Advancing

Procurement
Analytics
Capturing the Long Tail with
Simplified Data Preparation

Federico Castanedo

Advancing Procurement
Analytics
Capturing the Long Tail
with Simplified Data Preparation

Federico Castanedo

Beijing

Boston Farnham Sebastopol

Tokyo

Advancing Procurement Analytics

by Federico Castanedo
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Table of Contents

Advancing Procurement Analytics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction
Locate, Categorize, and Maintain Data
Overcoming Unexpected Events
Procurement in the Public Sector
Current Solutions
Spend Analysis
Data-Driven Action
Managing Costs at a Sub-Commodity Level
Dealing with Data Variety
Universal Business Language
Speed and Lack of Scalability in Data Preparation
Novel Approaches to Procurement Analytics
The Next Step Forward
Game Theory
Inventory Optimization
Machine Learning in the Future of Procurement

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Advancing Procurement Analytics

Introduction
The explosive growth of data is enabling managers to make deci
sions that can give companies a competitive advantage. At the same
time, making sense of this influx depends on the ability to analyze
data at a speed, volume, and complexity that is too vast for humans,
or for previous technical solutions. Organizations are challenged
with not only surpassing their competitors, but making decisions to
optimize their own business activities and workflows. Yielding
insights from data has the potential to transform companies inter
nal processes and reduce costs.
An important area where this transformation has a huge business
impact is the optimization of procurement processes. During the pro
curement process, some companies may spend more than two thirds
of revenue buying goods and services, which means that even a mod
est reduction in purchasing costs can have a significant effect on
profit. From this perspective, procurementout of all business activ
itiesis the key element in achieving cost reduction.
In a nutshell, procurement is about planning the buying process in a
proactive and strategic approach. The process includes preparation
and processing of a companys demand, as well as the end receipt
and approval of payments. The process can begin by issuing a pur
chase order, and end when the order is shipped; or, it can cover a
broader scope, which includes demand planning and inventory
optimization. Demand planning and inventory optimization tasks
are mostly data driven, and their outcomes depend on the quality of
the input data and on the accuracy of the predictive algorithms.

The importance of procurement teams is clearly evident. In 2015, a

Global Chief Procurement Officer Survey by Capgemini Consulting
revealed that 72% of procurement groups reported to a C-level exec
utive (in 2012/2013 it was a 59%), and more than 16% reported
directly to the CEO. A study from IBM shows that companies with
high-performing procurement teams report profit margins of
7.12%, as compared to 5.83% from companies with low-performing
procurement teams. In addition, companies with top-performing
procurement teams report profit margins 15% higher than the aver
age performing company, and 22% higher than low performers.

Locate, Categorize, and Maintain Data

To generate savings faster than their competitors, procurement
teams should have an appropriate way to locate, manage, and main
tain data; the challenge, however, is that data is not always easy to
collect because it is usually spread throughout the organization.
Traditionally, procurement organizations have the goal of maximiz
ing cost savings, and to achieve it they usually focus on the spend of
the top suppliers. This approach is based on the Pareto 80/20 princi
ple: approximately 80% of the spend will be covered by 20% of the
suppliers; on the other hand, the remaining 20% of the spend is cov
ered by the other 80% of suppliers. Nevertheless, in some cases the
long tail can be 50% of the total spend by the organization. It is
common to focus on the top suppliers rather than analyze the com
plete long tail, because sourcing managers do not have enough time.
But if the time spent in the process of analyzing data can be reduced,
it will be possible to analyze the complete long tail and take advan
tage of the complete picture (Figure 1-1).

Advancing Procurement Analytics

Figure 1-1. Supplier/buyers spend usually follows a Zipf distribution.

The long tail in yellow may have an amount higher than the green one
but is split over a high number of suppliers.

Overcoming Unexpected Events

Procurement or sourcing managers need to purchase the right
quantity of products at an advantageous price and at the right time.
Therefore, it is important to understand how delays, disruptions,
and other unexpected events affect the overall operations and the
sourcing costs. That means managers need to be fully aware of the
potential impact of geopolitical and other events in the demand of
the products they need to acquire.
To overcome unexpected events, managers need instant access to a
supplier database to identify new suppliers if necessary. A key con
sideration is to have immediate access to the profile of trusted sup
plier data, enabling a buyer to start commercial transactions with
new suppliers. As an example, blur cloud software provides a web
application to transparently and simply manage, source, and deliver
services. It allows the user to create project briefings and use the
blur marketplace with more than 65,000 service providers. Other
startups, like Tradeshift, focus on simplifying the invoicing opera
tion by providing a supplier platform for invoices and payments,
using connections between companies to verify the transactions in a
manner similar to social networks. Other companies focus on
streamlining the entire procurement process using cloud-based sol
utions, like Ariba and Taulia.

Overcoming Unexpected Events

Leading procurement organizations are also augmenting their infor

mation with trusted third-party sources to respond efficiently to
unexpected events. As an example, Tamrs platform provides inte
gration with Reuters data, allowing the analysis of the supplier mar
ket and the ability to track significant news (e.g., bankruptcies).

Procurement in the Public Sector

Procurement is also an important topic in the public sector, where
there are potential benefits for the government. In most countries, it
is also mandatory to publish the public contract notice to ensure
enough transparency. As an example, the website OpenProcure lists
US public agencies and their respective procurement thresholds;
these thresholds identify the dollar amount under which a govern
ment agency can purchase a product without the requirement of
doing a competitive bid.
Data integration of public contracts is a related topic in the Euro
pean Union. Public contracts must be available by law in the EU, but
data is not easy to obtain, and published data commonly appear in
different formats and languages. Lod2 is a large-scale research
project funded by the European Commission with the goal of
advancing the representation of public contract data to enable elec
tronic data integration. They propose that public contracts can be
represented using linked dataallowing semantic queries and links
to external information.

Current Solutions
In todays big data era, procurement teams want to be more data
driven, and data sources cannot be managed as a group of individ
ual silos. As procurement teams begin to collect and maintain
higher-quality data, advanced analytics techniques will be utilized to
drive decision-making strategies and identify opportunities.
Most procurement organizations have some data infrastructure in
place. Typical infrastructure components are Enterprise Resource
Planning (ERP) systems, which primarily manage direct spend with
suppliers, and Source-to-Pay (S2P) systems that manage indirect
spend with suppliers. Some basic analytics, focused primarily
around spend, are usually performed with this software to answer
business questions.

Advancing Procurement Analytics

Spend Analysis
Spend analysis is the process of collecting, cleaning, classifying, and
analyzing procurement data with the purpose of decreasing costs,
improving efficiency, and monitoring compliance. There are many
benefits of spend analysis and management, such as reductions in
materials and services costs, inventory costs, decreased sourcing
cycle times, and improved contract compliance. The cost, lack of
knowledge, or availability of scalable spend analysis tools are com
mon roadblocks.

Data-Driven Action
The original approach to analyzing spend is to build spend cubes
along three dimensions(1) suppliers, (2) corporate business units,
and (3) category of itemwhere the contents of the cube are the
price and volume of items purchased. Using procurement analytics
to determine things such as how much is spent by supplier, category,
etc., can lead to the following data-driven actions:
Aggregation: It is possible to reduce the supplier base and
increase the cost savings by the aggregation of multiple suppli
ers for a single product. This provides direct savings based on
the difference among current prices and negotiated contract
pricing.
Compliance: Discover contracts that should be carried out fol
lowing specific terms, but for whatever reason were not accom
plished; this includes monitoring the terms and conditions of
the contractual agreement and tracking rebates and payment
terms.
Untouched spend: It may be the case that high costs in some
categories go unnoticed by the procurement team. This may
happen because managers do not have enough time to analyze
all of the categories and existing tools are not quick enough.
Price arbitrage: This happens when multiple prices are charged
for the same unit even from the same supplier. Price arbitrage
requires having the right information at the right time and ena
bles you to estimate costs before quotes are received.

Spend Analysis

 Spend recovery: This allows you to detect duplicated invoices

for payments, whether done intentionally, as in the case of fraud
(example from Boeing), or not.

Managing Costs at a Sub-Commodity Level

To understand and identify the true drivers of cost in a big organiza
tion, it is necessary to manage costs at sub-commodity level, using
detailed taxonomies. This process involves diagnosing price differ
ences of similar components by integrating several data sources, and
it allows businesses to make decisions at the sub-commodity level.
To identify key suppliers to partner with, it is necessary to under
stand sales, trends, and growing/declining product lines; its also
necessary to monitor and analyze market developments. A critical
factor for success is not only having access to all of the data from the
different subsystems, but also having high-quality, accurate data.
Moreover, to be able to react on time, the procurement analytics
actions should be carried out frequentlynot only once or twice a
year. Finally, the analytics results must be easy to use in order to
make the right decisions.
As an organization becomes more mature and grows, problems with
procurement analytics arise, limiting their ability to quickly and
effectively answer business questions and generate adequate datadriven actions. These problems primarily revolve around data prep
aration and can be classified as:
Lack of quality in data preparation, due to data variety.
Speed of data preparation.
Lack of scalability in data preparation.
We will focus on these problems, and how they can be addressed, in
the sections that follow.

Dealing with Data Variety

Sourcing managers usually have both quantitative and qualitative
data, with different formats. Before doing any type of analysis, this
data must be prepared and integrated, or curated, to represent accu
rate information.

Advancing Procurement Analytics

As companies struggle with the amount and variety of data stored,

they find it difficult to centralize and integrate it in one place. This
situation especially arises in large corporations, which often have
systems from different vendors and data stored in different formats
(resulting in data silos). Large and mid-size organizations may have
five or more sources of spend data. Furthermore, legacy vendors do
not have sophisticated automation techniques for data preparation
and require human involvement.
Broadly speaking, there are two solutions for the data variety prob
lem:
1. Embark upon a complete transformation of all the software
platforms and databases, and generate the data into a common
format/schema.
2. Use an integration and data unification platform.
In procurement, data variety often appears when you have business
units in different countries. For example, it may be the case that a
business unit with offices in both Spain and France has different
ERP systems, where the same item may be stored using different
IDs. Most of the time, this occurs because the supplier provides dif
ferent IDs for the same item, and possibly different pricing as well.
So the internal ERP system records the ID provided by the local
supplier and does not have visibility of other countries data.
Another example is within a Supplier-to-Procurement system (S2P),
where there may be many entries related to the same supplier. For
instance General Electric may be also be entered as GE, Gen,
Gen Electric, etc. All of these different entries for the same entity
lead to confusion and wrong analytics results. It is common to have
a lot of records that need to be assigned/classified into a material
group or commodity code. This classification of things into broader
categoriesfor example, in building a catalogis something that
can be automated very efficiently using machine learning algorithms.

Universal Business Language

Undertaking data integration to overcome data variety is a wellknown issue in computer science. Several languages, such as XML,
have been proposed to develop middleware layers and enable data
integration. To solve the integration problem in B2B, the OASIS
Universal Business Language (UBL) was developed. It defines a
Universal Business Language

generic XML interchange format for business documents, which can

be used to meet procurement requirements. One of the drawbacks
of XML is the required data overhead, due to the fact that its foun
dation is built on using tag pairs to represent elements. Currently,
UBL is being replaced by JSON encoding, which provides a light
weight approach to integrating data.
For more information about the technical issues of data preparation,
we refer the reader to the free OReilly report, Data Preparation in
the Big Data Era.

Speed and Lack of Scalability in Data

Preparation
While its clear that its very important for organizations to operate
quickly, analyzing massive amounts of data quickly is a major chal
lenge. Existing solutions often require manual approaches to inte
grate and clean data, are often cost and time prohibitive, and
prevent organizations from scaling to more sources. Given this sit
uation, procurement analytics are generally focused on only a frac
tion of the available data. Cleaning and joining data using
conventional methods, even before using any analytics tools, can
cause reporting to take weeks to months to generate.
Sourcing managers need to make decisions based on spend analysis.
One of the objectives of spend analysis is to support strategic sourc
ing and cost reduction initiatives. It is necessary to have a general
view of the companys spend in order to understand overlaps in sup
ply chain and purchases. This means that its critical to boil the data
down into something that can be acted upon in a reasonable time
frame, to either help companies generate more revenue, serve cus
tomers better, or operate more efficiently.

Novel Approaches to Procurement Analytics

Most organizations rely on ERP data and Excel to run the majority
of their analysis for procurement. This often involves multiple peo
ple working on the same datasetcreating massive inefficiencies. In
addition, scaling the operation under these conditions creates an
exponential cost curve. Even procurement legacy vendors do not
have sophisticated automation techniques for data preparation and
integration, so manual effort is still required. These approaches do
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Advancing Procurement Analytics

not scale well because they need human intervention to solve data
integration issues.
A higher level of automation is possible with machine learning algo
rithms that automatically interact with the user to solve the integra
tion problems jointly. This new approach should provide the
benefits of increased speed and scalability of the complete data prep
aration operation, including cleansing, integration, and classifica
tion of datasets. This leads to faster answers, fewer fire drills,
greater visibility into parts or suppliers, and enhanced trust in the
analytics process.
One example is the Tamr platform, which is a tool designed to sim
plify the data preparation and unification process. The platform
builds a global view and allows the user to generate reports and data
analysis. It provides a probabilistic, bottom-up approach to the
complete data preparation operation, leveraging automation and
human input in the process of validating data. The Tamr platform is
also capable of connecting with different systems and data sources
(even third-party data) and automatically builds a taxonomy. It can
also be used to migrate data from legacy systems to ERP and can
integrate and unify data to generate a clean dataset for migration.
Several examples of sourcing analytics dashboards generated from
the Tamr data integration platform can be found on this site.
The machine learning capabilities of Tamr reduce time for data inte
gration, allowing the organization to scale. The platform also has the
ability to accept expert feedbackhelping the user handle excep
tions and conflicts in the system. Although there are other software
tools that automate the procurement process (like BellWether and
BravoSolution), they are not prepared to work with existing legacy
systems.
By automating and reducing the amount of time required for gener
ating reports, managers can spend their time in negotiations with
suppliers, rather than working on reports, allowing them to analyze
more data quickly and uncover more opportunities. The idea is to
allow deeper analysis with fewer resources, or at least without
adding more.
Opportunities in procurement are not always easy to detect and may
be subtle. As an example, a spend analysis report from Concur, the
automatic travel expense management software company, highlights
masquerade purchases, duplicates, and out-of-pocket expenses as
Novel Approaches to Procurement Analytics

the greatest areas of concern. Through spend analytics, Concur was

able to determine an interesting figure: by crunching 10M transac
tions, they detected that employees who purchased in-room movies
tended to spend less overall on their trips.

The Next Step Forward

Novel and intelligent software solutions are enabling procurement
organizations to make faster and more effective decisions. By using
the correct tools, extracting core ERP data and combining it can
take minutes, when it previously took days. New procurement solu
tions will enable automatic aggregation and analysis of data from
diverse sources and will provide an efficient view of the dispersed
information. Ideally, these new tools will provide automatic notifica
tions of risk, saving opportunities, and suggest improvements in
supplier relationshipsbut we are not there (yet).

Game Theory
Procurement has also been a research topic in academia from the
game theory and auctions perspective. Game theory applies mathe
matical models to the process of decision making, in order to pre
dict the outcome of the interaction. The application of game theory
to the procurement process can be used to understand how and
when the buyer can increase the pay-off in their favor (by reducing
the price). In their paper Truthful Multi-unit Procurements with
Budgets, Hau Chan and Jing Chen presented research for the boun
ded knapsack problema special class of procurement games where
each seller supplies multiple units with a cost per unit known only
to him. The buyer can purchase any combination of units from each
seller, under a specific budget. It has been shown that for multi-unit
settings with budget considerations, no mechanism can do better
than an ln n-approximation, where n is the total number of units of
all items available.

Inventory Optimization
Inventory optimization or management is another well-known
research topic. In their paper Optimal Dynamic Procurement Poli
cies for a Storable Commodity with Lvy Prices and Convex Hold
ing Costs, Chiarolla et al. discuss inventory management policies in

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Advancing Procurement Analytics

the presence of price and demand uncertainty. They focus on the

inventory of a commodity traded in the market, whose supply pur
chase is affected by price and demand uncertainty.
More related research can be found in The Journal of Purchasing &
Supply Management.

Machine Learning in the Future of

Procurement
In the future, we will see more applications and use cases of machine
learning to improve and optimize procurement practices in order to
reduce costs and increase margins. One area likely to show advances
is unsupervised machine learning or clustering to detect similar
contracts. In this application, insights have the potential to identify
the most suitable contracts, help prepare contracts by detecting
those that are similar, and identify opportunities from demand
aggregation. Predictive models can be also used to infer the number
of bidders for a public contract. In this situation, the bigger the
number of bidders that will be estimated for a contract, the better. It
can also help to detect suppliers that can offer the same service or
products (for an interesting example, check out this kaggle competi
tion sponsored by Caterpillar, where the goal was to predict the
price a supplier will quote for a specific tube assembly). For even
more information about procurement, we refer the reader to the
Chartered Institute of Procurement & Supply (CIPS).

Machine Learning in the Future of Procurement

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About the Author

Federico Castanedo is the Chief Data Scientist at WiseAthena.com,
where he analyzes massive amounts of data using machine learning
techniques. For more than a decade, he has been involved in
projects related to data analysis in academia and industry. He has
published several scientific papers about data fusion techniques, vis
ual sensor networks, and machine learning. He holds a Ph.D. on
Artificial Intelligence from the University Carlos III of Madrid and
has also been a visiting researcher at Stanford University.