Step 1 - Procurement Analysis

Procurement Analysis

This step lays a solid foundation for further steps in professionalizing the procurement function. By obtaining a detailed understanding of current expenditures, procurement processes, and potential risks, companies can save costs and work more efficiently. This first step puts the company on the path to a professional and strategic procurement organization.

In an era where cost control and efficient operations are essential, this first step forms a critical foundation. It is the basis on which the rest of the procurement strategy and structure will be built. By gaining thorough insight into current procurement activities and expenditures, companies can identify "quick wins" and reduce risks. This analysis not only helps save costs but also uncovers inefficiencies and provides valuable insights for further optimization. Below, we explore in detail how this first step takes shape.

Inventory of procurement activities

One of the first steps in a professional procurement analysis is mapping out who holds procurement responsibilities within the company. This goes beyond an administrative list of names and departments; it is about understanding the current dynamics, involved individuals, and procurement culture within the organization. Based on experience, this is the most critical step to truly ensure this project’s success within the specified timeframe.

Project managers, department heads, and sometimes even the executive board are often involved in procurement decisions. By identifying who currently makes choices and arrangements with suppliers, organizations can gain a comprehensive view of the existing procurement structure and areas for potential optimization.

The human aspect: Building support and balancing freedoms

In the inventory of procurement activities, personal habits and employee freedoms often come to light. Many employees are used to independently making decisions about purchases from trusted suppliers they have chosen themselves, whenever they see fit. This freedom gives them a sense of control and efficiency in their own work, but it can also lead to fragmented spending and missed savings opportunities for the company as a whole.

For this transformation to be successful, it is essential to address this from the beginning. A plan to professionalize the procurement function can feel threatening to employees who fear their decision-making authority will be curtailed. Therefore, it is important in this inventory phase to not only focus on identifying who is responsible for procurement but also to consider their perspectives and concerns. This not only helps in understanding existing work habits but also provides an opportunity to build support for the changes to come.

Communication and engagement: Planning for future roles

To make the transition to a centralized and professional procurement organization successful, it is useful to start thinking from this initial step about what the new procurement organization will look like and which employees will have a role in it. Not everyone will retain the same level of procurement authority, but that does not mean their expertise or involvement should be lost. By creating a clear communication plan that explains the "why" behind the change, the company can share the benefits of a centralized procurement organization: cost savings, better contract terms, and reduced risks.

Moreover, it is helpful to inform employees early on about how their roles might change and what skills or responsibilities they can retain or further develop within the new structure. For some employees, this transition may even present opportunities to grow in their roles or specialize within specific procurement categories. For example, a project manager who is accustomed to handling contracts may take on an advisory role in supplier selection or be involved in evaluating bids.

Retaining freedoms within a streamlined structure

The transition to a professional procurement function does not mean all freedoms should be removed immediately. A balance between structure and flexibility can even be beneficial. For example, it may be useful for certain operational departments to retain some autonomy in their procurement decisions, but within predefined frameworks and contracts negotiated by the central procurement team. This maintains the necessary agility for specific departments while ensuring control and consistency across the broader procurement organization.

In short, by focusing in this initial inventory phase not only on processes and decision-making authority but also on the human side, the company builds a solid foundation of trust. This ensures that all parties understand why the change is necessary and feel motivated to contribute to the success of the new procurement organization. The above is also somewhat dependent on the company culture. From prior projects in various countries, I’ve learned it is essential to take this into account.

1. Analyzing spend data: Gaining insight into expenditures and procurement patterns

Spend analysis is a crucial part of professionalizing the procurement function. By thoroughly analyzing expenditures, an organization gains valuable insights into procurement behavior, supplier relationships, and potential savings opportunities. Effective spend analysis allows the company not only to save costs but also to make strategic decisions that lead to better relationships with suppliers and increased efficiency within the procurement organization. There are numerous solutions on the market that support this process and claim to analyze expenditures with advanced technologies such as AI. While these tools can be valuable, we will not delve further into them here but instead highlight the core aspects of effective spend analysis.

 Why spend analysis is essential

The goal of spend analysis is to understand, structure, and optimize expenditures. This process is not only focused on identifying cost savings but also on improving the overall procurement strategy by uncovering patterns and opportunities. For example, spend analysis enables the company to:

• Identify purchasing patterns: By identifying regularly recurring purchases, the company can pinpoint major suppliers or frequently bought goods. This insight provides opportunities to consolidate purchases, reduce the complexity of the procurement process, and achieve economies of scale.
• Reduce costs and realize savings: Through volume concentration and bundling, the company can negotiate larger discounts with suppliers. It can also identify and eliminate duplicates or inefficiencies in spending.
• Optimize supplier management: With an overview of which suppliers handle large volumes, the company can make strategic choices about which suppliers will become long-term partners and which require evaluations of terms and performance. 

How to conduct spend analysis: Key steps

An effective spend analysis includes several steps that together provide a holistic view of expenditures. Here are some essential steps to optimally analyze spend data:

• Collect and structure data: Start by gathering all relevant data, including invoices (all invoices), purchase orders, contracts, and historical spending per supplier. Spend data often comes from various systems, such as ERP systems, procurement systems, and financial software. This data must be carefully organized to be usable.
• Cleanse and normalize data: A key step in the spend analysis process is data cleansing and normalization, especially if there are many suppliers, categories, or products involved. Supplier names or product descriptions are often entered in different ways, resulting in a fragmented view of spending. Data cleansing ensures all data is uniform and consistent, making patterns easier to recognize.
• Categorize expenditures: Once the data is cleaned, it can be categorized. This means grouping expenditures by category (e.g., IT, materials, services) and subdividing them by specific products or services. This helps provide insight into which categories incur the most costs and where savings potential lies. See the next chapter for more on this.
• Analyze supplier data: Examine who the major suppliers are, what volumes are purchased, and how prices vary per supplier. By analyzing spending per supplier, the company can make decisions about consolidating suppliers or negotiating new terms. Specific analyses can offer insight into dependencies on certain suppliers as well as the risks of these dependencies.
• Identify quick wins and long-term strategies: A good spend analysis provides insights into both quick wins and long-term strategies. Quick wins can be achieved, for example, by consolidating purchases or making volume agreements with the largest suppliers. Long-term purchasing patterns can help develop a strategy for supplier consolidation or the use of fixed contracts with better terms.
• Use of software or analytical tools: Although the focus here is on the process, there are numerous spend analysis tools on the market that offer advanced features, such as AI-driven insights, data visualization, and benchmarking. Many of these tools use algorithms to recognize patterns and provide immediate insight into purchasing patterns, categories, and supplier performance. 

What are the benefits of spend analysis?

A deep spend analysis offers multiple benefits:

• Direct savings: By identifying opportunities for volume agreements or consolidation, the company can achieve immediate savings.
• Improved procurement strategy: Spend analysis forms a foundation for strategic procurement choices, such as developing long-term contracts or entering partnerships with suppliers.
• Better negotiating position: With insight into the total spending pattern, the company can negotiate more effectively, leading to better terms and discounts.
• More efficient supplier management: By gaining insight into the supplier structure, the company can reduce risky dependencies and prioritize supplier choices.

Key stakeholders in the spend analysis process

Spend analysis requires the involvement of various internal stakeholders:

• Procurement managers: They play a central role in conducting and interpreting spend analysis and translating the outcomes into concrete actions.
• Finance department: Provides critical data and supports the process by verifying financial analyses and cost structures.
• Department heads: Provide context on why certain purchasing decisions were made and help identify procurement needs per department.
• Executives: Support the long-term strategy by approving decisions on supplier management and strategic partnerships.

 Spend analysis summarized

Spend analysis lays the foundation for a strategic, data-driven approach to procurement. By gaining insight into procurement behavior and expenditures by category, a company can better steer toward cost savings, risk management, and value creation. Although spend analysis requires a lot of data and a structured approach, it offers immediately visible benefits and helps align procurement with the company’s strategy.

 3.  Establishing procurement categories – creating structure in procurement activities

An effective procurement function begins with the establishment of clear procurement categories. By dividing procurement activities into categories such as materials, services, IT, maintenance, and facilities, a clear procurement landscape is created that provides not only insight into expenditures but also ensures targeted guidance and assignment of responsibilities to specific departments and teams. This is essentially part of the spend analysis, but I have dedicated a separate chapter to it.

Why: The purpose of categorizing procurement

One of the primary reasons for establishing procurement categories is to structure procurement activities and thereby gain insight into spending patterns within the organization. This allows the company to understand not only where and how money is spent but also to identify savings opportunities by taking targeted action per category. Categorization allows companies to negotiate better with suppliers, bundle larger volumes with a few suppliers, and better map risks per procurement segment. By grouping procurement activities based on categories like materials, services, IT, maintenance, and facilities, a structured procurement landscape emerges, enabling targeted steering and assigning accountability.

Understanding the "Why" behind each procurement category

An effective procurement categorization starts with a clear understanding of the “why” behind expenditures per category. Why are these expenditures being made? What is their contribution to business goals? This is more than just a financial question; it involves the strategic and operational role each category plays within the company. By understanding the underlying needs per category, the procurement team can not only optimize expenditures but also ensure that procurement decisions directly contribute to the organization’s objectives.

Each procurement category has its own role and importance within the organization, which requires an adapted approach:

1. Material and production-related expendituresWhy: For many companies, materials are central to their product or service. This means material expenditures are essential for achieving production or service levels.Stakeholders: Production managers, quality control teams, and R&D departments. They must be involved to ensure materials meet the required quality and continuity of supply is guaranteed.
2. Services and support facilitiesWhy: Services such as logistics, cleaning, or marketing are often supportive but essential to the organization’s operational success and reputation.Stakeholders: Operational managers and department heads responsible for utilizing these services. The procurement team works with them to determine whether contract terms meet the needs and where savings or improvements are possible.
3. IT and technological expendituresWhy: IT investments often support the organization’s digital infrastructure and competitiveness. Without the right IT resources, business operations can be severely disrupted.Stakeholders: IT managers and executives are key partners in this category. They bring specific technical requirements and innovation needs, while the procurement team helps them find cost-effective solutions.
4. Maintenance and facility expendituresWhy: Maintaining property and infrastructure is essential for ensuring business operations run smoothly and safely. Facility expenditures, such as office facilities, provide an optimal work environment.Stakeholders: Facility managers and safety coordinators need to be involved to ensure expenditures meet operational and regulatory requirements. Together with the procurement team, they can seek out contract partners who offer the appropriate quality and terms.
5. Indirect expendituresWhy: Indirect procurement includes various costs, such as office supplies and other overhead. While these expenditures do not directly contribute to production, they support business operations.Stakeholders: Financial and administrative departments often lead this category. They help understand the cost structure and possible savings.

How: Steps to define categories and create structure

Defining procurement categories is not just an administrative task; it is a strategic process that must be carefully executed to maximize value from each category. With the abundance of solutions on the market today, many systems and tools offer almost immediate categorization and spend analysis by leveraging artificial intelligence (AI). While these solutions can be very valuable, a careful assessment is essential before committing to one.

Although AI-based solutions are often powerful analytical tools that help companies gain detailed insights into spending patterns and procurement categories at a low threshold, several considerations must be taken into account:

• Privacy and data security: Many of these solutions require the input of detailed, often privacy-sensitive data. It is important for the company to ensure that all data is well-protected and that the chosen solution provider meets privacy and security standards.
• Cost and scope of application: While some solutions are low-cost, this can also bring limitations in the long term, such as flexibility or integration. The procurement team must assess whether the chosen software genuinely aligns with the organization’s scale and specific needs.
• Purpose and customization: AI solutions can add value but only if they are well-aligned with the business strategy. There is a risk of implementing AI tools without a clear business objective, causing the investment to not be fully utilized.

For effective categorization, a careful step-by-step approach remains essential:

1. Inventory all expenditures: Gather data on all expenditures based on invoices and contracts. This forms the foundation for categorizing.
2. Cluster similar expenditures: Group expenditures that are similar in nature or usage. For example, all expenses related to office supplies can fall under one category, while IT-related purchases, such as hardware and software, are classified under IT.
3. Consult with departments: Engage departments that regularly conduct procurement activities to map out their specific needs and preferences. Their input helps in categorizing so that it aligns with the internal organization.
4. Determine strategic priorities per category: Not every procurement category has the same priority. Materials directly used in production may be more critical than indirect costs like marketing services. Prioritizing categories ensures a more efficient procurement policy and focuses resources where they have the greatest impact.
5. Use software for categorization: ERP systems or specialized procurement software can allow the company to automatically track, group, and analyze expenditures by category. This simplifies monitoring and adjustment of categories and provides a data-driven insight into expenditures per category.

What: The outcome and benefits of Category Segmentation

The end result of this step is a clear segmentation of all expenditures by category, which helps companies to:

• Structure and streamline purchasing behavior: Categories make purchasing activities more uniform, enhancing efficiency.
• Enhance negotiation focus: By grouping categories, companies can centralize purchasing volumes and secure better terms with suppliers.
• Improve risk management: Segmenting expenses by category makes it easier to identify risks, revealing dependencies on certain suppliers or vulnerabilities within specific purchasing categories.
• Assign responsibilities purposefully: Each category has a designated responsible party, leading to better internal collaboration and accountability.

Who: Involved Roles and Responsibilities

To effectively execute this step, it’s essential for different parties within the company to have a clear role in the process:

1. Purchasing Managers: Coordinate the categorization process, maintain stakeholder communication, and ensure the “why” is integrated into the purchasing policy.
2. Department Heads and Operational Managers: Responsible for their departments' daily expenses and provide essential input on requirements per category.
3. Financial and Administrative Staff: Support the process with data analysis, offering insights into the cost structure of various categories.
4. Executives and Senior Management: Their approval and support guide the entire trajectory, ensuring that categorization aligns with the organization’s strategic goals.

 Balance between change and autonomy

Transitioning to a professional purchasing function doesn’t mean immediately eliminating all freedoms. A balance between structure and flexibility can be beneficial. Allowing certain operational departments some autonomy in their purchasing decisions within predefined frameworks and contracts negotiated by the central purchasing team retains agility while ensuring consistency and control within the broader purchasing organization.

4. Order frequency - enhancing efficiency by understanding ordering patterns

Analyzing order frequency by category provides valuable insights into the procurement process, helping to optimize the use of time and resources. This analysis gives the company an understanding of how often certain products or services are ordered and how much time and resources are spent processing orders. By identifying patterns in order behavior, the company can uncover inefficiencies and discover opportunities to consolidate orders. This not only leads to cost savings but also reduces the administrative burden, contributing to a more efficient and intelligent purchasing organization. 

Why analyze order frequency?

Analyzing order frequency offers several advantages, especially in terms of efficiency, cost savings, and reducing administrative workload:

• Order processing efficiency: By mapping how frequently orders are placed, companies can identify inefficiencies. Many small, recurring orders can indicate time-consuming processes, resulting in additional costs and administrative burdens for each order.
• Identifying consolidation opportunities: Understanding frequency patterns enables the company to consolidate orders. For example, instead of placing a small weekly order for office supplies, the company might switch to larger monthly orders, reducing purchasing and transportation costs.
• Achieving Cost Savings: Analyzing order frequency helps identify opportunities for economies of scale by consolidating orders. Larger, less frequent orders strengthen the company’s bargaining position with suppliers, potentially leading to volume discounts and better terms. 

How to perform an order frequency analysis

Here are some steps for effective order frequency analysis:

1. Gather data on ordering patterns: Start by collecting data on all placed orders, including their frequency, costs, and quantities. This data can come from ERP or procurement systems that automatically track order history and provide frequency reports.
2. Segment by Category and Supplier: Analyze the order frequency for each purchasing category (e.g., office supplies, IT equipment, services, and maintenance). Also, identify the frequency of orders per supplier, as this provides insights into potential bundling opportunities within specific suppliers or categories.
3. Analyze Orders by Product Type and Department: Look at ordering patterns by product type or department. Some departments may have fixed, frequent orders for specific products, while others may order only occasionally. By segmenting this information, the company can decide if there are categories that could be consolidated.
4. Identify consolidation opportunities and determine optimization levels: By analyzing how often similar products or services are ordered, the company can determine whether there are consolidation opportunities. This means ordering on a set schedule or in larger quantities, leading to lower costs and reduced administrative burdens. It’s essential to balance less frequent ordering with avoiding stockouts.
5. Communicate with Departments and Suppliers: Discuss with departments and suppliers the options to reduce order frequency. For internal departments, a joint plan can streamline orders, while for suppliers, set delivery times or larger order volumes can lead to better terms.

What are the results and benefits of an order frequency analysis?

By analyzing order frequency, companies can realize both direct and indirect benefits:

• Lower purchasing costs: Reducing the number of orders decreases ordering and transportation costs. Additionally, larger orders are often purchased at a lower price per unit.
• Reduction of administrative burden: Fewer orders also mean less processing time, fewer invoices, and less follow-up by purchasing and administrative departments.
• Better supplier relationships: Implementing a more streamlined ordering process and placing orders at fixed times allows suppliers to better meet the company’s needs. This can lead to better terms, faster deliveries, and a stronger negotiating position.
• Optimal stock levels and fewer adjustments: By streamlining order patterns, companies can better manage inventory levels. This reduces the risk of overstocking or stockouts, resulting in optimal inventory and lower storage costs.

Who should be involved in the analysis?

A successful order frequency analysis requires the involvement of various departments and stakeholders:

1. Purchasing team: Responsible for collecting and analyzing order frequency data and coordinating consolidation opportunities.
2. Department heads and operational managers: They provide insights into their order needs and help implement bundling strategies within their departments.
3. Logistics and inventory management teams: Manage inventory levels and collaborate with the purchasing team to assess the impact of less frequent ordering on stock.
4. Financial and administrative departments: Support the analysis by providing cost information and helping calculate savings from reduced administrative workloads.

Order frequency analysis: Summary

Analyzing order frequency enables companies to work more efficiently and reduce the administrative burden of procurement processes. By understanding and optimizing order patterns, the company can not only save costs but also improve supplier relationships and build a more robust, streamlined purchasing function.

5. Identifying immediate improvement points and risks in Procurement Analysis

An essential part of procurement analysis is identifying immediate improvement points and potential risks within the current procurement process. By understanding these areas for improvement, an organization can start reducing costs, improving efficiency, and controlling risks that could otherwise impact continuity and performance. Below is an explanation of some key focus areas in the analysis:

Uncontrolled Purchasing

• What does it entail? Uncontrolled purchasing refers to purchases made outside formal procurement channels or without established contracts. This often occurs when departments make purchases independently of the purchasing team, typically due to urgency or a preference for a specific supplier.
• Risks and consequences: Uncontrolled purchasing can lead to higher costs and operational risks:
• Lack of favorable terms: Suppliers without contracts often offer standard prices, whereas contracts allow for negotiating discounts, delivery times, and service conditions.
• Compliance and Legal Risks: Without a contract, there are often no agreements on liability, data security, and regulatory compliance, posing legal and compliance risks.
• Lack of transparency: Uncontrolled purchasing weakens visibility into procurement spending, making it harder to manage expenses and effectively monitor budgets.
• Improvement approach: By identifying suppliers without contracts and bringing them under contract, the company can secure better terms and improve spending transparency. Establishing a centralized procurement system for all purchases can reduce uncontrolled purchasing and ensure consistency in supplier agreements.

Transaction Cost Analysis

• What does it entail? An analysis of transaction costs reveals how much time, resources, and money are spent handling each invoice and transaction. A high transaction frequency for small, recurring orders can be inefficient and result in increased administrative costs.
• Risks and consequences: When many transactions involve small order amounts, it can lead to:
• Increased administrative burden: Each transaction requires order processing, approval, invoicing, and payment, consuming time and resources and resulting in high costs for relatively small orders.
• Procurement management inefficiencies: Processing numerous small orders can distract from strategic procurement activities, such as negotiating better terms or developing supplier relationships.
• Improvement approach: Bundling orders by supplier and setting up framework agreements for frequently used items or services can reduce the number of transactions. Consolidating orders reduces administrative burdens and creates opportunities for volume discounts and better terms. For instance, bundling weekly office supply orders into a single monthly order can significantly lower transaction costs.

Supplier structure optimization

• What does it entail? A fragmented supplier structure means that a company has multiple suppliers within the same purchasing category, potentially leading to inefficiencies. For example, if there are ten different suppliers for office supplies, this may indicate an unstructured purchasing practice.
• Risks and consequences: A fragmented supplier structure can lead to:
• Loss of economies of scale: Distributing expenses across many suppliers means potential volume discounts are missed.
• Supplier Management complexity: Managing multiple suppliers in the same category increases the administrative burden and complicates consistency in price and quality.
• Lack of strategic relationships: Working with many suppliers makes it harder to build long-term partnerships, which can affect favorable terms and innovation opportunities from suppliers.
• Improvement approach: Consolidating orders with a limited number of suppliers per category can simplify procurement processes and yield cost savings. For instance, rather than using multiple suppliers for office supplies, the company can choose one strategic partner offering higher volume discounts and better conditions. This also reduces the time and effort spent managing suppliers.

Supply Chain Risk Analysis

• What does it entail? A risk analysis in procurement focuses on identifying potential weaknesses in the supplier structure, such as dependence on a single supplier, working with suppliers without contracts, or collaborating with suppliers who do not meet internal and external compliance requirements.
• Risks and consequences: Dependence and lack of supplier risk control can have serious consequences:
• Supply Risks: Relying too heavily on one supplier increases the risk of supply chain disruptions, especially if the supplier cannot meet contract terms or faces operational issues.
• Compliance and Quality Risks: Working with non-contractual or non-compliant suppliers can lead to quality and regulatory issues, ultimately damaging the company’s reputation.
• Financial Risks: Unregulated, non-contractual collaborations can lead to unforeseen costs due to price fluctuations and additional service fees.
• Improvement approach: Conducting a thorough risk analysis helps the company map these vulnerabilities and take proactive measures. This could include:
• Supplier Diversification: Spread risks by working with multiple suppliers for critical categories, reducing dependency on one party.
• Strict Contractual Agreements: Contract all critical suppliers to secure consistent quality and delivery assurance.
• Regular Evaluations and Audits: Conduct periodic evaluations to monitor supplier performance and ensure they comply with quality and regulatory requirements. Audits can help detect potential problems early.