Four Broken Procurement Processes You Wouldn’t Have With Exact Purchasing

Gaurav Sharma recently penned a truly great post on LinkedIn on 5 dated procurement processes/setups you can get rid of without AI or any tool whatsoever. This is the type of post we need more of because AI isn’t always the answer (and in fact, it’s rarely the answer), and AI shouldn’t even be considered until the technological needs are identified (which, if the right process is followed, require AI a lot less than the hype machine would lead you to believe).

Not only should you not have the five processes he outlined if you are a best-practice Procurement department, but 4 of them wouldn’t exist in the first-place if you built your Procurement programs off of Busch-Lamoureux Exact Purchasing.

Let’s take them one-by-one.

Spend it or Lose it at the end of the year.

Proper Procurement, and the proper business operations it would dictate, would never have this because budgeting based on historical spend is bad budgeting, as is pricing based on historical price points. The era of global stability is over, natural disasters are on the rise, critical resources are becoming scarcer by the day, and logistics becoming uncertain and unpredictable due to the fallouts of sanctions, wars, disasters, strikes, and uprisings. As a result, what you will pay this year, and what you will have to charge to maintain a fair profit margin, will not necessarily have any correlation to what you paid last year, especially in categories where more than half of supply comes from a single country (such as rare Earths from China) or flows through a single chokepoint (like oil, fertilizer, etc. through the Strait of Hormuz).

Budgets need to be based on expected costs using the most up to date data at the time, and revisited every time a category comes up for (re)sourcing. And, most importantly, be based on forecasted demand, which needs to be up-to-date when budgets are created and updated regularly based upon category velocity and actual sales/utilization over a typical, statistically significant, time window (which will be different for every category). This is the key: budgets should be based on expected, and approved, demand and cost ranges — not fixed spend buckets.

And you need to make three critical changes to budget management to be successful.

  1. If the purchases are needed (i.e. buying less will shutdown a production line, result in a costly stockout, etc.), the expected spend can be exceeded (as long as all efforts are made to keep it as low as possible) and the organization will react by either increasing pricing or cutting elsewhere if they can’t.
  2. If the forecasted demand has been reached, it cannot be increased without approval (or approved forecast updates for input components), even if the expected spend hasn’t been reached.
  3. For discretionary categories, if the organization was able to delay demand (by finding a way to get one more year out of that cell phone or laptop, delaying hiring through better automation and occasional overtime, or simply pushing off MRO restock until the next major project started), expected baseline demand is NOT reduced for the next year. In fact, if a valid argument exists, unused demand may even be carried over. Organizations that can reduce or defer demand need to be rewarded. In the long term, you’ll save money if you encourage delay of spend until absolutely necessary.

And if you use Busch-Lamoureux Exact Purchasing, you’ll have an infrastructure where you are able to re-compute forecasts as needed, query current pricing as needed, monitor for events in high risk or highly volatile categories, get alerted when you may need to accelerate an event, and have an infrastructure to take the right action at the right time where you aren’t sourcing based on a fantasy budget but a real, up-to-date, demand with real, up-to-date, market pricing.

Approval Chains

If you’re using Busch-Lamoureux Exact Purchasing, you have regularly updated, agreed upon, forecasts and expected demand. You have pre-vetted suppliers. You have market pricing, contracts, purchase orders, and m-way match. Once the demand, suppliers, and contracts / bids have been accepted and approved, if everything matches, there is no need for a human in the loop. You configure the (A)RPA and let it issue the okay-to-pay to the payment system and let the payment happen. Unnecessary approvals add unnecessary time, create unnecessary work, and potentially cost you not only the opportunity for early payment discounts, but even fines if you don’t make the payment windows mandated by the UK, EU, and other countries for paying small suppliers.

PowerPoint Category Strategies

A PowerPoint dies as soon as it is presented. No one ever goes back to it. With Busch-Lamoureux Exact Purchasing, for any high complexity, high risk, or high impact category (which are 7 of the 8 categories), you setup the necessary price, risk, quality, delivery, etc. monitoring systems from day one. You have alerts whenever a significant event occurs that could significantly impact your pricing, quality, or supply. And, for any category that is high impact, you have mitigation or response strategies already defined in your procurement systems that you can action.

KPIs that incentivize activity

In Busch-Lamoureux Exact Purchasing, you define KPIs based upon success factors, NOT activity factors. You’re concerned with savings against market (i.e. cost avoidance), not historical budgets. If market prices went up 15%, you’re not saving over last year in any managed category. But if market prices went down 10%, you shouldn’t count any decrease in spend against last year’s spend of less than 10% as savings, because if you didn’t reduce spend by 10%, you’re doing a lousy job. It’s not resolved issues, it’s straight through processing. And so on. With Busch-Lamoureux Exact Purchasing, you don’t have worthless KPIs in the first place.

The only process/setup it doesn’t eliminate is tolerating underperformance. That’s entirely a people issue, and if you have people that tolerate underperformance, they need to go. No process can fix that. Only your willingness to take action can.

* as a certain Western society does everything it can to pretend climate change doesn’t exist while its greatest ally does everything it can to bomb us to the next great flood as it unleashes over 2 million metric tons of carbon dioxide (tCO₂e) a month with the bombs it uses in a single conflict — a measurable level of emission equal to 0.05% of total monthly (tCO₂e) global emissions

It’s Never Good News for the Oompa Loompas

Last year, when we asked but what about the Oompa Loompas, we noted that Hershey was undertaking a mega-project to modernize its supply chain with the hopes that its $250 Million supply chain would generate a savings of $300 Million going forward on an annual basis.

Which sounds great in theory, but if it’s not bringing jobs back for the Oompa Loompas, it’s not great in practice because, as you should all know by now, the Oompa Loompas have been suffering for at least the past 20 years (which is the length of time we’ve been covering their plight, which included the layoffs they saw at Hershey back in 2007).

Especially since the bad news never ends. Two weeks ago, artisan chocolate maker Kate Weiser Chocolate announced they were shutting down completely and putting all those Oompa Loompas out of work again. Hopefully they Oompa Loompas get some good news soon before the art of true chocolatiering is lost forever!

Why Do You Need Frameworks and Systems for Sourcing Excellence?

I’m going to call out a comment made by the Sourcing (Optimization) Grand Master himself, Paul Martyn, to a recent post I made echoing Matthew Buckingham‘s statement that today’s procurement leaders aren’t enough for tomorrow:

“If tomorrow’s environment demands creativity and crusading, how do you see procurement leaders operationalizing that without it devolving into noise?

More specifically:

What does “creative” procurement look like in a measurable, repeatable way

And how does a “crusader” avoid becoming a blocker instead of an enabler when pushing the C-suite to abandon comfortable models?

Feels like the gap isn’t mindset, it is translation into decision systems that actually move outcomes.”

You need

3) outcomes

2) created by decision systems

1) that support your sourcing and procurement needs

This requires

1) Sourcing Excellence in execution

2) BIC multi-objective optimization and analytics that fit into

3) a proper category framework for your organization, like the Busch-Lamoureux Exact Purchasing Framework, that helps you understand the systems and processes you need to employ in each category

Links

You Need Automation. But You Don’t Always Need Agentic and You Almost Never Need Gen-AI!

In a previous post we dove into how analytics must drive source to pay, because most of source to pay should be automated and touch free as most of the source to pay process is straight forward (and capable of being automated for the last decade), non-strategic, and low to medium value.

Strategic Sourcing is an activity that should be focussed on high risk, high complexity, and/or high value categories and occasionally focussed on medium risk, medium complexity, and/or medium value categories where there is incomplete information or insufficient product/category history, atypical turbulence in the market, or highly particular requirements that just came into effect as a result of new regulations. That’s a minority of products/categories, not a majority.

Procurement should only be focussed on significant exceptions. And, with proper, modern, systems with proper e-document integration and exchange, most of the documents should be arriving in standardized digital formats, and most of the processing should, thus, be fully automated. And most of what is non-standard will be PDF in relatively standard formats that LLMs will be able to process to 95% accuracy and only require a few human verifications and field completions. The days of 20 people invoice processing team should be long gone, as the tech, even for standardized PDFs, has been in production by the leading players for over 8 years. Invoice discrepancies can be auto-identified, suppliers auto-notified, suggested corrections auto-included, one-click acceptance emails/screens for the suppliers included, and most contingencies accounted for. Only in the rare situations where suppliers refuse to accept a correction, invoices are in very non-standard or handwritten format, payments don’t go through, etc. should a human need to get involved. However, 95% to 99% of all documents and transactions that flow through Procurement should be 100% automated.

But most of this doesn’t need experimental Agentic AI or Gen-AI. Classic RPA will do just fine. For most of the rest, Adaptive RPA, with a bit of Machine Learning / Auto-Suggestion based on human-based exception processing, will do the trick nicely. If you look closely at current generation (A)RPA, Machine Learning, Optimization, and Predictive Analytics and walk through the full source-to-pay process, there is very little that can’t be automated without Gen-AI LLMs or experimental Agentic Systems. Sourcing — there are many standard (seven step) processes that can be completely automated based on data analysis, data-based risk assessments, goal definitions, and optimization. RFX (including e-Auctions) can be fully automated and, from the time you specify a product/category to source, everything can be automated to the award (including the demand pull/calculation from other systems).

When it comes time to contract, if you have standard templates or a large clause library, the system can automatically create the contract from the template and RFP responses, integrate DocuSign, and auto-execute it. If you don’t, or if you have to use the supplier’s paper, then you might use an LLM to create a draft for human review and/or analyze the supplier’s paper for terms, pricing (to make sure it matches the bid) and potential risks, as well as suggested revisions, before you sign. Gen-AI/LLMs unnecessary, but useful on a point-basis if you don’t have a good historical equivalent of a solution like Coupa Exari or iCertis.

Supplier onboarding can be fully automated with RPA powered dynamic workflows and third party data ingestion, as can risk and compliance analysis — no modern Agentic solutions needed.

Then we get to automatic invoice monitoring and point-based re-orders, receipt creation from inventory integration, and invoice processing in e-Procurement which has all been around for at least a decade. Automated approvals subject to tolerances, rules and pre-approvals — as well as predictive analytics on payments for new or one-time suppliers/orders or (slightly) out-of-tolerance invoices can automate the entire invoice-to-pay process.

We can get through the entire process on best-of-breed, classically oriented, RPA tech with some machine learning that processes human decisions in exception management, alters or augments the rules (and guardrails), and auto-processes the same type of situation next time. We quickly get to 95%+ throughput for any task that should be mostly automated, and a top human employee with BoB (A)RPA solutions and some augmented intelligence packages for analytics and research becomes 10 to 20 times as productive as they would have been in the past.

That’s the real future of Procurement. Small, top-talent teams (mentoring small emerging top-talent teams) doing the work of teams five to ten times their size, doing it better, and delivering more value than anyone would have believed possible with best-of-breed tools. Not error-prone, hallucinatory, agentic systems that work well in demos and a few select categories, and go all over the place in reality (and then try to hide their mistakes like Nick Leeson [who single-handedly collapsed Barings Bank] until they do a modern equivalent of the 2005 J-Com trade and cost you hundreds of millions of dollars on your key billion dollar product line).

So while you need to modernize at all costs, you don’t need to go full Agentic on unproven solutions. Get 90% of the way on tech that has been proven where you can control the automation level until you get comfortable with automation and learn where you can safely hand tightly boxed “decisions” to the machine (where well-defined calculations would determine your decision the majority of the time) and where you can’t. Otherwise, you’ll just end up being another member of the 94% AI failure camp. That’s not a statistic you want to be part of, especially given the cost of this tech today (and the increased cost tomorrow as energy grids start to break and the compute costs for modern AI tech goes through the proverbial roof).

Roll Up The Space To … Lose!

Over the past decade, a number of the big PE firms in our space decided that a “roll up the space to win” strategy was the right approach and bought a large number, and in some cases dozens, of assets in the Procurement space globally. Vista, Main, KKR, Accel-KKR, and Thoma Bravo all followed this strategy in the hopes that with enough assets, they’d control enough of the space that controls the transactions to give them a long term home inside a significant number of major corporations.

It was a great plan, and a great play at the time (as it worked out well for them), but one that may backfire for anyone who is late to the party as the Age of AI, coupled with the realization that bit pushing applications don’t cost very much anymore, means that these nine and ten figure plays are not going to maintain their market dominance, or their income stream that depends on seven figure annual subscriptions, for much longer.

As per THE PROPHET‘s recent piece on An LP, an AI Builder, and a PE Advisor Walk into a Bar, the time for the traditional players is coming to an end — especially the mega-suites that thought they could charge 7-figure license fees until the end of time. Whether or not Agentic AI can fully replace them (they can’t, by the way), the price compression is changing the game. (Especially when you’ve been warned that Now is NOT a Great Time to Buy … a Mega-Suite.)

If you don’t have time to read the piece, THE PROPHET believes that Agentic AI is going to effectively boil the ocean and cook all of the traditional plays, charging high six and seven figures a year for relatively simple tasks that can be mostly automated by these Agentic AI solutions for a tenth of the cost (until compute costs skyrocket, but still, that’s significant downward price pressure now) in the process. If you don’t trust AI, even better, since applications that were built on modern stacks in the last 5 years with the ability to wrap discrete tasks in micro-services and orchestrate them into dynamically configurable workflows that exactly match your needs, cost about a fifth of what these big plays do and do more for you. Either way, as has been indicated many times on this blog over the past, unless your Source to Pay needs are in the top 10%, you probably don’t need to be paying more than 250K for your Source to Pay.

Now, no one can see the future with clarity, everything is in flux, and we could both be wrong, but all software (like hardware) depreciates with time, tech always advances faster than we would like to think, organizations in unregulated market places under severe cost pressure are always looking for ways to cut costs, and those providers who are running on old stacks that are hard to adapt and support aren’t going to be able to keep up or keep costs low enough. There’s going to be a massive shift, and any major players not in the public sector (where contracts tend to extend beyond our professional lifetimes due to the slow pace of change in government organizations) are on the verge of shifting out of business.

So, like THE PROPHET, when it comes to the continued dominance of traditional SaaS in a big PE portfolio, I’m not buying it either.