Analytics Must Drive Source-to-Pay, but not necessarily Gen-AI

Xavier recently penned another great piece on Analytics in P2P: From visibility to actionability where he highlighted the failures in analytics in traditional P2P:

  • static, backward looking, spend by category, invoice cycle time, approval rates, compliance rates
  • insights only after transactions are processed, payments are made, and cycles completed
  • late payments multiplying, exceptions accelerating, and supplier risk accumulating
  • lack of operational insight

According to Xavier, P2P can only be modernized if the embedded analytics shift from descriptive to diagnostic.

  • don’t report KPIs, explain the root causes (which approval paths contributed the most to approval time)
  • don’t report exception rates, identify suppliers that consistently cause them
  • don’t report spend anomalies, break it down and identify root causes

It’s a great start, but where it needs to get to is actionability. Xavier begins to address this point by stating the next step is “predictive awareness” where the system anticipates likely outcomes within active processes, such as predicting which invoices are likely to miss payment terms, which requisitions are likely to stall in approval or which suppliers are likely to generate disputes based on current patterns as that allows a Procurement professional to intervene before issues arise.

Finally, Xavier gets to the main point — the real inflection point comes when analytics begin to recommend actions and influence execution paths. Prescriptive analytics in P2P requires tight coupling between insight and control. If analytics identify a high-risk transaction, the system must be able to route it differently, apply additional validation or prompt a specific decision. If analytics detect a low-risk, repetitive transaction, the system must be able to reduce friction without manual intervention.

But it needs to go one step further. It must not only route differently, and apply more controls, but it must still do so automatically based on the diagnostic and predictive analytics. It can’t just apply a “one-size-fits-all” approach for automation and kick every exception out for human processing. You can’t always make the default path smarter because there should be different paths depending on the cost of the purchase, the risk associated with the purchase, the discrepancy between the invoice, goods receipt, PO, and/or contract terms and conditions. You need multiple streams that are auto-selected by predictive analytics that support the right actions given the assessment of the conditions.

The reality is this — except for truly exceptional situations, once you’ve made the decision on what to purchase, procurement should be 100% automated. It’s all e-document exchange, analysis, authorizations, and (payment) transactions. Unless something is really off, a buyer should never be involved once all the workflows, rules, and authorizations are setup.

But this automation should extend back into, and through, source-to-contract. Building on the Busch-Lamoureux Exact Purchasing pocket-cube framework, there are categories that are low risk, low value, and low complexity — you should NOT be buying these manually. “Agentic” automation should be taking care of these for you, considering that even a worst-case screw up will be of little impact. Then there are categories of moderate risk, value, and/or complexity which can be fully automated if all of the necessary data is available and there is a cost and supply history to build on, there are no special situations that need to be taken into account, and a worst-case analysis indicates that even a statistically unlikely “bad buy” will be of minimal impact. These should be 90%+ automated from the decision to buy to the recommended award, with extensive analytics and augmented intelligence for human review. And if the buyer likes the default recommendation, it should be just one click for the process to go from award to e-signed contract.

All of this requires very extensive descriptive, diagnostic, predictive, and actionable analytics and intelligence with extensive, adaptive, robotic process automation ([A]RPA) that can automate everything that should be. The reality is that while everything should be sourced (or exactly purchased), when you have all of the (market) intelligence, the standard processes, and the organizational goals encoded, then there’s no reason that the systems shouldn’t do the majority (or the entirety) of the work for you.

While buyers won’t be replaced by agentic systems (despite the over-hyped BS claims of AI Employees), they will be heavily augmented by them when most categories aren’t complex, risky, or strategic enough to require human review or intervention.

How Do We Fix The Procurement, Logistics and Supply Chain Disconnect? (Part 2)

Yesterday we gave you a history lesson on how we got here, from the time it worked back in 1885 to now where it’s completely broken. The reason? You can’t understand how to fix it if you don’t understand why it broke. (The Short Answer: McKinsey and peers who echoed their thought leadership to break down functions, outsource staff, outsource production, outsource logistics, and downsize until there’s almost nothing left in the organization.)

Procurement was never meant to be divorced from Supply Chain or Logistics. It was all supposed to be an integrated function. Buy. Ship. Manage. Repeat. But it’s not, and because no one will give up a fiefdom, and because almost no one has enough cross-disciplinary training to understand the intricacies of most functions, yet alone manage them, it won’t become part of Supply Chain again (or at least not for a long time — at least not before the fall of the modern house of Usher).

So fixing the disconnect is going to be hard. The departments will remain separate. The business language will remain distinct. The goals and KPIs will be local and different. Procurement is going to want lowest cost from a supplier it believes can supply the necessary volume over the lifetime of the (contract) award. Logistics is going to want suppliers that are on lanes served by existing carriers they have contracts with who have excess capacity and from whom they can get a good rate.

Supply Chain is going to want to utilize warehouses, ocean routes, FTZs, and other networks they have in place that they believe are low risk and high performance — they have to assure supply to manufacturing. Each goal would likely select a different supplier — there will be one supplier that is lowest price, one that is lowest shipping, and one that fits in best with the current network with a high supply assurance rate. Furthermore, if you “work” with them and then select the supplier they don’t want, they’ll think you weren’t actually “working” with them.

But, fortunately, you don’t need to work with them to work with them. You just need their priorities and their data.

You can make the best balanced decision for Procurement, Logistics, and Supply Chain if:

1. You understand the competing objectives AND their relative priority

You sit down with logistics and ask them what their most critical criteria are in supplier selection, ask them to rank them, and ask them to relatively weight them. Then you sit down with supply chain and do the same. Then you take your critical (generic) criteria, rank them, and relatively weight them. Then you create an integrated list based on the relative rankings across your three departments, weight based on C-Suite priorities, and get the final, general purpose, rankings blessed by the CFO and COO.

2. You integrate into all of the internal AND external data sources at your disposal

When you go through this exercise, you’ll realize that multiple factors affect landed cost, supplier risk, supply assurance (and supply chain risk), quality, and other key factors. You’ll realize that the only way to evaluate all of this is to pull in key sets of data from the logistics system, supply chain systems, and external data feeds (so that risk analyses are done on complete, up-to-the-minute, data) and integrate them into a decision matrix.

3. You make a decision that satisfies the objectives subject to the data available

And you do this using modern decision optimization that balances all of the objectives relative to the weightings, hard constraints, soft goals, and supplier offerings. As per our prior article, thanks to the introduction of multiple “buy local” acts (US CHIPS, EU IAA, Chinese local content) , The Time for Optimization is Finally Here as it’s the only way you will be able to satisfy all of these requirements with a single multi-vendor buy as you have to match
procurement decisions with supply chain factory requirements as you have to buy for different requirements and produce to those requirements and produce where its most economical to get those goods to the countries they were produced for.

In other words, you fix the disconnect with:

  1. shared priorities,
  2. integrated data,
  3. integrated decision optimization that takes procurement, production, and logistics requirements into account.

And if you don’t fix the disconnect, your organization’s entire existence may soon come into jeopardy.

How Do We Fix The Procurement, Logistics and Supply Chain Disconnect? (Part 1)

First, a history lesson.

Back in the beginning, in 1885, Railroad Barons were building the nation during the Gilded Age, writing the first handbook on purchasing, and managing their logistics and vertically integrated supply chains in house.

But as technology advanced, so did the need for mass production and specialization, and production of components that could be easily, and more economically, produced by a third party started to be done by the third party so the firm could focus on more specialized production in house. But then the Panic of 1893 set in, the Guilded Age began to come to an end, and the Progressive era began.

The Progressive Era, which focused on social and political reforms, also saw continued technological progress as well which occurred as the railroad era gave way to the automotive era (symbolized by the Ford Model T in 1908), the introduction of the first production line, and the need for improved logistics (enabled by Autocar Truck, one of the first motor truck companies) as supply chains slowly lengthened and became more complicated.

These functions were still managed in-house as part of a single function, buying from American companies, even if the materials were coming from halfway around the world (as the American company would buy from the American importer), and everything worked well (unless unions got in the way — but that’s not the subject of this post). Then we saw the New Era, which lasted a little over a decade until the Great Depression happened, which was bad, but it led to the New Deal, which saw more political reforms, and then we got World War II, which, when it ended, led to the post-war economy which ushered in the American Dream for the Consumer and the rise of the management consultancy (and marketing agency) for the Business — where the former had just began two decades earlier.

During this era, we saw the rise of McKinsey that revolutionized corporate structures through the institution of professional management, performance-based pay, and strategic planning. This led to the introduction of downsizing (unnecessary middle management) in the 1960s, the 7S framework in the 1970s (that focussed on aligning strategy, structure, systems, shared values, skills, style, and staff) that introduced the importance of systems, and then the 1980s brought outsourcing of talent and offshoring of unspecialized supply.

This led to the split of logistics from supply chain to manage the transportation from global countries, and the split of Procurement from Supply Chain as that was a back-office function that could be outsourced, and the great divergence began. Once costs started soaring, we saw the introduction of the first dedicated Procurement software in the 1990s, the proliferation of platforms and the rise of Procurement in the 2000s, and the rest, as they say, is history.

Procurement became a completely standalone process, and purchasing became completely separate from supply chain and logistics. During the age of globalization where conflict was low, free trade flowed, and stagflation ruled, everything worked well. But then we got COVID, tariff/trade wars, global instability and increased conflicts, critical strait closures, and supply chains breaking on a daily basis. Decisions made by Procurement months, or years, ago in isolation don’t hold up any more. Neither do processes that assumed sourcing events could take months. Neither do risk mitigation plans that assumed you could just switch to the other supplier in the region (who you gave a volume minority contract to) when the region has been cut off.

The days of Procurement succeeding stand-alone are gone. It must operate in a supply-chain-aware, logistics-aware, and geopolitical aware context. But, for the most part, except for supplier selection in the seven-step-sourcing process of your choice, it doesn’t do any of this. So how do we fix the disconnect?

There’s No Cost Management UNLESS It’s By Organizational Design

Cost Management is what thought leaders and analysts have been talking about for 25+ years in Procurement (and is something that has been discussed on SI since its founding in 2006), but not something that is typically realized.

It’s more than just strategic sourcing, contract [lifecycle] management to capture the agreements and obligations, e-procurement, and 3-way matching for cost assurance (and obtainment), but rarely does an organization even achieve these (and that’s why up to 30 to 40 cents of every negotiated savings dollar never materializes).

It’s even more than including Procurement in NPD and NPI (which is where 80% to 90% of the cost is baked in), or in supply chain / logistics network (re) design, which still isn’t the case in the majority of organizations.

It’s a fundamental organizational realignment from traditional budgeting, pricing, forecasting and spend planning based on historical spend and revenue to dynamic budgeting, pricing, forecasting and spend management based on real-time market data as categories come up for sourcing or renewal, internal organizational spend increases or decreases (on hires or fires; internal development projects; assets are acquired, fully paid off, or divested) where budgets are defined based on real-time market data and updated forecasts when a sourcing event is kicked-off, pricing is adjusted based on actual costs and expected market tolerance to standard margins/mark-ups, forecasts are re-run using advanced curve fitting models with the most recent data, and spend planning is adjusted based on all of the prior updates.

The “when a sourcing event is kicked-off” is the key — not when it’s planned, when it needs to happen because the company has decided to introduce a new product, accelerate a planned event due to an expected demand or cost increase, or a supply chain disruption has necessitated emergency replacement of supply.

The harsh reality is that if a chip or RAM factory was just wiped out by a natural disaster or fire (which happens about once a decade), prices are going up. Doesn’t matter what you spent last year, this year is a whole new type of ball game — especially if supply routes become cut off and your only options are longer sea routes, air routes, or new (already overloaded) suppliers in new regions that aren’t cut off.

And any savings or cost avoidance success needs to be measured against the average market price at the time.

But, as pointed out by this article in Supply Chain Digest on how to get From Supply Chain Cost Cutting to Cost Management, this is not what happens every time a market shock hits, executive pressure rises, and the organization is told to take costs out fast.

As the article continues, the danger is not the mandate itself. It is what repeated, reactive cost-cutting does to the supply chain’s long-term health. It can lead to diminishing returns on cost cuts, weaken operational effectiveness, and narrow options the next time volatility strikes.

And it’s all due to a hidden problem with the traditional approach. Namely static budgets create the wrong conversation. Because, when supply chain performance is judged primarily against an absolute dollar budget, leaders often get pulled into debates about compliance instead of outcomes and, even worse absolute-dollar metrics can also steer attention toward the biggest cost line items, even when those costs enable profitable growth.

According to the author, the solution is to ditch static dollar budgets, assess performance through an adaptive lens that aligns with margin assessment, and report costs as a percentage of revenue. Which is great advice, but doesn’t really help you transition the organization to being cost management (vs the current method of cost mandating that is completely divorced from reality and regularly results in organizational failure) focussed.

That’s where the Busch-Lamoureux Exact Purchasing model comes into play. When you align around exact purchasing, and segment your spend into the pocket cube, you realize that for all of your high complexity, high risk, and/or high impact categories, you need to either architect the cost model and the supply chain around it, monitor market conditions in real time (and possibly trigger [re]-sourcing events as a result), or continuously monitor input pricing as well as the price points an average consumer will pay across your markets at different volume levels and adjust your cost and revenue model accordingly.

You no longer plan around fixed costs and prices for the next year, that never happens, but around evolving market realities. And if your price point adjustments are limited, then you know you need to scale back on service commitments, marketing during a downward market trend (when consumers don’t have time to buy), or overpriced sales personnel just adding to expenses with no identifiable return. i.e. Spend is reallocated as appropriate to keep the organizational profitable and productive during extreme events or market conditions while other companies can’t adapt due to lack of category management structure and organizational alignment around what is actually being bought as they still operate off of a spreadsheet that represents a fictional model of non-reality.

The Kraljic Matrix is NOT a Foundation for Future Fit Supplier Segmentation

A recent piece over on Procurement Leaders noted how the author had several recent conversations about how the Kraljic Matrix has become outdated (and, as per our series last week, it has) and how one consumer goods company came up with their own approach to supplier segmentation to “leverage critical supplier capabilities to maximise value”. More specifically, he company has focused its supplier segmentation on two completely different matrices: first, the level of engagement; and second, suppliers’ ability to execute commercial growth and capabilities in an attempt to allow the company to do is to segment suppliers based on the strength of their relationship and the specific value they should bring to the business.

And, in effect, shift the Kraljic matrix from “noncritical, leverage, bottleneck and strategic” to “transactional, essential, visionary and strategic”.

It’s progress, but not much. It’s making the same error that every analyst firm (and even analyst) is making, and that’s thinking that segmentation can be appropriately captured by a 2*2.

As per our series last week on what the Busch-Lamoureux Exact Purchasing framework really is, it’s not a matrix, it’s a pocket cube* — which accomplishes the goal of the Kraljic matrix by appropriately segmenting categories in a manner that allows them to be properly managed from a supply-assurance based Procurement perspective. This is the point you need to start from if you want to create a supplier segmentation strategy for appropriate supplier management.

Then you see it’s not just

  • transactions (transactional in Exact Purchasing)
  • essential (governance in Exact Purchasing)
  • visionary (risk monitoring in Exact Purchasing)
  • strategic (architecture in Exact Purchasing)

Because

  • transactions can be low impact (and non-critical) or high impact (and create a bottleneck if they don’t show up)
  • governance can be accomplished at the spend level if the spend is low impact, but needs to be relationship level if the spend is high impact
  • risk monitoring is enough (and no vision required) for low impact spend but detailed risk management with mitigation plans that involve strategic, and maybe visionary, relationships will be key for high impact spend
  • strategic can be accomplished through cost architecture and mitigation strategies for low impact categories, but require detailed supply chain architecture with supplier participation in the high impact categories

This means that there are at least seven categories that need appropriate supplier management — all of the high impact transactions, plus the cost architecture (as you need supplier input), market risk management (as you need supplier relationships to rapidly shift demand), and relationship governance (as you need cooperation to manage obligations). And the degree of management depends on the categories.

Plus, to make matters even more difficult, some suppliers will cross multiple categories — which means that you can’t just put them into the most intense management category and treat all interactions as interactions in that category. You have to take the category into account, and focus the management on what’s critical, not what isn’t. Management requires HUMAN INTERACTION, and you only have so many people with so much time to build the RELATIONSHIPS, so you have to focus based on the category being supplied.

In other words, it’s not a matrix, it’s a cube that manages the supplier based on the category impact to the P&L, the market risk (that lies primarily with the supplier or the supply chain they introduce), and the complexity (where the supplier needs to be able to produce items that meet the complex requirements). And suppliers who supply more than one category will fall into more than one bucket.

In other words, to fix supplier management, first fix Purchasing.

(And that’s why it’s so critical to Take Purchasing.)

* and, one that’s different for every industry, which might make it a 4-polytope, but since each company can customize the pocket-cube, we’ll stick with the pocket cube