-cost supplier may actually pose unseen risks to an organization due to slow delivery, poor financials, and other factors.
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What Procurement Intelligence Adds to the Buying Process
While conventional sourcing depends on internal documentation, quotations from suppliers, and personal experiences, all these remain relevant, but fail to give a clear idea about the total market scenario. This can be made more effective through proper intelligence activities, which involve combining internal and external data sources for explaining what is going on, its importance, and how to act upon it.
Relevant data could come from historical spending, contractual agreements, performance ratings of suppliers, commodity price, inflation, transportation cost, capacity shifts, geopolitics, and financial parameters. Spend analysis enables procurement groups to gain better visibility and control by structuring and analyzing spending information.
This does not imply collecting the largest possible amount of data. It implies making decisions from meaningful data.
Build a Clear View of Spend
Visibility of spend is an important aspect of sourcing intelligence. Teams must be aware of what they are purchasing, from whom, how much, and whether purchases have been made in accordance with contractual agreements.
Supplier names, category names, information about business units and payments needs to be normalized. In one case, there can be multiple names for the same supplier. Normalization allows the organization to get a proper estimate of its total spend and to identify negotiation opportunities.
The next step is categorizing spends in a meaningful way. This will help teams to identify fragmented buying, off-contract spending, cost differences, and unnecessary supplier duplication. It also allows category managers to concentrate on valuable or risky categories.
Spend data should prompt questions such as why there was an increase in volume, why two locations pay different prices, or why a valuable category has many suppliers.
Combine Market Signals With Internal Data
The internal record provides information on what the organization has bought. The external market information will provide insight into the future of the team.
Market analysis includes supplier rivalry, lifecycle of the product, seasonality, economic factors, movement of raw materials, and regional risks. These can provide insight into market conditions and supplier dynamics for negotiation strategy, sourcing timing, and risk planning.
For instance, a manufacturer seeking to renew its contract for packaging material may be faced with stable internal demand but increasing resin prices. The buyer can use this as a cue to investigate long-term contracts, different pricing structures, substitute materials, or additional suppliers before the price rise hits the business.
This is where procurement solutions can help teams by integrating market information, spend records, and supplier data into one process. Although technology should minimize manual searches, judgment is needed to interpret the findings.
Evaluate Suppliers Beyond Price
The decision to choose suppliers must take into account both cost and risk associated with the relationship. The unit cost does not say much about delivery, quality, responsiveness, innovation, compliance, and financial capability.
A viable supplier scorecard could include such metrics as delivery timeliness, defect rate, lead times, service level, warranty claims, commercial performance, and contract compliance.
Teams should customize the scorecard based on categories. For example, a logistics provider needs to be closely monitored on delivery and capacity issues. For a software provider, it would be necessary to pay particular attention to security, uptime, data management, and support.
Procurement intelligence becomes increasingly valuable when performance is analyzed over time. One late delivery does not matter, but the trend may point to capacity, staffing, or financial problems.
Strengthen Supplier Risk and Due Diligence
The risk assessment process should start even before a contract is awarded to a supplier and it should go on throughout the duration of the relationship between the two entities. The extent of analysis should depend upon the significance, accessibility, geographical location, and effect of the suppliers on business operations.
There could be a detailed study of financial health, management, operational flexibility, regulatory risk, supply chain vulnerability, cyber security, and continuity planning. It becomes more critical when the supplier deals with technology, access to information, or core business processes.
The same rule is applicable beyond technological considerations. The critical supplier operating a single facility might be more vulnerable than its more expensive competitor operating diverse facilities. Such data might help procurement create contingency plans and adjust its purchasing strategy accordingly.
Monitoring of risk factors must also be attentive to change. Changes in ownership, sanctions, strike at the supplier’s facility, natural disaster, financial crisis, or recurrent service failures will modify the supplier’s risk profile instantly.
Turn Insights Into Sourcing Actions
An effective analysis is of no use until it impacts the decision-making process. It is essential for procurement analysts to have proper guidelines for transforming the findings into procurement decisions.
The simple process of doing so may start from posing a business question, collecting all necessary data, validating it, making comparisons, and making recommendations for action.
A threshold could be determined where an intervention needs to be initiated. The category manager could review the supplier in case the deliveries do not meet the required levels, prices exceed the defined range, or spending outside the approved contracts exceeds a certain level.
Dashboards could be useful, but it is necessary that they provide information on exception management and decision-making only. Usually, the senior leadership requires only a few indicators related to cost, risk, service, and strategy.
Create a Repeatable Intelligence Process
Organizations do not need a complicated system right away. What they need is consistency in their data, clear ownership, and a repeatable cycle of review.
Start with just a few key categories and list out the decision-making that would be enhanced by better information. Then find reliable internal and external data sources, assign ownership of the data, and reach agreement on common terms for suppliers, categories, savings, risk, and performance.
Consistently review your process. Data sources will evolve, markets will change, and priorities will shift. A good program of business intelligence must evolve while maintaining its consistency.
Near the close of each sourcing cycle, organizations should reflect on what was learned and what could have been done better. Such lessons learned can help future sourcing efforts.
Making Better Procurement Decisions
Successful procurement requires an appreciation of the link between cost, market conditions, supplier capacity, and risk.
Procurement intelligence provides the framework for making sense of these signals and informing decision-making based on a more solid foundation of evidence.
This will occur when relevant information is supplemented by sound business judgement.
Contemporary procurement solutions can help to provide this kind of information, but ultimately it is up to individuals to make the judgement call on how much risk matters.
Teams who begin with solid spend information, effective supplier metrics, market signals, and sensible rules of decision will be able to create a manageable system that provides a better foundation for their sourcing and negotiation needs.
Author’s Bio: Pankaj Tuteja is Head of Operations – India and brings practical experience in sourcing, procurement, supplier management, and global supply-chain operations. He is associated with Dragon Sourcing and Procurement Freelancers, platforms that support businesses and procurement professionals with sourcing expertise and specialized procurement resources.
