Procurement analytics: Benefits and 8 KPIs managers should track

Navigating SaaS procurement is a daunting task for businesses, plagued by time-consuming cycles and opaque pricing. This lack of clarity in cost and lengthy negotiation process also diverts time and resources away from core business activities. 

This presents a pressing need for a more efficient and transparent approach to assess and adjust your current contracts and plan future purchases carefully.

Every forward-thinking company is now relying on tech-enabled procurement to collect a wide range of data from different sources in their supply chain. Data collection is integral to making effective strategies, but that’s only the beginning. Companies must also leverage analytics to see the transformative impact of data on procurement strategies.

Procurement analytics involves making sense of the data and using it to accomplish a specific goal. 

In this article, we will explain the definition and importance of procurement analytics, along with the 8 most important KPIs to track.

What is procurement analytics?

Procurement analytics helps businesses interpret the data collected from different sources, such as supplier performance metrics and contract terms, detailed purchase order and invoice histories, insights from internal systems, etc., to generate actionable insights. 

These findings are used for making critical purchase decisions on the go, reviewing the shortcomings of current practices, improving processes, and eliminating procurement risks. 

Data used in Procurement analytics

During analysis, your internal and external data are the most significant components that help make effective, data-driven decisions:

• Internal data is sourced from your applications like CRM software and ERPs. A procurement contract can be another valuable internal source for gathering data like supplier performance. 
• External data is collected from places other than your company database, and that is often available publicly. Supplier information like risk profiles and industry credit ratings fall into this category. 

Benefits of procurement analytics

Procurement analytics can initially seem complex to managers due to varying data types and impacts across industries. However, its benefits are widely recognized and consistent across different sectors:

Solve procurement challenges 

Procurement analytics empowers teams to resolve sourcing, purchasing, and accounts payable challenges. Resolving these issues right at the beginning of the supply chain optimizes the rest of the process for better performance.  

For example, a company facing sourcing challenges in SaaS procurement utilizes procurement analytics to evaluate past data and wide-ranging market trends to choose the right vendor. This benefits the entire supply chain, enhancing collaboration and reducing lead time and overspending.

On top of that, downstream operations like inventory management, production planning, and delivery timelines are also positively impacted.

Lower costs

Using tools like Spend Analytics, procurement managers can be more proactive in their cost savings during SaaS deals. They gain a granular level of visibility into their spending spectrum and renegotiate SaaS pricing with vendors.

With the right tools and benchmarking, the historical price data of the products can be compared with the industry standard to evaluate the cost-effectiveness of the agreement. 

Likewise, contact leakage, which shows the discrepancy between the expected and real contract value, is possible with spend analytics. By analyzing contract utilization on an item or category basis, you can identify which products from a vendor are not meeting expectations. It allows you to renegotiate costs based on specific performance insights.

Mitigate risks

Unprecedented risks can put the entire supply chain in disarray. Procurement analytics brings in the much-needed transparency to rule out non-performing vendors and secure business from risks.

It compares the spending with the vendor's performance, like delivery duration, acceptance, and rejection rates. This offers the procurement managers the right guidelines to verify vendors in the supply chain with potential risks. 

This can also come in handy while planning projects with strict timelines. Procurement analytics enables managers to identify vendors who consistently deliver quality products, distinguishing them from those offering lower quality at reduced prices.

8 procurement metrics and KPIs to track

Procurement teams use KPIs to gauge the effectiveness of their operations. The most relevant KPIs vary by organizational goals and industry, but there's a common set tracked by most teams: 

Spend v/s budget

Spend v/s budget is an operational KPI that measures how accurately you budgeted the procurement costs. It compares the budgeted cost with the actual spend — the smaller the gap higher the accuracy. The spending is calculated as a separate business unit or a part of the overall organization budget. In both cases, the finance team must be made a part of the process.

Spend under management

Spend under management refers to the total sum of money actively overseen and managed by a procurement manager. It is calculated as a whole or split according to the procurement spending in different categories, regions, and suppliers as well. Spend under management creates more visibility into spending and puts the managers in the driver’s seat to control the expenses and practice strategic sourcing.

Inventory carrying cost

Inventory carrying costs include all the expenses incurred for storing inventory. Warehouse rent, salary to warehouse employees, electricity, and loss of stock due to theft or natural calamity also fall under this category. This is an important KPI for procurement managers because it directly impacts their decisions on how much they should spend on purchases and when. The idea is to maintain an optimum inventory level while keeping the inventory carrying cost low.

Cost avoidance

Cost avoidance is proactively taking certain measures to save the business from unplanned costs. These costs do not show up on the financial statements. However, they still chip away at the company's profit. These situations often stem from factors beyond the control of procurement managers, such as war conditions at the vendor's location or natural calamities.

Exchange rate exposure

Also known as currency risk, exchange rate exposure is the potential impact on the procurement cost due to the fluctuations in the currency rates. While procuring items from international suppliers, this is one of the most important metrics to track as it directly impacts the procurement cost. 

To reduce this exposure, procurement teams negotiate fixed-price contracts with vendors or adjust the price based on agreed-upon exchange rate benchmarks. Building a diverse supplier base is another idea to safeguard from currency fluctuations and offer more flexibility in managing costs. 

Price competitiveness

Price competitiveness is a vendor-related KPI that prioritizes working with vendors that offer competitive pricing compared to the market. Maintaining price competitiveness is key to establishing cost efficiency and maximizing value. While purchase cost is at the core of calculating the price, the total ownership cost, including logistics and maintenance costs, is also taken into consideration.

Procurement ROI

This internal metric calculates the profitability of procurement functions and how they contribute to the company's overall revenue goal. The easiest way to calculate procurement ROI is by dividing the annual cost savings by the annual procurement cost. Procurement managers should be careful while calculating ROI. Overemphasizing savings can result in exposing the company to risks like sourcing goods from vendors that provide the lowest price but have a track record of untimely delivery on several occasions.

Average payment term

The average payment term is crucial for procurement teams overseeing digital purchase-to-pay processes. It measures the average time to settle a supplier invoice from receipt to payment. This metric is determined by dividing the average accounts payable by the total purchase cost, including tax, and then multiplying the result by 365 days. Companies aim for a longer average payment term than accounts receivable to sustain a positive cash flow.

Get expert guidance on tracking procurement analytics with Spendflo

Spendflo is an advanced SaaS buying and optimization platform that enables procurement teams to track spend analytics, gather deep insights, and make data-backed decisions. The intuitive saving dashboard can help your procurement team stay on top of critical indicators in a matter of minutes. 

Here’s what you can achieve with the platform:

• Get a complete understanding of the overall SaaS spending
• Keep track of the most expensive SaaS contracts
• Monitor the timeline of your requests and remove bottlenecks
• Understand spending across different departments and identify where you’re overpaying
• Never miss renewals by tracking them in a calendar format

Read this case study to learn how the Digital Experience Platform (DXP) Crownpeak used the Spendflo dashboard to get timely reminders on SaaS renewals and save 30% on their annual SaaS expense.

To understand how Spendflo empowers your procurement team with relevant metrics, get a free savings analysis from our certified procurement experts today.