The COVID-19 crisis made obvious the fragility of certain supply chains. Who in the entire planet would have thought that we could run out of face masks and hand sanitiser one day? Very likely no one. The crisis, a severe teacher, among other lessons that it taught us, made procurement management, also called purchasing management, a more strategic issue for organisations.
In almost all business functions across all industries, digital technologies have disrupted and improved business operations. Purchasing management, commonly known as procurement, has not been left off the guest list, of course. The heterogeneity of procedures, fragmentation or the lack of a purchase hub, accessible to different areas of the company, to input, manage and get insight on procurement, have been a long-lasting challenge. And the larger the organisation, the more this challenge unfolds.
By relying on fit-for-purpose digital tools, the organisation can centralise and standardise procurement operations, implement more robust policies and reduce dependence on a limited number of suppliers, among other advantages. Notice that we’ve intentionally used the word fit, because, in this case, as in most transformation endeavors where the digital component is the driver, there isn’t an all-purpose solution.
This article focuses on digital procurement, whose implementation nowadays is a must-have rather than a nice-to-have. Citing the COVID-19 crisis as responsible for its acceleration shouldn’t come as a surprise. Indeed, we can’t recall any article that hasn’t referred to the coronavirus, in one way or another, over the last 15 months or so.
Let’s revisit the etymology, challenges and implementation matters of digital procurement.
Defining digital procurement
To some extent, the act of defining existing concepts is repetitive, but when it comes to matters that merge two streams —procurement and digital in this case— it’s quite clarifying and necessary. Because procurement can still be done with little or no help from digital tools.
Procurement is the set of practices that define purchasing policy and strategy, the selection of suppliers, the negotiation of contracts, the establishment of purchase orders, the monitoring of services or goods delivered and invoice management. Key to any business so it keeps functioning and delivering, procurement is augmented and perfected via digital tools. However, while tools to computerise procurement have existed since the 90s, a vast majority of them were focused on processing and storing data.
Today, emerging technologies such as artificial intelligence (AI), machine learning (ML) and advanced analytics and data-driven optimisation software have upgraded the procurement game by linking the business with a network of external and internal stakeholders so that insight is appropriate and better-informed, and decisions are more strategic.
In less than 25 words, digital procurement is procurement whose value for the organisation is enhanced by digital tools, allowing for timely and well-informed interactions across the entire value chain.
COVID-19, digital procurement’s booster (and a severe teacher as well)
Like it was taken from an apocalyptic movie, the COVID-19 crisis happened and, to our regret, it’s still around. When health emergencies, confinement measures and border closures came, procurement took the spotlight due to severe disruption in the supply and distribution chain of goods, works and services in both the public and private sectors although the crisis particularly affected the former. 18 months later or so, procurement still ranks high in the list of discreet heroes that the crisis brought with.
The COVID-19 crisis has raised awareness of the importance of supply management in many situations. The most prominent example is how recommendations related to face mask wearing rules evolved depending on the ability of governments to obtain them.
Certainly, COVID-19 challenges have been an opportunity to analyse and rethink procurement, its organisational role, its strengths and flaws and how to advance the function. A fair mix of people’s capabilities, technology, technical instruments and planning, all of them framed by the right organisational mindset, are necessary so that procurement becomes a true strategic tool for the organisation and all stakeholders involved.
And, when we refer to technology, the digital part of it is the almost irreplaceable partner. With the urgent coordination and cooperation needed within the business and among different actors to alleviate the crisis, digital procurement was, to some, more than handy. To the ones that didn’t have it in place, it has been an eye-opening experience that is forcing them to digitalise the procurement function.
In various sectors, it was important to secure the supply chain, sometimes by diversifying suppliers to avoid being dependent on a single partner, sometimes by relocating the production of elements considered to be strategic.
The biggest issue of today’s procurement
Coordination – that’s procurement’s biggest challenge – coordination in the broad sense of the term, within the organisation and across different value chain and supply chain actors.
There are various good reasons to make procurement, especially digital procurement, a new strategic affair within organisations, regardless of the sector they operate in. Public administration, businesses, nonprofits, sport clubs, you name it: all of them cannot afford to neglect the need for well-managed, responsible procurement.
More often than not, procurement is fragmented across various departments within the same organisational structure, resulting in operational inefficiency. For instance, and based on what PwC’s digital procurement team told us, it isn’t infrequent to stumble upon orders that have been placed twice, or have the same invoice paid twice due to a lack of coordination.
In general, the more complex the organisational structure is, the more essential the need to manage procurement by means of a centralised operating model. The same goes for businesses with a vast offer of products and services.
Organisations must be able to understand procurement in a holistic way so they can manage strategic risks better and even reduce them, take advantage of leverage effects and reduce costs.
Advantages of digital procurement
Digital procurement makes the overall purchasing management better. More specifically, it reduces costs, improves flow traceability, strengthens supplier and vendor relationships, and makes monitoring, audit and reporting more robust. It allows for a greater professionalisation of purchasing management, with trackable operations records and more easily accessible indicators.
When specialised by area, for example, purchase officers have greater room for negotiation, being able to ensure they have the best value for money.
Also, the organisation as a whole and each department individually have continuous access to spending assessment. With this information, adapting the organisation’s policy is easier and data-driven, helping to reduce supply- associated risks, to integrate social or environmental criteria or ensure the integrity of suppliers through Know-Your-Supplier procedures.
Embracing digital procurement needs change management
Digital procurement doesn’t happen within the blink of an eye. Which transformation, digital or not, happens like that, anyway? Foresee, therefore, a change management process as part of the deployment of digital procurement. And, even before that, analyse how the digital procurement projects are incorporated into the overall digital transformation roadmap of the organisation to align expectations, time and resources.
Unavoidably, centralising purchasing management calls for a major habit change in teams across the organisation. Get prepared, then, for imaginary but annoying trenches, reluctance, a certain level of disbelief, and even naysayers trying to boycott change. It always happens. Really.
Some departments may feel that they are losing autonomy and their needs will be left unattended. In other cases, the newly established digital procurement procedures will be perceived as limitative, as another burden to add to the list.
At the heart of any project to modernise and harmonise procurement-related operations, trust plays the role of a great facilitator, as it increasingly does in other transformation endeavours.
To have more chances to implement digital procurement smoothly, strengthening the relationship between the different business areas and the procurement department is a smart move.
Also, often, organisations put together a sort of digital change management platform with the tools and new procurement procedures to deploy. This is also important because it enhances transparency, also key to any transformation.
And, naturally, there is the human side of the process, unarguably the most important. We have to train the teams, give them support and, more importantly, think of what motivates humans to change. Following the “carrot-stick” approach, for instance, could be an effective way to encourage the adoption of the new procedures.
Nevertheless, while this procurement transformation aims at process harmonisation, it is also essential that these processes remain as flexible as possible. If the procedures are excessively cumbersome —two weeks to order pencils and paper— users will be, very likely, tempted to bypass them.
What we think
Digital technology helps to professionalise procurement management. With the right mix of tools and training, the organisation as a whole can constantly assess spending. Adapting the purchasing policy, integrating social or environmental criteria or ensure the integrity of suppliers, then, is more straightforward.
It’s not only about saying “let’s digitalise procurement”, but when and what needs to be digitalised. Different elements need to be assessed for the procurement digital strategy to be in line with the company’s objectives.