August 2, 2021

Procurement 4.0 - the digital transformation of procurement

A guide to digitalisation in procurement. Discover what is to come in the future, learn how you can already benefit from the advantages today and how you will successfully master this transformation.

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← BACK TO THE OVERVIEW

This is the sixth part of our series " Digitisation 2021". In the previous articles, we looked at digitalisation in the areas of sales, IT security, marketing, logistics and finance. Today we are talking about digitalisation in procurement.





What is digitalisation in procurement?

Digitisation in procurement means using digital technologies for purchasing to save - who would have thought it - time and money. This is achieved through improved efficiency and the identification of areas for optimisation. In addition, relationships with suppliers and the respective stakeholders are to be developed and deepened.


Deloitte - Digitalisation in procurement
Deloitte - Digitalisation in procurement


Status Quo Digital Procurement

But in reality, the procurement function is often stuck in analogue processes and outdated technologies. Data is kept in numerous Excel spreadsheets or Word documents and seeps away in isolated data silos. This makes this data incapable of being used for automation or prediction (cue: predictive analytics). Plus, the experts who understand it are also lacking.

Another reason is that the digitalisation of procurement is often treated as a poor relation - omnipresent areas such as sales, marketing or IT security draw all the attention. Although the primary focus on these areas is justified at the beginning, procurement is another crucial component that holds a real treasure for companies: a large set of existing data as well as additional connections to many internal and external departments and areas. In particular, the connection to suppliers, stakeholders as well as the entire supply chain.

In the future, a significant impact will be the ability to make data-driven business decisions. And procurement has the potential to provide a large part of the data that is relevant for these decisions.

However, due to the high level of connectedness in procurement, there is also a danger lurking on the other side: as digitalisation progresses outside of procurement, it could be completely outsourced or completely replaced by machines, bots and artificial intelligence.

Purchasing managers and CPOs (Chief Procurement Officers) have now the chance to strengthen the competitive position of the company on the market as well as their own department using digitalisation - if they miss the opportunity, the department falls behind, is partly replaced or even has to face being completely dissolved.



Advantages with the digitalisation of procurement

In addition to the necessity that we have just learnt about, digitalisation naturally also offers significant advantages in this area.

  • Saving costs: Deloitte says that companies with optimally structured procurement save 21% in personnel costs and up to 30% in process costs
  • Building trust and encouraging stakeholders to involve you earlier in their processes where you can deliver added value
  • Stimulating innovation amongst suppliers
  • Intuitive and streamlined buying experience for stakeholders
  • Improve corporate social responsibility (CSR) by integrating CSR into processes such as supplier assessments and purchasing decisions
  • Reducing organisational risks by improving compliance processes and by conducting supplier audits
  • Increasing connectivity inside and outside your organisation by creating platforms through which internal and external parties and stakeholders can access data, processes and more
  • Developing new business models

Let's now take a look at the technologies that need to be considered in order to take full advantage of digitalisation.


KPMG Germany - Technological procurement disruptors and their Value contributions
KPMG Germany - Technological procurement disruptors and their Value contributions



Digital technologies and opportunities for procurement

Artificial Intelligence (AI), Machine Learning (ML) and Cognitive Computing

Machine learning (a subset of AI) is the ability of a machine to continuously improve its own performance - with no human intervention required to tell it how to perform its tasks.

Through pattern recognition and repeated application of this ML algorithm, unstructured data (data on expenses, costs, contracts, suppliers, etc.) can be quickly collected, structured and analysed. This is particularly suitable for large amounts of data (Big Data), for example. But also for data from accounts payable or travel expenses, which are often recorded outside the enterprise resource planning system. The analysis can provide new insights as well as opportunities to optimise processes and applications. In the best case, new business models can be discovered. Cognitive computing includes technologies such as AI, machine learning, human-machine interaction, speech recognition, facial and image recognition and much more. Therefore, chatbots are a classic application of cognitive computing. These are used to answer efficiently a wide range of supplier requests in an automated way and thus significantly reducing the administrative workload for procurement.


Predictive Analytics

This combines statistics, modelling, machine learning and AI, among other things. This combination analyses data and trends to make predictions about the future and identify risks and opportunities. Essentially a digital "crystal ball". This is to forecast cost/price fluctuations, demand, supplier/country risks, etc. and acts as a proactive decision-making tool.


Robotic Process Automation (RPA)

RPA helps to complete repetitive, administrative tasks. In doing so, the programme imitates humans performing a task and does not try to think or interpret itself like artificial intelligence. For example, the RPA can calculate when certain orders need to be placed - and then place them.


Blockchain

In simple terms, a blockchain stands for secure and direct transactions on the internet. It is particularly useful for the supply chain because it enables and reinforces end-to-end transparency and control. A blockchain is an encrypted data structure that uses a trusted peer-to-peer network (a network of computers connected and working together) to create digital ledgers of transactions. 


eProcurement / E-Procurement

eProcurement refers to buying and selling products and services electronically via the internet. In doing so, it supports the online exchange of information between procurement and suppliers and has been shown to increase productivity and transparency while reducing costs. eProcurement also refers to the 3rd phase in the evolution of procurement systems (Fig. 1, see below).

Cloud ERP and democratisation

The benefits of moving applications and services into the cloud are obvious: permanent availability and being up-to-date, a very high level of fail-safety and advantages in terms of data backup.

We have already talked about the democratisation of ERPs in the last article. In summary, it is about enterprise resource planning systems emerging as the central control centre for digital processes. However, the ERP system is not pulling all the strings as a monopoly, but a network of microservices and specialised applications interacting independently with each other and with the ERP system (or not). 


Besides these possibilities, there are other technologies for procurement, but it would go beyond the scope of this article to discuss them. Worth mentioning here would be: Visualisation, crowdsourcing, 3D printing, sensors & wearables and virtual reality.

In any case, these are already a whole range of technologies, each of which represents a challenge in terms of implementation. Equally, they represent an important role in optimising companies, offer real added value and making it easier for procurement to manage the supply chain. And last but not least, there are tangible cost savings waiting in the wings for any business.


How to start?

But technology alone is not enough. Although they are the essential tools for digital transformation, the success of this depends on one thing above all: the right strategy.

“84% of procurement organizations believe that digital transformation will fundamentally change the way their services are delivered ... Yet only 32% have developed a strategy for getting there.”

-The Hackett Group

Whereas the Hackett Group assumes 32%, Deloitte came to the following rather modest conclusion in its "Chief Procurement Officer Survey 2018":

“Only 6 percent of the procurement leaders in the survey believe that their digital procurement strategy will help them to fully deliver on their objectives and improve enterprise value. Only 18 percent of procurement leaders have a digital procurement strategy supported by a complete business case.”

- Deloitte

Going further, Deloitte states that "applying digital technologies to the procurement function will enable strategic sourcing to become more predictive, transactional procurement to become more automated, supplier management to become more proactive, and procurement operations to become more intelligent."

No two opinions exist about the extensive potential. In order to fully exploit this potential, the first step is a careful digital strategy and vision. This should be action-oriented, scalable and flexible, especially to integrate new technologies and approaches. We have defined a 4-step plan below to help you start and implement digitalisation in procurement.


Digital Procurement: Strategy, Planning, Implementation and Revision

To successfully transform procurement digitally, it is advisable to continuously apply the following four steps:


1. Identify potentials and set goals

A crucial success factor for companies is to understand their current position in the procurement process within their own organisation.  This includes the relation to external stakeholders. Where does your company stand in the digital transformation of procurement?

This allows you to identify potentials as well as define goals. This information in turn helps to develop a positive business case that combines short-, medium- and long-term goals. What results and values can be expected in the following areas and how can they be continuously improved?

Effectiveness: lower price through process and material cost savings, better product quality, increased turnover, higher profit.

Sustainability: reduction of risks and increase of innovations

Efficiency: accelerated product launch (time-to-market), improved access to resources, optimised processes through shortened process cycle times

An additional component of sustainability that is not a primary KPI but should not be neglected is the “procurement experience”. This term is intended to summarise the experience of customers, suppliers and stakeholders alike. Creating positive experiences here means that procurement is likely to be involved in initiatives at an early stage or to gain access to important resources or information

One example is the automotive industry, which treats its suppliers as strategic partners. There is a good reason for this, as up to 75 % of the components of an automobile are developed and produced by suppliers to the automotive industry today. This relationship is called Supplier Relationship Management (SRM for short) and ensures that procurement costs are optimised and the company's own manufacturing processes are safeguarded.


2. Selection of the tools and the team

Once you have set the goals, you can work to achieve them. Which people and stakeholders are needed to achieve the goals and which technologies are used? Digital tools can support and enrich procurement in four key areas:


Automation

Automation helps to eliminate mundane, routine and repetitive tasks. It also ensures the digitisation of data in the process, respectively the need for it to be in digitised form.


Decision-making process

In decision-making, digital assistants help to speed up the process by making recommendations.


Connectivity

The overall level of connectivity is increased through collaborative/intelligent workflows. Both internal and external portals with enhanced collaboration and communication also contribute to this. Open technological platforms, e.g. based on open source or through the use of standard protocols or interfaces (APIs), provide increased interoperability.


Innovation

Innovation is driven by technologies and services that can provide insights to the product, customers and suppliers. These technical solutions reveal patterns or indicate which areas are capable of innovation. The experts in analysing this data are data scientists.


Depending on the goals and outcomes a company wants to achieve or strengthen, it can identify digital solutions that are best suited for the respective goal. The selection process should take into account the extent to which a chosen technology contributes to the expected business outcome.


More important than the tools are the people who implement the digital transformation and continuously test and improve it. In "Building blocks of a digital strategy for procurement", Deloitte focuses on talent management (see Fig. 1). By capturing the current state and defining the goals in the first step of our 4-step plan, you can capture exactly what skills, talents and knowledge you need.


Fig. 1: Deloitte - Digitalisation in procurement: Building blocks of a digital strategy for procurement
Fig. 1: Deloitte - Digitalisation in procurement: Building blocks of a digital strategy for procurement

In addition, not only the internal team of experts is considered, but also the stakeholders. Especially those in key positions. Take them on board early enough, integrate them into your processes and maintain an equally value-adding relationship with them. Win-win always wins.


Fig. 2: Varun Gupta, "Procurement Strategies for Digital Supply Chains" - Interactions in the Digitised Supply Chain
Fig. 2: Varun Gupta, "Procurement Strategies for Digital Supply Chains" - Interactions in the Digitised Supply Chain


3. Digitalisation of procurement on the basis of customer, product and supply chain

The strategy is set, the team is assembled and the stakeholders are also on board - the transformation can start! The previous figure (Fig. 2) shows that communication takes place between all areas of the digitalised supply chain. In order for the procurement department ("supplier" in the figure) to add value and be efficient, their strategy must be aligned with the strategies of production, supply chain and the company, and additionally address customer needs.

By taking this holistic approach into account and combining it with Industrie 4.0 technologies, which we presented earlier under "Digital technologies and opportunities", procurement achieves the status of Procurement 4.0 (Fig. 3).

Fig. 3: Varun Gupta, "Procurement Strategies for Digital Supply Chains" - Development of Procurement Systems
Fig. 3: Varun Gupta, "Procurement Strategies for Digital Supply Chains" - Development of Procurement Systems


The term Procurement 4.0 means the interactive collaboration of all parties involved in a supply chain, as well as ensuring that everyone benefits from this collaboration. We have previously learned about the advantages that result from this constellation.


4. Tracking and revision

In the final step, impact and value creation are measured and evaluated. In carrying out the process, new skills are learned and new insights are gained, which in turn lead to new goals. With these newly defined goals, the whole process is then repeated. It is possible that the original goals were not achieved - now you have the opportunity to adjust the procedure, the goals or both accordingly. In this way, continuous improvement is achieved in all business areas and among the participants in the supply chain. This also requires working with supply chain stakeholders at this stage as well as gathering customer feedback. This reinforces each relationship and ensures that the desired business objectives can be achieved.


Conclusion 

Procurement is becoming increasingly important - also in terms of increasing profits. To maximise value creation, this department must be given adequate attention, resources, technology and talent. After all, procurement is also the main instance for security of supply. In addition, there is an enormous potential in existing (and future) data and processes that can be fully exploited with the help of data scientists and business intelligence analysts.

On top of this, procurement has a social responsibility. Corporate Social Responsibility has been a legal requirement since 2017 and ensures sustainability in the supply chain. Contribute your part for future generations and make the world a slightly better place - at least in one part of your supply chain.