Technology is opening up procurement to efficient and cost-saving opportunities, including predictive analytics
Procurement is a business function that has traditionally been slow to take advantage of technology. It has tended towards a savings mentality, choosing to focus on reactive cost-cutting, rather than being proactive and boxing clever with predictive analytics to monitor spend and add value.
But that has all changed. “Historically, procurement has looked in the rear-view mirror and out of the back window; now we can look out through the windscreen at the road ahead,” says Andrew Coulcher, director of membership and knowledge at the Chartered Institute of Purchasing and Supply.
Automation of procurement has come a long way in the past five years, but is likely to push even further. According to ProcureCon’s Annual CPO Study of chief procurement officers, within the next 18 months a mere 3 per cent of respondents would have no procurement processes automation while 61 per cent would have between 21 per cent and 60 per cent automated.
“The large majority of respondents will be working on increasing their use of the technology based on its potential to aid them in their strategic transformations,” the report says.
Big data and predictive analytics are procurement’s secret weapons for the next couple of years. So far, technology has been used more to cut costs; not that this is unimportant, but the real gains will be as companies start to use technology more innovatively and creatively.
“Added value in procurement is often seen as coming in the form of cost-reductions, but it’s also about getting closer to suppliers, becoming more collaborative in how you operate,” says James Jenkinson, head of digital at Efficio procurement consultants. “With corporate spend on third-party suppliers averaging 30 to 40 per cent of revenues, procurement needs to have a much higher level representation.”
Technology is lifting the role of procurement, providing services that are critical to maintaining corporate reputation, not to mention legality. With procurement functions frequently stretching across the globe, companies need full visibility all the way to the end of a supply chain to guarantee it is free of issues such as modern-day slavery or bribery and corruption.
“Automated procurement systems can help map connections in a supply chain; for a CEO, who is legally responsible for the elimination of poor processes, that puts procurement in a different light,” says Mr Coulcher.
Using technology, such as the blockchain, companies can validate supply chains, bringing a level of transparency that has not always been possible. Last autumn, BHP Billiton, the mining company, announced plans to use ethereum blockchain to improve its supply chain processes. Recording and tracking of geological samples, which can cost millions to produce and are used to make decisions across the world, will be carried out via a web app instead of an Excel spreadsheet.
Big data and predictive analytics are procurement’s secret weapons for the next couple of years
The move allowed BHP to share data with third parties, improving relationships with suppliers. It’s a change that is a key reason why technology now plays such an important role in procurement; with a growing use of high-tech solutions, supplier relationships are changing.
“Procurement used to be a transactional service, but as the function matures we are seeing much higher level interaction,” says Mr Jenkinson.
So while procure-to-pay systems – now used by 62 per cent of companies, according to ProcureCon’s Annual CPO Study – enable CPOs to make faster and more efficient purchases, it is in the sphere of relationships that technology is having the greatest impact.
“The use of technology in procurement is partly being driven by very innovative suppliers offering bespoke solutions,” adds Mr Coulcher.
This is now routinely used to improve the supply of goods and services, especially for companies operating globally. It offers the ability to harmonise purchasing across multiple sites. Platforms such as PunchOut or RoundTrip make it possible to access, say, a supplier’s catalogue from within a purchaser’s own system.
This can lead to a massive automating of the procurement function, since everything from the negotiating process to the settlement of invoices can be handled digitally. “A lot of organisations are still using conventional ways of going to market, but using the internet to provide an open way of bidding is increasingly being used not just for commodity goods, but for complex and sophisticated services,” says Mr Coulcher.
Pub and restaurant chain Mitchells & Butlers moved to an electronic tendering system that reduced its new supplier onboarding process from three to four weeks to a matter of hours. It used a platform, web3 Source to Contract, configured to its specific needs by developer Wax Digital, to transfer paper-based contract storage to an online database. The system enables each division to choose its own suppliers from a selected list, with supplier details stored centrally and visible to the rest of the business.
The platform was put to the test when Mitchells & Butlers bought Orchid Group, a rival pub operator, and a raft of new suppliers were evaluated and brought into the system within a few weeks. According to Simon Madders, project implementation manager at Mitchells & Butlers: “We have found an innovative solution that can flex as we do.”
But perhaps the biggest prize for companies that adopt technology is the possibilities brought about by predictive analytics. Newer technologies such as machine-learning and artificial intelligence (AI) are transforming the manipulation of data so procurement departments can foretell the future with increasing accuracy. It’s a particularly exciting time to be working in procurement technology.
Mr Jenkinson says: “Most procurement functions are crying out for something that will tell them what to buy in the future. With the growth of open-source AI platforms, it’s relatively cheap to build the applications; the cost is peanuts compared to the spend in, say, an IT department. But you can see big gains – 20 per cent or more – in efficiency.”
That brings a much more important role for the CPO, who can offer the board critical insights into the company’s future. Technology has driven cost-savings, efficiency-gains, improved supplier relationships and is now driving the CPO towards the boardroom. It requires a high level of innovation and flexibility, but will make CPOs more influential than ever.
CAN PROCUREMENT BE FULLY AUTOMATED?
Technology has often been viewed with much suspicion by procurement departments. The fear was that automation such as e-procurement would bring about a race to the bottom, focusing on price at the expense of other factors in the supply chain – and at the expense of the employees in procurement.
Certainly it’s true that many processes once done manually can now be done by machine; buying via a central hub, with automatically generated invoices that go directly from the supplier’s system to the purchaser’s finance department, matched using optical character recognition and paid using blockchain technology.
It is all work that used to be done manually, via spreadsheets, telephones and e-mails, and many foresee a procurement department empty of people, replaced by a few quietly whirring machines.
But technology can only go so far. “Procurement cannot be managed within a silo,” says Andrew Coulcher of the Chartered Institute of Purchasing and Supply. “There is a place where artificial intelligence and emotional intelligence meet. There will always be a role for human-to-human contact.”
What automation means for those still working in procurement is an elevation of the function. Procurement has moved from simple buying to a trusted-adviser role.
“It’s all about how to add the most value,” says James Jenkinson of procurement consultants Efficio. “It takes a lot of human interaction to make sure you have the right performance models. You will always need humans to be inventive.”