Procurement Analytics: Is Sievo the answer?
Analytics is the field of converting data into information which offer insights, sometimes counter intuitive to conventional thinking. The Oxford dictionary defines analytics as - a careful and complete analysis of data using a model, usually performed by a computer; information resulting from this analysis (Oxford Learners Dictionary https://www.oxfordlearnersdictionaries.com/us/definition/)
Procurement has long recognized the importance of analytics. Analytics as a capability requires deep expertise supported by technology to create maximum value.
In this article you will see how a technology like Sievo can enhance the value you deliver. Before diving into that, let me briefly touch on analytics as a capability.
Capability
Procurement information management consists of identifying data requirements, collecting data, establishing ownership and governance, converting data to information, and finally developing insights from it. Organizations with ERP systems are generally pretty good at identifying transactional data requirements and data collection for Procurement purposes, and to some degree converting data into information. Data ownership and governance are often loosely defined. Procurement needs to pay most attention to converting information to insight.
Analytics maturity in Procurement varies widely, relying mainly on the expertise of the individual in role. Some companies dedicate a finance team (or person) to provide analytics expertise to Procurement. Often, this is the Controller with multiple responsibilities, who can provide only limited support. Value can be generated by building this muscle within Procurement.
Supply chain disruptions in the post Covid world exacerbated by the inflationary phase we are entering has put pressure on Procurement to offset inflation through productivity gains. If I can’t pass on input inflation through selling price increases, then I need analytics to identify other areas where I can create value.
So, what are these areas of potential value? Here are some examples. Refer also to my earlier article on identifying and finding Procurement value (Sourcing Value: What is it and how do you find it? - by Kumar Kannan - Sourcing: A Practitioner's View (substack.com))
Price reduction – year over year price reduction
Terms improvement – extending payment terms (without any offsetting price increase)
Cost of quality (number of defects, number of returns, etc.)
Delivery to promise
Inventory carrying cost (alternatively stock out costs)
Supplier consolidation
Cost avoidance when negotiated price changes by less than a market index, or when you are buying a product for the first time and no previous purchase price exists.
Procurement efficiency – speed of RFX’s, request to contract time, spend managed per Procurement person, number of suppliers managed
Supplier risk mitigation
Procurement spearheading sustainability initiatives
Championing supplier diversity initiatives
Each of these need data and analysis to develop insights and actions. As technology continues to creep up the Procurement value chain, commodity managers will be expected to create value by looking at spend more deeply and innovatively. Strong analytics enhanced by technology will reveal these latent sources of value.
(Figure 1: Data to Value Ladder)
Companies can require this skill in all their commodity managers. Alternatively, they can dedicate analysts as hired guns for commodity managers across categories and business units. Regardless, of the path taken, investing in Procurement analytics will help the commodity manager be much more effective in delivering value.
There are several technology tools in the market – Sap BI, Tableau, which straddle the first two steps in figure 1 well. Insights and Value generation are still predominantly the domain of humans with expert knowledge. Some emerging technologies using Artificial Intelligence (AI) and Machine Learning (ML) have started to encroach into the Insights domain. Sievo is one of them.
Technology
Sievo
The analytics functionality that a tool like Sievo offers will enhance the Procurement value you can deliver. I came across Sievo (Sievo | Procurement Analytics Software) during my research. I find it a comprehensive analytics platform which addresses most of the value opportunities identified above. Sievo is a Helsinki based privately held company with an office in Chicago, and approximately 200 employees. Included in its more than one hundred customers are Kellogg’s, Carlsberg, Levi’s, and T-Mobile (Deutsche Telekom).
This paper shares my findings on features that stood out, and any concerns. My review included access to a demo environment in which I was able to experiment with the features and functionality, and hours of conversations with their staff. In the interest of brevity, I will highlight only those aspects that I found interesting. Standard features which I consider to be table stakes, will be mentioned in passing or not at all. You can decide whether you wish to dig deeper into this technology. I have focused on Sievo analytics, their core offering; I have not reviewed their other products such as contract management.
Refer also Spend Matters Spend Analytics Fall 2021 SolutionMap (Strategic Procurement Solutions Benchmarking with Spend Matters SolutionMap).
What Sievo does and how.
(Figure 2: Source to Screen; courtesy Sievo)
Rich Functionality
The power of Sievo lies in its Source to Screen process, the activities which happen under the hood to create value. Consolidating data from multiple ERP systems, and normalizing suppliers and spend categories is the foundation for generating information and insights.
Sievo offers a package of dashboards (I use “reports” interchangeably), classified into 4 broad sections – Spend, Savings, Forecasting and Benchmarks. Each of these sections has numerous sub-sections containing different reports; for example, Spend contains out of the box dashboards, such as Overview, Supplier 360, Category, Tail spend, Sustainability and Risk Management.
Comprehensive dashboards.
Sievo can consolidate Procurement data across different ERP systems and business units to present a consolidated view of Procurement activity drivers, results, and opportunities. Sievo dashboards provide all the information you need in an easy-to-read fashion; you can also create your own dashboards. I will highlight the ones that I found interesting.
Realized savings.
Sievo uses a pure definition of savings which should resonate with all Procurement and finance leaders. Calculations include only year over year savings which impact EBITDA. Material code is the basic unit for savings calculation. The dashboard also shows savings by supplier and category.
I like the Savings Bridge which is a spend walk. This graph shows the impact of not just quantity and price but other externalities such as exchange rate, market price and quantity are broken down to show true savings contribution by Procurement. Material substitution savings are shown separately. The system can exclude outliers such as unit of measure errors.
The ability to isolate the impact of each component will allow Procurement to target their actions in areas where maximum impact can be delivered.
(Figure 3: Price Savings Overview; courtesy Sievo)
How will your approach change if this information is readily available to you?
Payment terms.
There are three reports: current state, scenario, and opportunity. You can test out different payment terms coupled with different weighted average cost of capital (WACC) to see the working capital and EBIT impacts. You will see which suppliers should be targeted; conversely you can decide which suppliers to exclude from a payment term extension and see the impact of that exclusion.
You will have visibility into the hundreds of payment terms used by your Procurement organization, allowing you to rein in this runaway steed and create value. You can see spend paid early and paid late, allowing you to adjust payments to impact working capital, take early discounts, and become a better customer.
(Figure 4: Working Capital Opportunity; courtesy Sievo)
Process optimization.
You will see the number of purchase orders (PO) created by categories, suppliers, and in different spend ranges; allowing you to consolidate and reduce the number of PO’s, making the ordering process more efficient and less expensive.
Sensible AI/ML.
Sievo experts and customer category managers verify classification done by Sievo in the largest spend categories, because they have the most knowledge and experience in it. AI and ML is used in spend classification and supplier consolidation, primarily in that 10-20% which is tail spend, typically involving hundreds, if not thousands, of suppliers.
AI is integral to Sievo’s solution, but it is not considered as the panacea for all Procurement needs. Sievo recognize that stakeholders must trust the numbers; once that trust is lost, it is very hard to regain. This was refreshing to hear from a supplier, especially in an environment where most suppliers are trying to hype their AI/ML prowess.
The algorithms use text clustering, key word extraction and fuzzy matching (finding similar sounding names) for this purpose. The data sets on which they are applied include purchase orders, supplier invoices, supplier master, and D&B feeds. Users can reclassify results during review, and the algorithms learn from such reclassifications in real time.
Sievo is also developing the concept of Insights to Actions under which algorithms will learn when users accept or discard insights that come from AI.
What is your perspective on the future of AI/ML in Procurement?
Price opportunity.
Sievo’s report compares the rate per unit at which a commodity was purchased with the lowest price at which the same commodity has been purchased from another supplier; it shows the price impact of different buys. The price from each supplier may not be directly comparable - one may include freight and the other may not, one supplier may provide year end rebates which are not factored in, etc. So, I am somewhat ambivalent about the value of this report without adjustments.
Risk.
Sievo’s report is updated based on an external risk assessment from riskmethods (www.riskmethods.com) or another provider. The dashboard also shows alternate suppliers who are less risky, but the recommendation is only based on your internal supplier base, so probably not of as much value as if it were to scour some external data base and pick an alternate supplier that you are not using today.
Sustainability.
Sievo gets an automatic data feed from EcoVadis (EcoVadis), a leading provider of sustainability ratings, with your suppliers rated on the EcoVadis scale. You can also link to internal supplier assessments.
Diversity spend.
Tracks and displays diverse supplier spend and links to supplier diversity certificates.
Benchmarking.
Mature Procurement organizations will compare their performance with the market to calculate Procurement’s real contribution. If others got the same savings as we did then we weren’t that much better, were we? In many categories market indexes were available for comparison. But it required a lot of manual effort to tailor it to our needs. Sievo offers a powerful feature for this purpose. The benchmarking section includes data feed from market indexes. London Metal Exchange and World Bank published indexes are provided out of the box. Other indexes such as Mintec can be linked at customer’s option.
If none of the standard indexes are sufficient for your needs, then you can create a custom internal composite index called a cost index based on primary input materials used and their weightings in the total material cost. The cost index is updated monthly based on actual prices you paid for various commodities. It is then compared with the market index to show how much of variance is a function of market price movements, and Procurement’s contribution to savings.
Do you compare with indexes? Is this a valuable feature?
Filtering capability.
The ease with which I could filter down into details from overview and summary reports, was impressive. You can filter on almost all data fields. If you drill down to Packaging in the Spend Overview dashboard, other dashboards such as Working Capital and Supplier 360 will also be simultaneously updated to reflect Packaging. Removing filters is also very easy.
I also like the use of sliders for dynamic adjustment of results. For example, a slider to select WACC percentage in the working capital scenario dashboard, a slider in supplier pareto graph to select the percentage of suppliers associated with a percentage of spend, a slider in the Opportunity dashboard to select high and low thresholds.
Navigation.
Generally, I found the screens easy to follow and navigate. Most screens display 6 graphs, 3 across; some screens offer an added table listing for detail. Hovering your cursor over most graphs displays key statistics in an easy-to-read fashion. The displays adjusted well to switching between my 12.5” laptop screen and 24” desktop monitor screen. I don’t recommend doing serious analytics on a smartphone; that would be like writing a thoughtful report on Twitter. Though, the application resizes to smartphones as well.
Training material.
I like their training material which comprise both videos and slide decks. The decks are very comprehensive and explain the methodology and calculations with examples.
Implementation & support.
Implementation is approximately 2 – 4 months; main drivers are the number of ERP systems in the customer environment, and the number of Sievo modules being implemented.
Data extraction can be done directly from ERP systems, customer provided flat files, and from the cloud. Classification is done through a combination of heuristics, AI algorithms and user input. Suppliers are normalized using D&B and Sievo’s supplier repositories.
Sievo is hosted in the EU on a private cloud and are in the process of migrating to a Microsoft Azure platform.
Sievo offers three levels of support which are primarily differentiated by number of data refreshes (monthly or weekly) and accuracy of spend classification (90% to 94%), covering 95% to 98% of the total spend.
Commercials.
Sievo licenses for an annual subscription fee that is negotiable and is loosely based on customer’s annual addressable spend. The fee covers unlimited users. There aren’t any stated list prices. I see this as an opportunity for a good negotiator and as a challenge for folks preferring transparent pricing.
Just to give you an idea, the annual subscription fees will be in the tens of thousands of dollars per year for a company with revenues of $500M.
External data feeds like riskmethods and EcoVadis require separate subscriptions, purchased directly or through Sievo. D&B feed for supplier normalization is currently included in the Sievo subscription.
Who would get the most value from this software?
Manufacturing and reselling/trading companies in the range of $1B in revenues and larger will benefit most from this software. For those in the $0.5Bn range and seeking to become a billion-dollar company, Sievo is worthy of your consideration as well.
Additional consideration.
While concepts and formulae behind calculations are sound, the devil is often in the details. So, what may appear to be a big opportunity could turn out to be not as large upon deeper analysis. Price opportunity, for example, needs to be carefully applied and interpreted.
The current solution is packaged in modules. Each module includes future upgrades to functionalities already included in the subscription. Sievo tells me that only significant upgrades will come at an extra charge. However, commercial changes in solution portfolio does not affect what has been purchased and customers can keep the functionalities they were getting earlier.
How long will Sievo be around in its current avatar? The risk of being acquired by a larger player.
I am not used to the European tradition of using commas in place of decimals and vice versa, and I have not seen numbers represented in the US format. However, Sievo says it can customize its screens to reflect the US format.
Final word.
I am impressed with the analytics functionality offered by Sievo. The designers have thought of everything that a Procurement organization will need for analytics and reporting. Most Procurement professionals will agree with the underlying methodologies and calculations. The software is easy to learn and use.
Sievo also offers other modules for managing contracts and project intake.
Check it out.
Acknowledgements
My sincere thanks to Sievo, particularly Miikka Mikkonen and Julius Seppänen for their contribution in explaining Sievo solutions and responding to my questions.
You can contact me with questions, or suggestions at kkannan@procuralservices.com, Twitter @sourcingviews, or leave me a note below: