The Way Digitalization changes the Role of Procurement and how to adapt to Procurement 4.0 by Sören Rau and Philipp Cirkel
The Way Digitalization changes the Role of Procurement and how to adapt to Procurement 4.0
Procurement has always been a rather cost saving operation. Depending on
the branch, procurement expenses can add up to 80% of the total costs of a
corporation. Regardless of that, the strategic importance of procurement has
not been realized by many organizations. But digitalization offers new
possibilities to increase the influence of procurement from an operational
activity to a strategical one. Big data and advanced analytics enable
procurement teams to drive enterprise wide value. The traditional supply chain consisting of
different branches such as manufacturing, sales, and research and development
can evolve from a simple “chain” to a complex “network”. There is no denying in
the fact that the key value of information systems is the capturing, analyzing,
and connecting company-wide and external data.
If companies are able to integrate all their data regarding markets,
suppliers, customers, manufacturing processes, R&D, logistics and sales
they can add a lot of value to the company. Even though 60% of the purchase
managers that participated in a recent Deloitte study answered that they do not
have a digital procurement strategy yet, many big consulting firms, such as
BCG, McKinsey and Strategy&, point out that the impact procurement is
becoming bigger and will soon be crucial to attain or retain a sustainable
competitive advantage.
How are information
technologies going to change procurement?
By aggregating and processing data simultaneously managers will have the
opportunities to act on real time. This is going to increase the flexibility,
adaptability and responsiveness to the changing requirements of the markets.
Smart technologies will make it easier to predict market trends, give a better
understanding of suppliers and customers and therefore improve the
decision-making ability of firms. Procurement decisions can also be automated
to a certain extend by algorithms. According to Strategy& the
automatization of repetitive processes, especially regarding suppliers, should
be a goal. This gives the purchasing departments more time to focus on
delivering value to the business. Having understood and analyzed data enables
to improve supplier relationships in terms of accurate planning, sourcing and
contract negotiations as well as supplier management in general. Due to the
automatization of processes one might assume that procurement teams will soon
be redundant, but this is very inaccurate. The rising complexity deriving from
the use of software will make procurement jobs more important as well as more difficult.
It requires more highly skilled talents that are capable to handle complicated
technologies, which is one of the main concerns of CPOs as reported by the
study.
How to transform the
procurement department of a company according to McKinsey?
I have already pointed out that there are multiple ways how a
digitalized procurement strategy can create value, but it is rather difficult
to establish a successful and thought-through strategy. McKinsey, one of the
leading management consulting firms, splits the process into two major areas:
1)
identifying and creating value
a) spend visibility
First of all it is key to make all processes transparent and analyze historic
data of purchase orders and processes. After identifying the key performance
indicators, manager can use the enterprise system in the desired way to show
the relevant data to improve transparency and understanding of the processes
b) Collaborative and advanced sourcing
In this step, companies start by categorizing their work flow to get an
overview of the internal processes and eliminate redundancies. Afterwards, the
purchased goods are broken down into categories such as logistics or freight
costs. This step helps to identify possible high cost activities and helps to
analyze problems. A so-called cleansheet and should cost analyses in the
following step makes it possible for companies to calculate how much a certain
product would cost under maximum efficiency and will serve as a reference price
to the company in the future. Based on their experience, McKinsey states that
the should cost analyses can reduce the actual costs by up to 40%. Business
collaboration portals deal with the internal communication to promote
collaborative sourcing. The consolidated requirements of different functions
and cross-functional cooperation enables the software provider to find a
solution that suits all the business unites of the company and support internal
communication. In the supplier x-ray, suppliers are screened and all
procurement-relevant data will be gathered and put into context. Having
established a high supplier visibility helps to successfully negotiate
contracts and optimize internal solutions because capacity, lead times, costs
and risks of suppliers are identified and can be integrated into the internal
planning. In the last two sourcing steps companies use the data and more
importantly their specified requirements and actively search the market for a
software at various eSourcing events and look for ways to use technological
tools along the value chain to ease the connection to suppliers and customers.
2) Preventing value leakage
Value leakage deals with the costs a company faces for “not getting the highest
quality service and the most innovation at the lowest price”. This basically
means that companies do not receive the optimal goods and services but pay a
higher price. To prevent this from happening, McKinsey advises to split this
process up into procure to pay and performance management.
a) Procure to pay (PTP)
The PTP processes are supposed to support the operational purchasing activities
of a company. Software systems are supposed to track and predict the entire
work flow and automate repetitive tasks. This reduces the processing time and
operational performance. Furthermore, automated compliance management empowers
companies to supervise every procurement transaction and spot value leakages.
Especially companies that outsource their processes on a global scale can
easily lose track of all their suppliers performance. Due to compliance
software, companies expect to reduce value leakage by 50% in the future.
b) Performance management
The performance management predominantly deals with monitoring supplier
performance. By using supplier performance scorecards information is provided
to managers that gives them the opportunity to be more responsive in case
problems occur. Procurement performance scorecards are intended to improve on
the digital solutions a company uses. By constantly reviewing the
functionality, companies are able to improve the impact of digital tools even
more. In this regard, performance management ensures the sustainability of the
applied information systems rather than actively increasing effectiveness or
efficiency.
The impact of digitalization on procurement is going to be huge. Thus,
it is very important for companies to adapt to the new possibilities.
Developing a strategy to enhance the procurement processes while using
information systems has to be done very carefully. It is very important to find
a digital strategy that does not interfere with the company’s general strategy.
It will be interesting to see how the digital developments drive the
procurement in the future.
Sören Rau and Philipp Cirkel
Sources:
Strategy&: Procurement 4.0: Are you ready for the digital
revolution? https://www.strategyand.pwc.com/reports/procurement-4-digital-revolution
Frauenhofer IML:
Procurement 4.0 https://www.iml.fraunhofer.de/en/fields_of_activity/einkauf_finanzen_supply_chain_management/services/procurement-engineering/procurement-4-0.html
Kerkhoff Group: Der
Weg zum digitalen und modernen Einkauf
The Boston Consulting Group: Beating the Unbeatable Supplier https://www.bcg.com/capabilities/procurement/beating-unbeatable-supplier.aspx
McKinsey: Driving superior value through digital procurement https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/driving-superior-value-through-digital-procurement
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