December 23, 2019 | Procurement Process and Excellence Blogs
In today’s complex business landscape, direct procurement teams are encountering an increasing and escalating web of challenges. A mature procurement operation is comparable to a conductor leading an orchestra. If one note is played off-key or is off by one beat, the entire flow is off, a once harmonious arrangement becomes discordant, and the individual musicians struggle to get back on track. Similarly, if one component is inaccurate or the timing is off in direct procurement, you have also lost control of the function.
Traditionally, the main goal of direct procurement and method of deriving value for enterprise customers was to cut down on costs. While reducing costs are of course a highly important priority, if you limit yourself to this sole initiative, you miss out on a wealth of opportunities for further value-realization. Direct procurement as a function has been slow to hop on the wave of innovation driving digital transformation, sticking to a more rigidly, run operation to mitigate risk and maintain control as much as possible. What accounts for the slow evolution of direct procurement? The answer lies in the nature of the function, in which its operations are core and intrinsic to a company’s direct financial health and success — which means the stakes are vastly higher in direct procurement. A company’s performance in direct procurement has direct and profound implications on its reputation, credibility, customer satisfaction levels, as well as its bottom line.
Transformation on many levels is imperative to successfully navigating the intricacies and high-risk environment of the current market. Digital transformation, especially in terms of adopting digital and emerging technologies will be key for procurement professionals to effectively manage enterprise clients’ supply chains to mine value and growth and boost competitive advantage.
So, what are the challenges facing procurement teams in today’s business market?
From intricate and layered complexities of processes within the function itself, to increased supply chain risk, issues with suppliers and technological obstacles, direct procurement is beset by no shortage of challenges and pain points. With performance in direct procurement core to a company’s direct line of products and offerings, and source of income, it is paramount that procurement teams successfully maintain an effective supply chain and sustain a smooth and reliable flow of data, while mitigating risk.
Direct procurement involves a plethora of complex processes that need to be effectively coordinated, each with direct impact on the company’s final product or service it offers its customers. The Bill of Materials, the fundamental blueprint that delineates the materials needed to manufacture a product, must be effectively managed, and then demand tracked and analyzed, as well as demand patterns identified. To facilitate these processes effectively, it is vital that procurement teams have access to a stream of accurate and reliable sources of data and information.
Today’s globalized business world is teeming with variables and factors that contribute to an exceedingly high-risk environment. Globalization has of course brought tremendous positive impact, widening the breadth and depth of the scope of the suppliers that procurement teams can choose from, as well as offering better rates for buying goods and materials. However, it also compounds an already complex business landscape, complicating procurement processes, heightening potential risk, as well as hinders procurement teams’ direct control over the supplier base. To effectively manage a wide, spread out and complex supply chain network, procurement teams need to maintain constant agility to strategically react and respond to mitigate risk, while maintaining competitiveness.
A strong handle on supplier relationships is vital to the performance of a company’s direct procurement. A number of factors and issues can have lasting and severe impact on a company’s supply chain from cost optimization, to the logistics of goods being delivered at the right time, to consistency of quality. Essentially, the less dependable the supply chain, the higher the risk procurement teams are forced to contend with. Suppliers can keep information regarding materials and goods from the manufacturer due to proprietary data risk restrictions. And especially, in the case of direct procurement, companies are intrinsically dependent on relationships with their suppliers and vendors, as again those relationships have direct impact on their products and offerings, as well as their source of income. Therefore, it is crucial that they keep a close eye on suppliers’ industry statuses, safety practices, etc., as any lapses in a supplier’s reputation can directly impact their own credibility as well.
While the key objective is to keep costs low and profits high, savings in direct procurement can be hard to come by. With suppliers’ rates ever-increasing, the first thought may be to simply move to a different, more cost-effective supplier. However, in direct procurement this is not so easy as you do not want to jeopardize relationships with trusted and reliable vendors.
To effectively manage the supply chain in the space of direct procurement, it is imperative that companies have access to a smooth and streamlined flow of information between the various points of distribution in real-time. However, procurement teams are forced to contend with security risks, lack of cooperation and poorly tracked data that can complicate and disrupt the flow of information. In addition, data streaming in multiple databases, enterprise systems and digital platforms can create information bottlenecks. Integrating and merging data from these disparate systems to make the platforms compatible can be a huge challenge.
Finally, the use of traditional digital platforms and often-lagging legacy enterprise systems can make it difficult to effectively coordinate the upstream and downstream needs of an already distributed and fragmented supply chain. This can lead to outdated or inaccurate information, and in today’s hyper-competitive market, companies simply cannot afford to experience those kinds of fallacies.
So, what are the technologies that offer solutions to direct procurement’s challenges?
Yes, direct procurement has historically been hesitant to fully embrace the capabilities of digital transformation. However, there is a current trend towards more agile direct procurement operations in which procurement teams are embarking on full transformation journeys spanning multiple years. One key component of a successful reimagining of the function is a change in mindset. Direct spend teams are learning that change is a constant and that in order to stay ahead of the curve, they must adopt digital and emerging technologies that will help foster more strategic insights and decision-making, as well as enhance agility.
As data lies at the foundation of the procurement function, it is imperative that direct spend teams obtain a strong handle on data to generate meaningful and actionable insights and information. Big data solutions are being implemented in which large volumes of data can be funneled through multiple ERP systems. Cluster analysis, for example facilitates better analysis of spend through intelligent algorithms that automatically cluster data to identify spend patterns. These patterns and analyses generated, will in turn help inform future spend.
Procurement teams are also implementing the use of artificial neural networks in their operations. These sophisticated information processing systems have the capacity to learn from observing data sets based on inputs and outputs to better predict and forecast the most efficient trajectories for supply chain planning.
What does a cloud-native, end-to-end, digital procurement and supply chain solution look like?
The digital transformation of the procurement and supply chain operation begins on a multi-layered, cloud-based, and fully integrated, end-to-end platform. A stream of self-correcting, self-cleansing classified and deduplicated data in real-time is at the foundation of the operation. The information feeding into the digital platform derives from external sources like transactional systems and Internet of Things (IoT) devices, as well as from internal origins. Directly above the foundation of data lies a core of intelligence that utilizes machine learning and cognitive computing. This architecture helps facilitate improved end-to-end supply chain visibility and transparency, capturing data across the entire supply chain to generate insightful and meaningful decision-making. Pre-built connectors then help integrate data into internal and external databases as well as systems. And the final component is advanced analytics and real-time optimization that facilitates the analysis of data into actionable information to forecast and create scalable models.
Real-World Applications Utilizing Digital Transformation Solutions
In the first case study we will explore, intelligence was implemented to help a leading retailer facilitate improved forecasting of its seasonal apparel requirements. Traditionally, the retailer had conducted its forecasting based on analysis of historical data sets. Being limited to such internal sources of data only addresses one side of the story, overlooking an abundance of insights that can be generated from external sources. And the retailer’s general results followed suit, enabling sell-throughs of between 65 to 70%. Through the implementation of machine learning-based forecasting, the retailer was able to generate insights based on external sources such as its consumers’ browsing patterns. The integration of this meaningful, externally-derived information into their forecasting strategies helped to up their sell-throughs to between 80 to 90%.
Cutting-edge and sophisticated intelligence is also invaluable in its capacity to help better optimize inventory to reduce costs. In this case study, a manufacturing organization utilized machine learning-based data analytics to identify the optimal numbers of items needed to keep in its inventory to cut down on spend. Maintaining optimal levels of inventory is crucial to ensuring on-time orders and deliveries to sufficiently meet consumer demand. By leveraging machine learning and analytics to analyze parts from a reliability perspective, as well as examining safe consumption patterns, functionalities, response times and lead times, the retailer was able to reduce 30% of its inventory. A reduction of that size generates a significant increase in savings and reduction of spend to bring more to the bottom line.
Today’s volatile and high-risk business world has created a cornucopia of complexities and challenges for the function of direct procurement. While direct procurement has historically been behind the curve of digital transformation, a reimagining of its operations has begun. Digital technologies, evolving mindsets, and organizational changes are the fundamental components that will help direct spend teams successfully navigate the intricacies of this hyper-competitive and ever-changing business landscape.