Analytics drives strategic sourcing

It's not just about profits - although that will always remain the ultimate goal for any enterprise. However, in today's supply chain, there are other factors in play. You might want to temporarily forsake profitability in pursuit of market share. You might want to emphasise different production volumes and different profit margins for strategic reasons. Today, cost-effectiveness and competitiveness are the strategic levers that executives are seeking to run their businesses with maximum flexibility.

For enterprises with supply chain complexity, the key to achieving cost-effectiveness and competitiveness lies in the ability to optimise the activities surrounding each of the source, make, store, ship and sell functions. The immediate dilemma that presents itself: how can managers be assured that the decisions they make regarding suppliers, commodities, manufacturing, trading partners and customers improve the company's cost-effectiveness and competitiveness through improved quality, service, and profitability?

Increasingly, the answer lies in deriving useful information through analytics that drive relationships up and down the supply chain.

Let's start by acknowledging an unpleasant truth: most of today's supply chain systems are inadequate to address the analytics challenge. Decision-makers today largely rely on a bevy of transactional systems that can provide visibility only into past activities - they are backward-looking. Of course, it's hard to drive forward by looking in the rear-view mirror. Can you answer the questions that matter? How many suppliers do you currently have? Could you narrow that supply base and deal more effectively with a smaller number of suppliers? Is your supplier base diversified enough - or too diversified? Are you and your suppliers complying with contract terms?

Talent and intuition are not enough. With thousands of suppliers to manage, human intuition and memory are outmatched. You need an integrated view of your company's supplier relationships and the commodities or services they provide to get the vital insight into your supply base, purchasing patterns, transaction histories, and supplier performance.

That's why forward-thinking companies are embracing forward-looking supplier-management solutions with predictive analytics that help them not only move toward industry benchmarks but, in fact, become industry benchmarks. With supplier analytics, you can:

* Consolidate information from multiple systems to gain a holistic view of your direct and indirect spending;

* Apply advanced algorithms and techniques to transform data into meaningful procurement information and model optimal sourcing strategies;

* Reduce direct and indirect costs and improve profitability;

* Understand what you are buying and from whom;

* Minimise the risk of supply chain disruptions;

* Select the best suppliers to help you differentiate from competitors;

* Streamline your supply chain management through collaboration; and

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* Ensure that your organisation's resources focus on the most critical suppliers.

To successfully implement supplier analytics and make intelligent decisions for a more effective supply chain, you need to understand and align all your activities with the goals of the corporation. You must measure the impact that strategic sourcing activities have on key performance indicators. In many instances, a "procurement scorecard" can assist this process and keep executives abreast of the implications of procurement decisions (more on scorecards in a moment).

Procurement professionals need the ability to explore opportunities and alternative sourcing models and strategies, supplier bases, contract options and supplier portfolios. That requires sophisticated ranking, optimisation and forecasting. Similarly, individual commodity buyers must, on a daily basis, investigate business questions whose answers lie in great volumes of procurement data generated by company transactional systems. The following are several criteria for sophisticated procurement analytics to promote strategic supplier relationship management:

* Scorecarding - Use a concise "dashboard" to visually ascertain the status of your procurement key performance indicators (KPIs). This procurement scorecard contains measurements that help you understand your suppliers' performance as well as your own internal performance. Graphical indicators (red, yellow and green) highlight areas of focus that you can "drill" into for more detail to either take action or enlist others to investigate further.

* Spend analysis - As a key component to understanding buying patterns, procurement specialists can analyse trends over time, such as corporate spending history, budget performance, usage patterns and changes in supplier dependencies. Analytics also highlight how commodities are purchased across affiliated suppliers, giving you increased intelligence when it's time to negotiate a contract.

* Proactive investigation - Use automated analytical "filters" on your data to alert you of changing trends so you can take appropriate action in a timely manner. You might choose delivery methods for these proactive alerts, such as e-mailed reports or graphs, a changed indicator in the scorecard, or even notification through a mobile device such as a phone or pager.

* Ranking - Ranking lets you establish an objective, repeatable and adaptable measuring system that reliably identifies the best suppliers for your organisation and responds effectively to changing business conditions. By using dynamic weighted averages to add balance and flexibility, supplier analytics objectively narrows, measures, and ranks suppliers based on your specific needs.

* Optimisation - Ranking considers each supplier in isolation, but optimisation gives you the big picture so you can set strategies for your entire supplier base. Optimisation looks at suppliers as a whole to reduce your exposure to risk, minimise purchasing costs, and increase your negotiating leverage with companies in your supply chain.

* Supplier monitoring - Using analytics, procurement professionals can monitor key supplier criteria by commodity team, company, or industry. For direct goods, this may include quality and on-time delivery, while for indirect goods, this may be price and service-level factors. Highlighting changes or trends in the specific supplier criteria that matter to specific audiences helps ensure your company can proactively minimise any negative impact on your supply-chain process.

* Organisation monitoring - As successful as a procurement department can be in negotiating the right contracts, making sure that your organisation takes full advantage of favourable pricing or service conditions can be a challenge. Supplier analytics uses specific business rules to highlight the groups or individuals in the organisation that are buying outside the contract scope or from suppliers who have not been approved. Once rogue spending has been identified, you can put the appropriate measures and programs in place to align future purchasing activities with negotiated contracts and spend-reduction goals.

* Contract compliance - Supplier analytics help you take control of cost-saving terms negotiated with your suppliers. Traditionally, realising volume discounts has depended on the suppliers and their own internal systems to recognise when conditions have been met. Integrated analytics provides the capability to monitor these factors. By incorporating key contract terms into business rules, you can learn when new levels of contract terms should be offered by the supplier, enabling you to be more proactive in managing your spending. You can also be notified of when contracts will be up for renewal, giving you time to explore new sources or seek better contract terms.

Across the source, make, store, ship and sell spectrum, analytics provide tangible and repeatable ROI. You can optimise sourcing strategies to not only reduce cost but also create a strategic supply base to help meet corporate objectives. You can increase manufacturing yield and throughput while reducing cycle times. You can improve collaboration with trading partners, where a small cost reduction can have a large impact on product profitability. Ultimately, you can profitably shape customer demand.

In many cases, companies will invest approximately .05% of their total spending for software, customisation, implementation, and training, usually yielding a 3% to 5% savings of their total spending within just six months, with the potential to reduce costs by as much as 10% or more within a year-the kind of payback (and horizon) that most companies willingly pursue.