Technology holds huge promise in the procurement sector but making the most of it requires a rethink.
By James Marland, Global Vice President, SAP Centre of Excellence for Spend Management
Observers have been predicting the evolution of procurement for many years. Yet the results of new technology initiatives have been disappointing, according to the latest research from the Chartered Institute of Procurement and Supply (CIPS). This article looks at why procurement is failing to evolve, and how leaders can turn this around.
There’s a great series of podcasts on the BBC at the moment called 50 Things That Made the Modern Economy. One of the episodes is about the first spreadsheet called Visicalc – a grid on a computer screen that took the world of accountancy by storm in the early 1980s. When this first spreadsheet came out it made 400,000 accountants redundant. But only in the sense that they didn’t have to perform such mindless and repetitive manual tasks anymore. They all found other more strategic work to do and earned more money.
We’re still acting like pre-spreadsheet bookkeepers in procurement. Consider the typical RFP: you ascertain all the requirements of the business, write them down and ask vendors to comply. It’s a classic example of focusing on the inputs, not the outputs.
The procurement puzzle
Procurement needs its Visicalc moment. While research by CIPS showed that although 97 percent of procurement teams had started using either machine learning, artificial intelligence, augmented reality, Internet of Things, or blockchain in their processes, the impact has been mixed at best. A lack of focus on people is to blame. As these technologies become more pervasive, we must remember to focus on the impact on people just as much, or if not more, than the whizz-bang tech.
The urgency is very real as inefficiency and errors remain rife. An interesting story about a sugar factory in the US brings to life the real-life ramifications of procurement gone wrong. In this case, the inability of the accounts payable department to pay the invoices had led to an expensive shutdown of the factory. A maintenance supplier’s invoices were not being paid as part of a strategy from treasury to keep more cash on the books. The supplier was refusing to conduct maintenance because of unpaid invoices.
It was just the same old story of bureaucracy in a large company: missing paper, unanswered emails, people on vacation, mis-keyed data, over-burdensome checks and balances. It’s also a great example about how customer experience and vendor experience are inextricably linked – and how technology to automate and simplify procurement can have a huge impact throughout your operations.
A better way
Another common procurement challenge is that too many expensive procurement resources are being deployed in the long tail with too few results. Unlike the 80 percent that goes to core suppliers, this long tail spend – the 20-plus percent of spend that goes to primarily low-volume, often one-off or infrequent orders to a wide array of suppliers – typically goes unmanaged in organisations. Efforts to find cost savings have been considered futile.
Solving the long-tail problem and the inefficiencies it creates demands a shift in procurement from the “age of mandate” to the “age of guidance.” Here are some practical steps to get there:
- Accept the search engine. Allow procurement teams access to marketplaces which have tens of thousands of suppliers and millions of items. Provide some light guard rails but make the experience easier than Googling and paying on a purchasing card.
- Go easy on approvals for small items. Focus on employee experience and try to exercise trust. Use artificial intelligence (AI) behind the scenes to spot fraud.
- Allow end-users to conduct “three bids and a buy” for items where they are the expert. For many service categories, the knowledge lies with the end user. Let them select who they want to do business with, bringing a category manager in only when asked.
- Deploy a simple, mobile navigation experience so they can find the correct path, for whatever they buy.
Beyond this, consider digging deeper into the value chain to see what business outcomes your stakeholders really want. Instead of asking vendors to comply with a set of predetermined requirements, share this information with potential suppliers and ask them to solve the stakeholder problem. It might involve them delivering in a different way. Here too, technology can help.
In Australia, we expect this type of value-driven approach to become more relevant as companies look to address purpose such as the plastics problem. What’s exciting is that businesses can have a huge impact in this area by taking the approach I’ve described above. Technology is and will play a critical role in making it easier, from tracing and tracking to letting companies communicate desired outcomes to buyers and suppliers en masse.
Redirecting even a small portion of global spend on packaging to pre-certified suppliers of recycled plastics and alternatives can have a tremendous impact as these suppliers grow, reap benefits from economies of scale, and lower the costs of their products, making sustainable materials more widely available and economical for buyers.
Procurement has the chance to lead the way – in securing sustainability and in ensuring positive customer experiences. With a focus on people, the long tail, and taking innovative approaches to how we do things, we can create meaningful change.