Comprehensive analysis of spend through digital twin analytics could help procurement teams get back on track in volatile times.

Since 2020, global supply chains have experienced higher levels of volatility. The COVID-19 pandemic, geopolitical conflict, economic tensions, and the worsening climate crisis conspired to drive sharp price increases in energy, metals, polymers, packaging materials, wood, and other raw materials in 2021 and 2022. Thankfully, prices have fallen over the last 18 months. However, purchasing organisations now “find themselves needing to adjust commodity and component prices back to a “fair price” level, based on actual raw material cost and energy price developments,” argues a new report by McKinsey. 

According to the report, advanced analytics in the form of “Spend Digital Twins” could be the answer. 

End-to-end spend visibility

McKinsey argues that, for purchasing organisations to achieve fair pricing, analytics are key. Powerful analytics tools will, they argue, provide the necessary transparency to understand the impact of changes to input cost drivers. Without end-to-end spend visibility, achieving fair pricing with suppliers is next to impossible, and can lead to loss of profitability. 

A spend digital twin is the tool to provide this transparency. The tool uses advanced analytics to build a digital copy of the entire spend cycle. This then enables organisations to more closely examine cost drivers at the category level. This in turn allows them to aassess the impact of their market development over time. And, finally, to establish a “robust fair price in relation to supplier’s price.” It’s the same approach taken with digital twins in manufacturing or warehouse management that allows organisations to drive efficiency, uncover the sources of pain points, and mitigate disruption. 

Doing it with procurement means, broadly speaking, modelling essential parts of the purchasing spend from the ground up. Organisations can do this based on input cost factors, which can be used to dynamically track fair price development over time.

Uses for a spend digital twin 

The procurement landscape is constantly changing, with current trends seeing a rise in sustainable sourcing, as well as nearshoring to increase resilience. Given the level of volatility,  the need for transparency and real-time insights is only going to grow. According to McKInsey’s report, spend digital twins can be valuable tools in several critical (and common) procurement contexts.  

Identifying negotiation potentials

Spend digital twins compare the fair market price index with actual price progression. By doing so, they can help a procurement buyer know when price changes have deviated from fair market price. Once identified, these deviations can be used as the starting point of a negotiation. 

Preparing for supplier negotiations

Once deviations in price have been identified, procurement teams can use a spend digital twin to prepare for negotiations with suppliers. The tool can help calculate the difference between the fair market index and the supplier price. This can help determine fair price adjustments at the current market level.

Deriving indexation contracts

A spend digital twin can also support purchasing departments trying to derive indexation strategies. Analysing the price development of previous years relative to a fair market index helps with understanding patterns. For example, if cost increases are immediately passed through by suppliers on a regular basis while cost decreases come with a delay, this may be a motivation to implement indexed contracts.

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