Not Your Grandfather’s Procurement (Part 2)

Mark Brohan

In Part 2 of a 3-part series, Marcell Vollmer, chief digital officer at SAP Ariba, shares his take on where digital procurement is headed. Read Part 1 and Part 3.

Q: Your report says that digital technology is changing how manufacturers at all levels are doing business as supply chain management and the purchasing cycle become even more automated and transparent. What’s the effect of this on e-commerce?

Vollmer: Similar to supply chain management, digital technology is helping to automate many parts of e-commerce and creating far more transparency throughout the entire e-commerce process. For example, AI helps run automated auctions and also intelligently matches buyers with the right suppliers to meet their specifications.

On the transparency front, analytics and data-driven strategies give buyers insights into their purchases from start to finish – where products are being made, their stage in the purchasing cycle, etc. This transparency can also ensure that there are no “hidden costs,” confirming accuracy and transparency of pricing and contracts. AI and machine learning can also help to recommend negotiations or automate discounts, ensuring that procurement always gets the best prices as they source goods and services.

Q: You mention four big roadblocks to the rollout of more digital procurement technology: budget restrictions (46%), analytics and data insights (43%), internal talent shortage and lack of know-how (43%), and master data management (40%). How are companies dealing with these roadblocks – or are they?

Vollmer: It was a surprise that on the one hand, chief procurement officers (CPOs) and procurement professionals responded that they see the need to drive digital transformation for their function, especially as they rated themselves as highly entrepreneurial. But on the other hand, they couldn’t execute the needed activities. The surprise comes as this is now the third year in a row that budget restrictions, data insights, and the lack of internal know-how are mentioned as reasons for the little progress made in between.

It seems that a lot of CPOs struggle to get the investments and funding for their own digital transformation. This is interesting, as procurement can directly contribute to the funding of needed investments by leveraging the purchasing power and reduced transactional costs through automation.

Q: Let’s talk numbers. What does it cost a company in actual dollars to implement some of these digital procurement applications and services? Where are these manufacturers getting the money – new capital spending or shifting existing resources?

Vollmer: A company should have an overall strategic plan on how to drive the digital transformation. Procurement is one of the key functions when it comes to the back-office transformation, as cost savings can directly contribute to funding some of the overall needed investments.

There is one additional aspect to consider: Procurement can also create value by leveraging the ecosystems of suppliers. Supplier innovations are very well-known and used as concepts for manufacturing; automotive, to name one industry. In automotive, a new car model or engine is a long-lasting innovation partnership between an OEM (original equipment manufacturer) and suppliers.

Key to any transformation are people. When you investigate the skills that procurement has today and the skills needed in the future, you will see that there is a huge gap. New skill areas, like data science and programming algorithms for machine learning, are not at the level needed to be successful in the future. Therefore, an employee training and development program is key to invest in the people today to prepare them for the future.

Q: Let’s talk more numbers. What kind of return on investment in actual dollars are manufacturers getting by investing in digital procurement technology?

Vollmer: Every transformation costs money, and therefore ROI is key. The beauty of procurement transformation is that procurement can contribute by generating purchasing savings and cost reductions [through] automation directly to the funding. Very often we see that the procurement transformation has an ROI of less than one year; this means you get the investment back within 12 months. But this is dependent on how rigid and fast the transformation [can happen] in a given organization.

Q: How does artificial intelligence improve e-procurement and e-commerce?

Vollmer: One very important thing AI does is simply to automate certain parts of the procurement process, which frees up CPOs to concentrate on more strategic activities and look at organizational trends outside their own department. As AI tackles more of the tactical day-to-day operations, procurement leaders can take on more collaborative, innovation-focused initiatives.

However, AI is much more important than just automation. While it can do things like automate bidding processes, it can also help identify and flag potential fraud; discover better supplier options, forecasts, risks, and trends; scan and review documents; interact with suppliers via voice recognition software; and overall, streamline many processes.

Q: How does the Internet of Things (IoT) improve e-procurement and e-commerce?

Vollmer: IoT will provide an entirely new level of connecting data from e-commerce to procurement. Imagine the potential of having supplies and warehouse stock items connected to the systems. Automated ordering and leveraging machine learning will allow a new level of scalability and benefit from connected devices across supply chains. Logistics and suppliers can be added to the network with new technologies like 5G to connect more or less all devices, spare parts, goods, and also services to systems.

Another benefit is the transparency and track & trace along supply chains. You can use blockchain or distributed ledger technologies, but you still need to define how you connect the devices or transport methods to it. Here IoT will enable a fully transparent monitoring of all goods from the origination to the product sold to consumers.

Stay tuned for Part 3 of this series, which explores the evolving role of CPOs and their progress with digital transformation.

This article originally appeared on B2BecNews and is republished by permission.

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Mark Brohan

About Mark Brohan

Mark Brohan is editor and publisher at InternationalHealthManagement.com and director of B2B e-commerce research. Follow Mark on Twitter @markbrohan.