Procurement is the last frontier of technology utilization, and it is finally getting the attention it deserves as a value producer, rather than just a cost minimization function.
— By Cecil Perang
Historically, procurement has focused on cost minimization or reduction. It is just another way of the organization saying, "Get me the best materials or products for the lowest price." Technology has primarily been used to date to automate manual processes, like departmental and supplier ordering, issuing RFPs and purchase orders, and matching deliveries to orders and invoicing.
The introduction of advanced technologies is a game-changer because it enables procurement to take the leap across the divide, from cost management to value production. Technologies like artificial intelligence (AI), machine learning, and blockchain are enabling procurement to drive organizational efficiency, productivity, innovation, strategic planning, supplier performance and market responses to customer needs.
Advanced Technologies Drive Procurement Into the Future
The role of procurement in organizations is changing as new procurement technologies are developed. The majority of procurement functions continue to use technology primarily as a way to automate and streamline sourcing and purchasing, along with the mountains of documentation required for the end-to-end process.
There are an increasing number of procurement departments embracing technology for an emerging new role – value integrator. New technologies already enable source-to-pay, alignment with the financial function, risk management, global sourcing and buying, supplier performance tracking, and commodity or category management. What is next?
Global procurement processes are faced with a continually shifting landscape with increased volatility and risks. At the same time, the organization must continuously generate innovation to remain competitive. Innovation covers a spectrum. It may be redesigning an existing product to increase the certainty if being able to source materials or parts, bringing suppliers and buyers together to develop new ways of doing things, and generating new ideas that increase the bottom line.
Driving procurement into the future, as a value generator, are the newest technologies. Not only are technologies like AI and blockchain enabling procurement to become a risk management and innovation function, they are driving procurement to become a function that also does forecasting and eventually prescriptive activities.
Minimizing supply chain costs will always be one of procurement's basic responsibilities, but that job got more complex with globalization and the need to embrace innovation through the utilization of more, smaller, and diverse suppliers. Supplier diversity professionals are becoming more data and analytics focused to demonstrate the real value of supplier diversity, and that is why so many in these positions are now partners with the purchasing function.
Not only are technologies like AI and blockchain enabling procurement to become a risk management and innovation function, they are driving procurement to become a function that also does forecasting and eventually prescriptive activities.
Sophisticated analytics enable procurement to make the business case for utilizing particular suppliers, identifying and minimizing risks, adhering to environmental and social sustainability principles, and increasing organizational transparency.
Developing Intelligent Procurement Systems
New technologies like AI, machine learning, Internet of Things (IoT), big data and blockchain can enable high-level value production through the procurement system. Already AI is used to develop intelligent bots, but bots are really the most basic application for AI. That is how fast technology is advancing. Creating the next generation of an AI procurement supply chain utilizes AI to perform a higher level of activities.
Deloitte anticipated the next generation procurement function as using AI, cognitive computing, and predictive and advanced analytics for intelligent procurement systems. AI and cognitive computing can leverage algorithms to perform activities like categorizing unstructured spend, contracts, cost, and supplier data. Cognitive computing can provide insights for more informed organizational planning and decision-making or identify new opportunities that would be missed otherwise.
Of importance to all procurement systems, but especially those managing high-risk global sourcing are predictive and advanced analytics. Combining modeling, machine learning, AI, and statistics can produce predictive scenarios for country or supplier risks, cost fluctuations, demand changes, emerging trends, and developing risks (governmental, environmental and social). Predictive analytics enable the procurement function to become a full strategic partner in the organization.
Blockchain is still in its nascent stage, but its ability to create decentralized ledgers that cannot be tampered with enables a high level of transparency and accountability. For example, blockchain-enabled transparency in the supply chain reduces risks by creating supplier details that cannot be edited, changed or deleted. Suppliers that offer more value to the organization, but are avoided due to lack of transparency, can be included in the supply chain.
Other advantages of blockchain include the integration of procurement and financial systems, improved security, early detection of fraud or other illegal activities, and reduced costs through smart contracts.
Collaborative Tools Produce Even More Value
Advanced technologies also enable enhanced collaboration, and that moves procurement to a key role as a value creator.
Collaboration tools enable procurement to connect internal decision-makers with external partners. Suppliers are more connected, and Supplier Relationship Management systems produce more value, as in innovation, as a result. The big data generated by the collaborative tools and integrated with data from other procurement systems can produce analytics that are used to shape supplier behaviors.
The International Foodservice Manufacturer's Association(IFMA) partnered with HAVI – a supply chain management, packaging, innovations, and logistics company – and the food industry consulting firm Kinetic12 to develop a system for using data as part of a collaborative effort to enhance the relationship between suppliers and big food brands like Chick-fil-A, Panera Bread, Sonic, and Starbucks. The goal is to determine how to optimize supply chain practices and identify ways the farm-to-fork movement can produce new food offerings. The success of the effort led to a follow-up phase that focuses on supply chain visibility.
The IFMA collaboration confirms the fact that AI, blockchain, collaborative tools, and other advanced technologies available now and yet to be developed can be a boost for the use of diverse suppliers that may not fit the traditional procurement process that favors large established suppliers.
This gets to the heart of the advantages of utilizing advanced technologies. It is not business as usual. It is a new way of leveraging procurement as a value producer across the board. The digital procurement function that embraces the advanced technologies leaves document processing to automation and steps into a strategic process.