Traditional procurement functions have measured success in terms of savings and timely materials or product deliveries. Smart sourcing can turn procurement into a strategic organizational partner through tech-based measurement of ROI and the value the function brings.
— By Valerie Gomez

While the amount of spend by category by supplier and the savings realized remain important metrics for procurement, they say almost nothing about value generation. Successful sourcing of materials, products and services is the core of competitive success. Traditional practices focus on reducing costs without comprising quality and timely delivery, but that is certainly inadequate for the complex supply chains of today.

Smart sourcing uses a variety of technology tools to identify and produce the analytics that drive supply chain investments and management in a way that generates value. Through technology, procurement becomes a strategic partner, participating in project planning, reducing risks of business interruption, and improving decision-making across the organization.

Becoming a Differentiated Value Generator
Once, supply chain risks were limited to events like ethical violations or a supplier going bankrupt. Today, sourcing professionals must consider a complex array of factors that include legal requirements, environmental sustainability, political turmoil, human rights, natural disaster events, technology and cyberattacks, and a more informed consumer base that holds companies to their promises and personal expectations.

Each of these areas presents risks that can disrupt the supply chain, so calculating sourcing and procurement savings and tracking time of deliveries are clearly inadequate. Procurement is not just a risk assessor either. In the complex supply chain environment, the function must become a value generator, and the value must be measurable.

A simple sourcing software program will not get the job done. Instead, sourcing professionals need technologies that can deliver the deep information needed to understand and manage the chain to achieve multiple goals of managing spend and deliveries (as usual), risk minimization and mitigation, improved project planning, value identification, investment management, and increased organizational transparency. Addressing these areas requires vast volumes of data and sophisticated analyzation processes that only technology tools can deliver.

Think of the procurement professional issuing a RFP and eventually a purchase order or contract. Now think of the differentiated purchasing function.

In the technology-advanced sourcing function, tools are used like cognitive intelligence; advanced risk detection and risk analytics; cloud services for data processing; dashboards for presentation of analytics and the ability to produce "what-if" metrics; portfolio management rather than just category management; solutions for compliance tracking; and value-added and value-capture tracking.

Using Technology to Drive Differentiation
Technology is the differentiator, enabling the kind of analysis needed for smart sourcing. Procurement has not traditionally calculated procurement ROI, but that is partly due the function being treated as a separate processing entity rather than as a strategic, integrated one.

As supply chains grow more complex and global, the procurement ROI becomes more important. The procurement ROI is a key indicator of the value the sourcing and procurement processes generate. It is a metric used to support adding new tech-based procurement applications and tools and for demonstrating value to internal stakeholders. Unless procurement professionals are able to quantify their functions value and performance, people will hold on to the perspective that all procurement does is "find and buy things."

Technology enables calculating ROI, but it can also add transparency so that internal stakeholders can see how value is captured and generated. Transparency or visibility across the value chain is important for category managers, especially if sourcing is done globally, and for monitoring risks. There is value in tracking, monitoring, and managing supplier risks, and technology enables the collection and analysis of multi-dimensional data across.

This is a win-win situation. Procurement displays the value of its applications and systems, and category managers can anticipate potential disruptions.

Smart sourcing embraces advanced technologies like cognitive intelligence (i.e. artificial intelligence and machine learning) to assess product components, environmental conditions, supplier financial condition, and other factors to improve sourcing. Smart sensors are increasingly feeding cognitive intelligence programs to track inventory, detect manufacturing issues, and monitor weather, for example.

The data generated is crucial to early detection of supply chain problems. Cloud systems offer the space needed to manage the volume of data, analytics and programs. Blockchain can track contracts.

Joining the Tram
The wealth of data and data analytics generated through smart sourcing contribute to a host of value-generating processes.

For example, sourcing professionals join a project team and can provide critical analytics for project planning. Smart sourcing guides decision-making in capital investments as to "what and where" in terms of strategic goals. One of the important digital solutions is the elimination of fragmented spend due to disparate systems used throughout the organization. It is a case of the left hand not knowing what the right hand is doing. Smart sourcing collects internal and external data, cleanses it, and uses machine learning to analyze and categorize it in a consistent manner. Managers and suppliers can look at the appropriate customized results in a dashboard with the goal of identifying opportunities.

However, value is only fully realized when insights are generated.

Smart sourcing uses technology to look beyond price and specifications. For example, technology can produce information on better product designs, alternative raw materials, revised specifications, and product production so that procurement can identify potential value that would be lost otherwise. McKinsey identified tools like online design-to-value and 3D printers to reduce time and costs associated with specification changes; logistics and inventory-optimization tools; and robotic process automation systems to extract, clean, and consolidate data from multiple systems. The consultant also pointed out that cross-functional teams are crucial to value generation. Having a procurement function lead and conduct an initiative without accessing high-level talent across functions will lead to underperformance and lost value.

More Than Dollars and Cents
The financial value generated by procurement flows from multiple directions. A supplier information management system can identify poor supplier quality or performance; an intelligent contract management program can increase compliance and identify potential risks; a procure-to-pay system automates manual processes while increasing performance monitoring and payment efficiency; and a financial system can identify areas of overspending or underspending in terms of supplier performance.

Yet, it is important to understand that procurement ROI is measured in more than dollar and cents. A strategic procurement function is a strategic partner in the organization, bringing value to project and long-term organizational planning by increasing visibility into supply chain processes. Figuring the procurement ROI is a step in aligning procurement and changing the way other business leaders perceive and engage it.

Choosing the right technology tools and fully utilizing them is the path to identifying, measuring, and sharing value.