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CPOs Find Analytics Improve Margins

Procurement organizations tapping into data and collaborating with other internal business units widened profit margins by more than 1 percent, according to a new study.

The companies in the report reported profit margins of 7.12 percent, compared with 5.83 percent for companies with low-performing procurement organizations, according to the Chief Procurement Officer Study 2013 from the IBM Institute of Business Value. The study, which was released last week, highlights the impact that chief procurement officers (CPOs) can have on a company's competitive advantage and profitability.

It hasn't always been that way. CPOs, along with chief marketing officers, have struggled for years to gain the same respect in the board room as chief technology officers, chief information officers, chief operating officers, and chief financial officers. The use of data to support procurement decisions and improve margins continues to change the perception of the CPO's role across the organization.

While IBM produces analytics products like those endorsed by the study, the report also touched on non-technical solutions. IBM Industry Solution General Manager Craig Hayman said successful CPOs collaborate more often with their peers from across the business. No longer do they solely rely on their own division's data, but rather work closely to pull in stats from the company's IT and marketing departments.

They also reach out to collaborate more with business partners and suppliers. It lets them better understand gaps in their supply networks and diversify the supplier base to ensure products are available at the correct store locations, while maintaining stable prices to improve margins.

“Analytics in the hands of chief procurement officers isn't something you would typically think about when trying to negotiate a better deal that fell out of contract,” Hayman said in the study. “By understanding analytics, CPOs can identify areas where they're spending more, and where suppliers are not being compliant with contacts.”

Rather than nailing suppliers to the wall for not complying with sourcing contracts, CPOs have begun to more closely collaborate to gain insights and learn, according to the study, which surveyed 1,128 procurement executives in 22 countries across North America, Europe, and Asia Pacific. Of the respondents, 15 percent were identified as top performers, defined by an ability to influence and drive innovation across their companies to increase profits.

Aside from a closer relationship with suppliers, the report identifies that successful CPOs demonstrate specific traits like the use of analytics, and the ability to quickly adapt to market conditions through supplier insights and data. It turns out that 83 percent of high-performing CPOs rely on analytics, compared with 63 percent of the lowest performers.

Top performers also more closely collaborate with suppliers, spending about 38 percent of their annual spend through strategic alliances. Successful CPOs also quickly adapt to market conditions by gaining insights through the supplier community.

From supplier insights, CPOs may agree to spend a little more on parts, Hayman said. “The supplier might say to the CPO 'I know you typically buy component A, but there's a version of the component with an added capability that costs a dollar more,' ” he wrote.

The CPO takes that insight and goes back to the marketing and product development teams to ask, “If I can get this added feature for just $1 more, can you market it?” The report suggests that 75 percent of successful CPOs gather these insights from suppliers and put them to good use.

Although companies oftentimes increase operating costs to improve margins, enhancing performance and streamlining processes typically means better profits in the long term. He said CPOs recognize the opportunities and have begun to embrace a variety of technologies that support this shift, including analyzing data to make procurement decisions.

Technology as a differentiator
The study found 94 percent of top-performing companies are more effective in their use of procurement technologies, compared with 44 percent considered average or below average in their use of technology. Companies with top-performing procurement organizations report profit margins 15 percent higher than the average company, and 22 percent higher margins than companies with low-performing procurement organizations.

The ability to analyze supplier contracts, relationships, and performance through a “360-degree” global view will become the most important area of investment during the next three years, according to the report.

12 comments on “CPOs Find Analytics Improve Margins

  1. Tom Murphy
    May 30, 2013

    The increase of a single percentage point in profit may not seem like enough until you consider it equates to about a 17 percent increase in profit.  That's a big deal. Better yet, predictive analytics are getting cheaper thanks to SaaS models that also let SMBs get into the game.  Look for a LOT more improvement in this area …. and soon.

  2. Laurie Sullivan
    May 30, 2013

    A penny saved is a penny earned, even though the government estimates the cost to make one at 2.5 cents. It's interesting to see how buyers are using analytics. I cover the online advertising industry daily and often see many of the trends used by the electronics industry migrating over. Now, I'm starting to see analytics move to electronics procurement. A handful of electronics companies began about a year ago using social networks and search query trends to forecast product demand in geographic areas. These companies could do so much more to improve raw material forecasts if they would track sentiment and keywords in news feed streams in sites like Twitter, Facebook and Pinterest. It's all about predictive analytics and software as a service. Interesting stuff.

  3. Hailey Lynne McKeefry
    May 30, 2013

    One percent increase doesn't sound like much until you put it with the reality of five to seven percent margins. That's a 20 percent increase. amazing. Purchasers have long been in search of the best way to work smarter not harder and analtytics seems like it's going to be a big part of solving that problem. It would seem to me that it would make it easer to spot trends over time as well…which is huge.

  4. Laurie Sullivan
    May 30, 2013

    I know. It's amazing. Before I spoke with the folks at IBM, for some reason I thought procurement already used this type of analytics. There's so much opportunity here. It's exciting.

  5. prabhakar_deosthali
    May 31, 2013

    Improved margins is a good news ! More than that it will act as a pull for using such analytics tools for many more CPOs.  This paradigm shift is very important in the long term where the decisions are taken more objectively based upon data and less subjectively -based upon instincts, hunches, hearsay information and the so-called experience.

    This changing trend is more important and long term profitable to the Supply chain associated businesses , in my opinion

  6. Himanshugupta
    May 31, 2013

    Analytics and Big data are today's buzz word and they are giving returns for those companies who are implementing these solutions very seriously. I knew that analytics is used heavly in Finance, Marketing, Retail etc but using it in procurement is really innovative. 1% saving is i think a huge deal and the profit can run into millions and all this at a little more effort. This is really great.

  7. hash.era
    May 31, 2013

    Analytics can do wonders for many figures. I think a good start atleast by now since this will look good for many analytical tools which are available in the market.     

  8. Lavender
    June 2, 2013

    In particularly, CPO analysis does favor to the accelerated component obsolescence, helping reduce the risks of counterfeit parts. 

  9. Hailey Lynne McKeefry
    June 4, 2013

    @Laurie, what do you think the main stumbling blocks for organizations? Is it a lack of knowledge? Need for IT know how to integrate? Not knowing where the information is or how to gather and analyze?

  10. Laurie Sullivan
    June 4, 2013

    Hi Hailey, I would add not wanting to share information across business units and the inability to speak the same language to the issues you named. I worked in corporate America marketing prior to becoming a journalist in 2000. IT doesn't speak marketing, and marketing doesn't speak operations. I write daily about online advertising, an industry that's excelling in analytics. I've already made suggestions to several online ad platform companies that they need to help procurement find and access the correct data. It could open a new market for them. An exec from Webtrends told me that only a few companies like IBM have the technology today to support electronics procurement. 

  11. Hailey Lynne McKeefry
    June 5, 2013

    @Laurie, I believe that's true. I found the engineering folks incredibly hard to interact with when i was in marketing. They wanted to talk bits and bytes and I wanted to talk end user value. There was a wide divide. Further, it was a Taiwanese compnay so there was an ACTUAL language barrier on top. I think “bilingual execs” those who can translate between say IT and operations, or marketing and engineering are going to be not just valuable, but also critically necessary going forward.

  12. FreeBird
    June 5, 2013

    I read the summary of this report and the additional color in this blog is really helpful. On one hand, if anyone in your organization goes to a C-level exec and says “I can save/make you money” why not listen? On the other hand, procurement is often viewed as an operations-level role that may or may not have a seat at the executive table. Bringing hard facts/data/analysis to the party is the best way to demonstrate the importance of procurement as a strategic advantage to a corporation. 

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