This article is a continuation of our series on procurement transformation and in this article, we focus on Digital procurement and its role in your procurement transformation journey.
You can read the previous articles here
Procurement transformation goals could vary from company to company but the common theme is that it impacts people, process, and technology.
Digital procurement can help to accelerate the pace of procurement transformation and significantly reduce the friction of change management. The first and foremost step in procurement transformation is to define the objectives and outcomes for procurement transformation. If you haven’t done that then the investment in procurement technology may or may not drive the desired results.
1.Digital Procurement – Definition
Digitization is a common theme across many industries. As per Gartner
“Digitalization is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business.”
Digital procurement hence could be viewed as a process to use digital technologies to enhance the procurement function.
Digital technology is a broad term which encompasses tools and technologies available at the disposal of a chief procurement officer to enhance the value delivered by the procurement function.
What do I mean by that?
Robotic automation, Artificial intelligence, machine learning, source to pay technologies, smart sensors are some of the tools in the arsenal which can be used to drive better value for the procurement.
But just taking a technology and slapping it on a process doesn’t deliver desired results. It all starts with identifying the business processes where technology can be used either to enhance the user experience, improve productivity or overall improvement of the function/department.
2. Digital Procurement – Key use cases
Let’s look at some use cases from a procurement perspective
Mckinsey provides a simple framework for that. Digital procurement can benefit from two perspectives
a) Identifying and creating value
The focus of these use cases is to provide the procurement team with tools and technologies so that they can identify areas where procurement can add value and deliver that value faster.
Some of the use cases under this category are
Saving opportunity identification: Category managers typically rely on data from ERP systems to understand spend patterns and identify any saving opportunities.
The challenge is that this data is generally incomplete and needs a lot of data cleansing and classification before a category manager can make sense of that.
This exercise is commonly known as spend analysis. However, the success of spend analysis depends upon the skills of the category manager. Skilled category managers can easily identify saving opportunities.
This is a use case for artificial intelligence to automate the savings opportunities and continuously monitor the data to identify new opportunities or suggest any deviation in the Spend trend as compared to previous year Spend.
Enhancing expertise: Category managers need a lot of data points to make purchasing decisions. For example, what market factors can impact the demand for a particular widget.
The other factors could be the need for capacity trends across different categories (market consolidation, capacity expansion by existing players, new entrants etc.)
Procurement technology can play a key role in enhancing the expertise of category managers by automatically gathering this data from different sources and consolidate this in a category dashboard.
Improving productivity: Category managers spend a lot of time with stakeholders to run RFP’s which includes a lot of back and forth.
Digitizing the RFP process can help speed up the process and increase productivity for the stakeholders and sourcing teams.
Imagine an e-sourcing tool which can not only present side by side comparison of responses but also compares answers from different vendors and identifies key differentiation for vendors.
Or a tool which allows stakeholders to define their decision criteria and suggest supplier rankings based on that criteria.
b) Delivering value
Delivering value use cases focus on the realization of the value which is quantified as a better customer experience, improved savings and overall better stakeholder engagement for procurement.
Mckinsey divides the use cases into Procure to Pay, Supplier performance and procurement performance. I would divide the value delivery use cases into the following two buckets.
Delivering a better customer experience
In today’s economy where consumers can hire a ride with the click of a button, employees also expect a similar experience from their enterprise systems.
Digital procurement can play a key role not just in automating the entire procure to pay process but also provide useful information to the employees to make the purchase process simple.
Some argue that the current generation Procure to Pay systems are on par with the technology available to consumers (Amazon.com is a point for comparison).
That is partially true, the current generation of systems have come a long way but there is still a lot needs to be done to bring them in line with consumer technology.
Things like guided buying is a common use case where AI can help improve the experience for your stakeholders.
On the other hand, you do not want to present them with 20 different product options like amazon.com does, because you are trying to consolidate spend.
Adding value through insights
Digital procurement can help enhance procurement value by better presenting the insights to the stakeholders.
You could look at technologies which automatically gather data about suppliers, not just performance data but other critical information like their financial results, performance data, and geopolitical trends.
This can help present a comprehensive supply chain summary to your stakeholders and help identify any supply chain risk.
Also, there is tremendous value in presenting the procurement scorecard to your stakeholders. More they know about procurement value-add, better the engagement.
3. Aligning Digital Procurement with Procurement Transformation
So what is the role of Digital procurement in your transformation journey?
It all goes back to the key objectives you have defined in your procurement transformation journey.
If you haven’t done that already, I would encourage you to define that first. We have covered that in detail here .. Objectives of procurement transformation
It is important to align objectives with technology because the use case for technology could be different based on your objectives.
Now let’s look at a few examples where aligning transformation with technology make sense.
Let’s suppose that you have established “Enhancing Customer Experience” as a key objective for your procurement transformation. This objective could be the key to procurement transformation.
Now, what do you mean by enhancing customer experience?
- Does it mean modernizing the user interface of your purchasing system?
- Does it mean to simplify the purchasing process?
- Does it mean provide better visibility into Spend
- Does it mean automating your manual purchasing process?
Assume that your objective is a combination of all the points mentioned above.
In that case, you are looking at toolset which can simplify your purchasing process and maybe other related processes like invoice processing.
So the technology you are looking for is either purchase order management or complete procure to pay system.
Let’s take another case – Let’s say the goal of procurement transformation is to build an agile supply chain which can meet the growing and often changing needs of your customers.
Your objectives can be further refined as
- Better evaluation of suppliers – 360-degree evaluation of suppliers, so that you can identify suppliers who can meet your requirements.
- Enhanced supplier risk management function – increased visibility into financial, performance and other related supplier performance metrics.
- Continuous tracking of geopolitical trends.
In that case, you are looking at a technology toolsets which can help you measure, track and analyze supplier performance. You also need a set of AI(Artificial intelligence) tools which can aggregate multiple data points to drive decisions or alert you on potential supply chain disruptions.
No matter the objectives, clearly define your outcomes and then align with the technology toolset.
Remember strategy drives technology application, not another way around.
Another side benefit of this alignment exercise is that it allows you to prioritize what objectives to work on first and of course, you are not investing all at one in an end to end technology package.
4. Digital Procurement Transformation Benefits
There could be many benefits of digital procurement but it is very specific to the business case you have decided to pursue. Again, based on your objectives, your technology toolset could be very different.
For example, if you see the above model from Deloitte, it presents multiple areas where technology toolsets can drive results for the procurement organizations.
Let’s take one example of Procure to Pay automation and see the potential benefits from digital procurement.
a) Enhanced customer experience
If you have been following the evolution of Procure to Pay tools, you must have noticed that the focus of the technology vendors have shifted to making their user interface more intuitive and providing a consumer app like experience.
There are many reasons which are driving this change.
Employees are demanding a better experience in their purchasing process. The new generation of employees not only want to move away from paper but also need a simple process for purchasing.
Procurement organizations are also realizing that if they have an easy to use solution backed by a simple process, you need less headcount for helpdesk support.
With that in mind, let’s look at some areas where digital procurement can help
i) A set of artificial intelligence tools to study buyer behavior and then suggesting purchase frequency or in some cases automatically place the order on user behalf. This is very common for Direct Spend but the same can be done for Indirect spend.
ii) Approvals can be simplified drastically, Imagine if the system knows that you always buy a product every month and your manager always approve the purchase. If that is the case, do you really need a manager to approve the purchase every time?
iii)Guiding the user for the right source: This could also include connecting with preferred partners to get the bids etc. Imagine, a system does everything without involving the sourcing team. I am sure you can see the obvious benefit of more spend under management with the same set of resources.
These approaches not only increase the productivity of the organization but also provide a very simple and better experience for your end users. Better the purchasing experience, better the engagement with procurement.
b) Predictive spend analytics – Impact on cash flow
Another area where digital procurement can play a pivotal role is advanced analytics and specifically impact of purchasing on cash flow.
Companies generally rely on a mix of purchase order data and invoice aging report to understand their working capital requirements. The challenge with that approach is that not all spend is on purchase orders.
Another common problem with this approach is that sometimes vendors directly send their invoices to the stakeholders instead of sending to A/P. This could lead to last-minute invoices and unpredictability on the cash flow.
To overcome this problem, you can use the tools available in your digital procurement toolsets to getter better visibility into your cash flow needs. Some of the potential benefits are
- Ability to project the working capital requirements based on past data. Imagine if the system can look at the history of purchases and then project how much cash do you need every month. In this case, it will look at the past data and identify the anomalies we mentioned above. So you are not purely relying on accruals but relying on the actual payment history.
- Another potential area for advanced analytics could be to map all the market data with your demand and then project cost increase or decrease based on the changes in the market conditions.
A common use is about commodity, if you buy a widget which uses copper as the main ingredient, then it makes sense to closely track the commodity price and the impact on that on the price of the widget.
However, an advanced use case would bet to factor in other conditions like geopolitical changes, change in demand and supply etc.
c) Tackle Maverick Spend
Maverick spend is a challenge for most procurement organizations and the larger the spend, bigger the issue.
The obvious solution to tackle maverick spend is to ensure that there are systems in place to guide your employees to the preferred vendors. The challenge is that this approach has been tried and most organizations have still failed to get the maverick spend under control.
Even though your employees want to follow defined procurement policies and procedures, it is possible that they were not able to find the right supplier in the system. It could be that your preferred supplier was not able to provide the product in the desired lead time.
Now Imagine if the technology toolset can log the activities/ transactions where the end user was not able to find what they were looking for.
Alternatively, you can do an analysis of past transactions and identify all the transactions where a preferred vendor was available but not used by the business.
You then analyze if the maverick spend is an issue because of a few employees or if this is across the board. Because the approach you would take is very different, it is critical to identify the root cause of maverick spend.
All this analysis can be done manually but one it takes a long time and two it is not a one-time activity, so you need to keep on investing effort in this.
An alternate approach would be to use tools like machine learning to automatically track such patterns. Once you have identified the root cause, you can use the same set of tools to then guide those users to your preferred vendors.
Think of this as Google Analytics for your spend.
5. How Procurement Technology Speeds Up Procurement Transformation
In the sections above, we covered multiple aspects of procurement transformation and how it helps different areas of procurement.
But how does it help you in procurement transformation?
Your mileage could vary but here are some common themes where adoption of digital procurement toolsets could lead to following benefits
1. Increased transformation speed
As we mentioned in the previous sections, the procurement tool sets applications are very specific to your transformation goals and objectives.
Let’s assume that your goal was to improve the purchasing experience for your end users.
In absence of technology tools, this needs to be done manually. That includes simplifying the process, hand holding your stakeholders through the purchasing process.
Even with all those efforts, the approach is not scalable because you need more people to handle queries etc. More queries lead to more headcount.
Compare that to a technology solution, you implement a purchasing order management solution and let it drive the users to the preferred suppliers. If you have already reviewed the purchasing process, then the tool can do the rest.
Your team can now focus on value-add activities like negotiating cost and building better catalogs for your end users.
2. Consistent output
The obvious benefit of digital procurement is its ability to provide a consistent output for any given process.
Let’s take an example of controlling maverick spend, the typical challenge there is to guide users to the preferred supplier.
In the backend, the purchasing team is always analyzing the behavior which is leading to maverick spending, whether it is the availability of parts from preferred vendors or the users are unaware of preferred vendors.
If you look at both these use cases, these can be addressed via hand holding your end users and continuous analysis of your spend data. However, you most likely will get inconsistent results because different people are handling it. The other challenge with this approach is that it is not repeatable.
You would almost never have enough resources for continuous analysis of these use cases.
Alternatively, this can be easily automated by leveraging a standard purchase order system with additional capabilities to analyze purchasing trends and accordingly guide users to the preferred suppliers.
And the process is always consistent and repeatable.
3. Overall lower cost
Digital procurement toolsets not only provide you with a mechanism for consistent, automated procurement processes but it also does it at a lower cost.
Procurement technology has come a long way – from complicated procurement systems to modern unified, easy to use end to end procurement systems.
In addition to that, there are a lot of platform providers like Amazon Web Services (AWS) and Microsoft Azure who have enabled solution providers to provide advanced artificial intelligence capabilities. That too at fraction of the cost as compared to developing those technologies in-house.
This leads to an overall lower cost for the procurement ecosystem.
Whether you are looking to implement a standard procurement system or roll up your sleeves and develop your own custom solution, all that can be done in the cloud and at a much lower cost.
There is no additional overhead of managing infrastructure or additional IT requirements which leads to lower overall cost.
Digital procurement could be considered as a new buzzword and seems like it is presented as a panacea for all procurement challenges.
Procurement technology is not new, however, the availability of newer digital procurement tools can certainly improve the overall procurement processes and help you accelerate your procurement transformation journey.
The key to success is a clear understanding and mapping of available technologies to your procurement transformation objectives.
If you just start looking at available solutions like blockchain, machine learning, AI – all this could be overwhelming. So we suggest that you start with assessing your transformation objectives, then consult with technology providers and see what toolsets can help accelerate your procurement transformation.
We would love to get your feedback on your procurement transformation journey and what role digital procurement is playing in that. Feel free to leave your thoughts in the comments section.