Predictive Analytics in Procurement: The Logic Behind The Hype

 Wouldn’t it be nice to know the future for certain? There are few fail-proof ways to see shifts in the business landscape before they occur, but there are ways to ensure your goals stay on the correct path regardless of what direction the future takes. Procurement departments, for instance, have objectives that require analysis of factors beyond historic trends—considerations like supply market volatility, supply chain disruption, regulatory changes, and a whole slew of other unpredictable situations. Unless corporations start adding fortune tellers to the payroll, successful procurement groups will continue to optimize their function from the insight gained through predictive analytics.

Without channeling the fearful Ben Stiller risk assessor character in Along Came Polly, predictive analytics facilitate risk judgments that are quick and favorable towards a full-picture view of the best-case scenario. As organizations face off in increasingly competitive environments, this provides the active approach necessary to form strategy around multiple potential outcomes.

Patricia Dreghorn summed up the overall impact predictive analytics can have in an article on Supply Management:

“Procurement no longer requires someone to bang their fists on the table and demand a better deal from suppliers. It can now be founded on intelligent forecasting, understanding the market trends and knowing when is the right time to take risks and seize opportunities. This ability to make better decisions is made possible by a combination of very insightful data and the ability to interrogate it.”

To clarify things in terms of hard numbers, according to a 2011 article on SAPInsider, “benchmark findings show that a 5% decrease in spend can drive a 45% increase in net income, and moving over to spend analytics tools can capture a 30% higher rate of cost savings, a 27% higher rate of spend being effectively managed, and a 10% increase in contract compliance compared to others using manual decision-making procedures.”

Supplier Risk Benefits

So what are the barriers to effective predictive analytics? A recent My Purchasing Center blog by Ipsita Suman (Beroe, Inc.) points the blame directly at supplier visibility issues:

“A survey conducted by KPMG and The Economist led to the discovery that about 4% of organizations still have little or no tier 1 supplier visibility. Fortunately for the other 96%, organizations realize strong supplier relationship maintenance will benefit them in the long run. This is proven by the reality that about 49% of organizations have some amount of visibility into their tier 1 and tier 2 suppliers. However, 32% of organizations know everything about their tier 1 and tier 2 suppliers. Ahead of the ball game are 9% of organizations, which have complete visibility on the vertical side.”

Even during natural disasters and unexpected man-made circumstances, predictive analytics can allow companies to minimize supplier risk after disasters. Sound a little too clairvoyant to be true? Consider the case of the monstrous earthquake and tsunami that hit Japan in March 2011. As discussed in an article in CGMA Magazine, “More than 45 of Nissan’s critical suppliers sustained severe damage as a result of the disaster, according to research by the Massachusetts Institute of Technology (MIT) and PwC. But analytics that had given Nissan comprehensive knowledge of its supply chain before the earthquake helped the company make good decisions after the disaster.”

Strategic and Operational Questions Answered

With a firm understanding of strategic and operational performance, situations that arise are comprehensible in a way that is not possible without a tool to quantify impacts and analyze potential responses. Henner Schliebs of SAPinsider points out a few of the many questions that analytics tools answer to enhance procurement performance:

• How can I manage demand in my most important spend categories?
• Where are my biggest strategic sourcing opportunities?
• Where are my biggest opportunities for supplier consolidation and subsequent savings?
• What are my most significant areas of off-contract spending?
• What spend category represents my highest level of supplier risk?
• What percentages of requisitions are declined and why?
• Where are opportunities for reducing non-value-added activities?

Reaping the Benefits and Gaining an Edge

Companies with a forward-thinking mindset strive to do everything in their power to enhance operations, but pursuing everything under the sun is easier said than done, given the immense limitations on time and resources. However, the fast adoption of analytical tools may force some businesses to start considering their options sooner rather than later. It is better to “keep up with the Jones’” than to lose out on market share. Although there are constraints within all tools regarding appropriate data and accuracy, it is worth researching options to see how your organization’s procurement team can advance to the next level.