In my first article, The Future of Procurement, Part 1: What CFOs Need To Know, I discussed how procurement goes digital and concluded that the CPO might evolve to a chief value officer to create impact and drive measurable value for a company.
Most studies, reports, and future trends focus on data, benchmarks, and projections based on interviews from experts. The question I often had when reading the latest trend analysis or studies was: What to do now?
This is an important question for finance. The close collaboration between finance and procurement is mandatory to transform procurement and establish a strategic sourcing function successfully.
Finance will directly benefit from the reduction in transactional activities to reduce shared services manpower needed on processing paper-based invoices, as purchase order and invoice automation will make printing, shipping, and scanning of invoices redundant.
As procurement devotes fewer resources to operational, tactical tasks, it can focus on higher-value activities and strategies. A bottom-line impact to increase the margin is obvious: to deliver value by aggregating demand, initiating supplier innovations, continuing compliance, and driving risk management across the entire supply chain.
In this blog, I will try to translate how the disruptive technology trends will impact the procurement function and how procurement could evolve to transition successfully into the future based on some concrete examples. I don’t expect to find the ultimate truth or even be able to predict the future. I’m a strong believer in the quote from Niels Bohr that “prediction is very difficult, especially if it’s about the future.”
How will the disruptive trends in technology impact the procurement function?
Let’s use the example of Internet of Things to start with. When sensors are connecting all devices, including manufacturing material with the production machines, a warehouse might do the ordering of supplies in a highly automated way based on demand and based on new incoming orders. This example could even be taken one step further. As sales is using a CRM system, which can be linked to a calendar like Outlook, the upcoming contracts and dates to sign a new deal are already in the system and the data can be used to plan production and to order the production material in time. The machine-to-machine communication allows fully automated process steps.
If a materials or spare parts can’t be ordered in time or a defect occurs, a 3D printer might be able to support short-term demand. In the future, even entire supply categories might get printed.
On the administrative side, we are seeing more and more automation in operational tasks such as the source-to-pay process. Employees are ordering goods or services as well as travel using an online system. Purchase orders (POs) get created electronically, sent out to suppliers, and converted to invoices, which get paid according to the agreed-on payment terms as soon as the goods receipt is in the system.
Automation in the demand, ordering purchase, and invoicing processes will lead to lights-out transformation across administrative and operational processes as well. A lights-out shared services for accounts payable might become reality to a large extent of what’s happening with PO and invoice processing. It is still fascinating that even the smallest businesses are creating an invoice with a computer today, an invoice still gets printed, put in an envelope and mailed, and the receiving company must open the envelope, scan the document, and try to capture the information by an optical character recognition system. Missing or unrecognized data must be entered in a system manually – usually by people in a shared service center.
The interesting observation is that the quality will never be 100%. The process is error-prone and inefficient by design, and it creates a lot of inefficiencies. But there is huge potential for this to be optimized and even eliminated by avoiding paper and transportation, which will drive lower costs and greater sustainability.
What’s the impact of all this automation and optimization on procurement, finance, and the shared services that support them? They’ll become more strategic. The more things get automated, the fewer people are needed to perform tactical work such as processing POs, scanning paper, and typing information into an enterprise resource planning (ERP) system. These resources can be shifted to more strategic activities such as planning and forecasting and supplier collaboration.
How can this automation – and ultimately optimization – be enabled? It starts by creating end-to-end process ownership from the purchase requisition to the payment (source-to-pay). Process governance is key to ensure the optimization and automation potential gets leveraged across the organization.
Then the systems have to be integrated as the end-to-end process gets defined. The cloud provides further potential to build on standard solutions, predefined processes by competitive and reduced total costs of ownership.
|What’s happening today…||What is the impact in the future…|
|A lot of different systems are in use and operated by IT. A mix of systems, and a mix of on-premise IT solutions and partially selected cloud solutions, coexist. High pressure on costs forces IT and lines of businesses to optimize and consolidate the system landscape to reduce the total costs of ownership.||The demands of cloud systems and standard solutions will continue to increase. They provide the potential to reduce the system complexity and total costs of ownership, as cloud solutions can be considered less expensive than maintaining an IT infrastructure only for one company.|
|Internet of Things with sensors offers high potential of automation from purchase order to invoice processing to payments.||Operational and administrative tasks will be fully automated and thereby, the procurement, finance, and shared services organization will shrink.|
|Processes are getting optimized and manual process steps assessed for automation potential..||Lights-out shared services will be enabled by high automation and end-to-end source-to-pay process optimization without paper or non-digital process steps across all organizations and companies performing tasks.|
Time to create the future for procurement, finance and shared services
The (r)evolution in technology and disruptive new trends, like machine-to-machine communication, will continue – and have a huge impact on existing businesses and business models. New technology will further increase the need for organizations to be agile, flexible, and adapt to accommodate both current and future needs. Procurement will have to keep up with the changes and focus on the value the function can create for the lines of businesses.
Today is the time to consider how to structure and prepare your organization for transformation. And this means thinking about driving end-to-end process ownership, governance and optimization, and an IT strategy that integrates cloud-based solutions with ERP systems to support your efforts.
It is impossible to predict the future. But with the massive amounts of data and groundbreaking technology available today, you can plan for and shape it to your advantage.
I invite you to provide feedback, add your own insights, and contribute to a lively discussion.
For more on this topic, read The Future of Procurement, Part 1: What CFOs Need To Know,