Procurement 4.0 is a transformation of the procurement function to incorporate advanced digital technologies. The technologies can radically change both how supply chains are managed and the necessary staff skill sets for success.
The Fourth Industrial Revolution, named Industry 4.0 (I4.0), has been rolling out across functions for a decade, intensifying as advanced technologies developed and improved. Procurement was not an early embracer of the digital transformation, but over time it has wholeheartedly joined the continuous improvement effort through the use of sophisticated technologies, like blockchain, Artificial Intelligence (AI), cloud computing, Internet of Things (IoT), big data and big data analytics, and robotic process automation (RPA). Procurement 4.0, a subset of I4.0, can use the wealth of available technologies to assist with monitoring inventory levels, managing supply chain processes, smart contracting, and smart logistics. Naturally, this creates new challenges for procurement managers, who need agility to meetthe digital transformation impacting people and processes in significant ways.
Learning from a Pandemic
The application of the new digital technologies in procurement is having a profound impact on everything related to this function - on anything to do with acquiring supplies and services from suppliers. The procurement manager must identify, source, procure, and manage sources, while maintaining alignment with the strategic goals of the business, and assisting staff. When Procurement 4.0 is introduced, everything changes in terms of systems, processes, and talent requirements. For example, AI becomes a resource for analyzing supplier behaviors through pattern analysis, which impacts current suppliers and the selection of new suppliers. Blockchain technology enables global-scale transactions that are technology monitored and managed.
Digital technologies can assist with purchasing performance management, pricing, supplier performance management, cost reduction, risk management and cross-functional activities.
The COVID-19 pandemic highlighted the importance of both local and global procurement functions not only adopting digital transformations, but also using them to become more strategic. The unanticipated disruption of supply chains that began in 2020 continued throughout 2021, leaving many companies still scrambling to find different suppliers. A lesson learned from the pandemic is that practical applications of I4.0 technologies can help companies avert an operational crisis. Dr. Robert Boute is the Professor of Operations Management at Belgium’s Vlerick Business School. He believes a high level utilization of AI would include stimulating crisis scenarios and finding a balance in the supply chain that consists of local and global suppliers. AI could quickly source the best mix of suppliers. Added advantages are that companies are more likely to add women and minority-owned suppliers to their supply chains by including local suppliers, and companies are supporting local communities of operation.
More Practical Applications of Digital Technologies
Blockchain offers numerous practical applications. For example, it makes smart contracts possible. These contracts are pieces of code that enable automation of actions based on predetermined conditions. The procurement manager can define smart contract rules that include chain of custody, batch tracing, compliance tracing, and automatic payment when pre-set conditions are met.
Managing data is always going to be challenging, because of the sheer volume available today. Cloud Computing makes storage of massive amounts of data for the generation of data analytics both possible and accessible. Procurement can utilize the data for predictive analytics, which is based on pattern recognition in areas such as spend and inventory controls. Software algorithms can identify trends which enable procurement to improve planning, based on forecasted scenarios.
As the technologies advance, some procurement functions are combining Artificial Intelligence and Robotic Process Automation. RPA takes repetitive, routine tasks and lets the software perform the basic downstream tasks, like data entry, asset monitoring, and inventory optimization. Artificial Intelligence performs tasks that require some equivalent level of human intelligence, mostly upstream tasks like predictive maintenance and supplier management. AI can understand uncertainty, learn from data, and mimic human thought processes.
There is no doubt that procurement functions are embracing digital technologies at a faster rate. Each year the Hackett Group announces the 2021 Digital Award Winners, and highlighted The Bosch Group, who developed a Purchase-to-Pay and Procure-to-Order automation system for guided procurement. The highly-automated Purchase-to-Pay system for indirect material and services has user guidance integrated into its user platform. The guidance navigates the user to the right buying channel, uses 50 ERP codes and standardizes processes for more than 300 company codes. The system is built with machine learning, AI, RPA, chatbot, and advanced automation.
Augmented Reality can enable virtual reality site visits, to meet with suppliers and enable scanning a component to get pricing and information on the status of raw materials. The Internet-of-Things enables real-time tracking of materials and components, as well as automatic reordering. It is safe to say that digital technologies can streamline nearly every procurement system and process.
Impact on Staff
Bosch also implemented a Procure-to-Order system to eliminate a lot of manual work involved in PO creation, master data management, and staff support. Procurement staff time was in turn freed up to do higher level tasks, like providing negotiation support and giving operational business units support. This highlights an important point.
The adoption of Procurement 4.0 has a major impact on staff skills requirements in various ways. The technologies move procurement professionals from transaction processors to forward-thinking strategic planners. Predictive analytics becomes a source of information for becoming proactive rather than reactive. Procurement staff are needed who are able to apply and utilize the technologies, such as interpreting data analytics,and using the information to meet business goals. They need higher level skills in areas such as risk assessment and management, supplier negotiations and real-time end-to-end supply chain management, problem-solving, and process re-engineering.
All experts in Procurement 4.0 make it clear that digital transformation only works when the right skill sets are available. Procurement staff therefore need retraining and upskilling. Companies today are posting a variety of procurement job titles and responsibilities that reference technology. Procurement functions are hiring people who have the skills to become a “Procurement Analyst,” “Procurement Operations Analyst,” or “Market Data Vendor Relationship Manager.” Job descriptions have responsibilities listed such as“gather, compile, analyze, and summarize product, service and supplier data for strategic sourcing” and “perform analytical calculations.”