Category Archives: Procurement Innovation

Procurement Automation: Good. Automated Procurement: Bad.

We shouldn’t have to say this. It should be very clear by now. But given that a number of vendors are using the terminology interchangeably, possibly to convince you they have the right solution, maybe it’s not clear. But it needs to be. Because procurement automation is NOT the same as automated procurement and while procurement automation, properly done, is the best investment an average over-burdened and under-resourced Procurement department can make, on the flip side, AI-driven automated procurement is the absolute worst. To put things in perspective, downgrading Excel to Lotus 1-2-3 would be a better move. But let’s back up, and start with some definitions.

Procurement Automation is the process of automating certain procurement tasks that can be best accomplished by machines and procurement automation technology is the technology that automates the tasks that can be best done by machines. In simpler terms, it automates the “thunking” by doing all of the tactical, almost mindless, work that is a waste of a senior Procurement professional’s time.

The Source-to-Pay cycle is full of tasks that are best done by machines when appropriate rules and boundaries are defined. For each major area, we’ll outline some of these tasks as an example.

Intake/Orchestration

Procurement Automation will analyze the request, identify similar requests made in the past, identify the actions used to resolve those requests, identify the suppliers considered and selected, the products and services used, and other information. It will present that information to the buyer, including the suggested actions, and allow the buyer to one-click initiate any of the suggested actions, which might include a sourcing event, contract renegotiation, catalog purchase, etc.

Sourcing

Procurement Automation will, when a user kicks off a sourcing event for one or more products, automatically bring up the suggested suppliers, automatically suggest the appropriate questionaries and forms, automatically suggest the appropriate Ts and Cs to insist on up front, automatically send the RFP to suppliers, automatically analyze the responses to make sure they are complete, in the correct format, and in an expected range; automatically compare the responses to find deviations from the norm; automatically highly the lowest and highest costs, CO2 factors, etc. and present all that information to the buyer.

Supplier Management

Procurement Automation will, when a supplier is selected, automatically handle the onboarding; monitor the data for changes; monitor the performance metrics; monitor the OTD; monitor third party financial and risk metrics; and alert the buyer to any issues and performance changes that are detrimental or may indicate forthcoming problems.

Contract Management

Procurement Automation will, when an award is selected, push the award into the Contract Management system, automatically generate the draft contract, send it to the supplier, highlight any redlines the supplier makes when it comes back and automatically inform the supplier if any non-negotiable terms and conditions (including those they agreed to when they responded to the RFP), and automate the generation of the response email when the buyer does their redlines.

e-Procurement

For catalog buys, it will automatically generate the POs, route them for necessary approvals, distribute them to the suppliers when approved, automatically match the ASNs when they come back, alert the buyers if ASNs are not received in a timely basis, and match the invoices when they come in.

Invoice-to-Pay

When the invoice comes in, it’s automatically matched to the purchase order, it’s checked for price accuracy, identified as partial or full, verified to be non-duplicate, and if any checks fail, it’s bounced back to the supplier with a description of the issues and a request for correction and resubmission. If the resubmission deals with the problems, it’s queued waiting for goods receipt/confirmation if not present, or matched if present. If the match is made, then it’s automatically sent down the approval chain, and if it’s not made within a certain time period, an alert is raised.

In all cases, it’s automating the tactical tasks that don’t require any decision making and only involving the human when necessary.

In contrast, Automated Procurement is the process by where entire procurement processes are handed over to the machine to fulfill instead of the human. In other words, when an intake request comes in and the buyer marks it for sourcing, an Automated Procurement solution will handle the entire event up to and including the award and auto-generate and distribute the Purchase Order(s). The buyer is completely bypassed and the right inventory showing up at the right time at the right price is left entirely up to the machine. Sounds good in theory. Looks good in practice when it actually works, which it will some of the time. But grinds the company to a halt when it fails.

A machine that pursues lowest cost will select an unproven non-incumbent supplier for a critical part when the suppler, who has not supplied that particular part to the company before, outbids the incumbent. It will not detect that the bid was made in an desperate attempt to help the financially struggling supplier stay in business, that the bid is not sustainable, and that the supplier is not capable of producing the part at the indicated level of quality. Then, when the first shipment is mostly defective, and the promised rush replacement order never arrives because the supplier goes out of business, the production line for the 75K luxury car folds all for lack of a single control chip. (A similar situation has occurred in the past. Recently, chip shortages stopped Cherokee production in 2021, and that wasn’t the first occurrence. Or even the second, or third.)

Machines are not intelligent. Not even close. And expecting them to make a good decision every time with no logic whatsoever (as modern Artificial Idiocy algorithms just stack probabilistic equations on top of probabilistic equations almost ad infinitum) is lunacy. So while you should invest in the best Procurement Automation tech you can get your hands on, you should steer clear of any and all Automated Procurement Solutions those fancy new startups try to sell you. While those solutions may work 90% of the time, that last 10% of the time, they won’t work that great. And, in particular, that last 1% of the time they will fail so miserable that the disruptions and losses that result will more than cancel out any and all savings and efficiencies you might get from the 90% of the time the tech worked in the beginning.

Where Should Procurement Have the Greatest Impact?

Ivalua and Procurement Leaders recently did a study on Purpose-driven Procurement: Entering an Age of Holistic Value that was partially covered over on EPS News that ran a typical, bland, headline on how Procurement’s Value Exceeds Cost Control.

Procurement can add value beyond cost control, and should add value beyond cost control, but what stands out the most in this article, and likely in the Ivalua/Procurement study, was the highlighted figures on areas in which Procurement has made the greatest impact (by % of respondents). Of the fifteen (15) areas presented in which Procurement should be making an impact, only three areas were selected by more than 30% of respondents, and the top 2 were the same old, same old responses of delivering cost savings and cost avoidance which are, in this market, the last two areas Procurement should be delivering value. First of all, times are such that there are, or soon will be no, cost savings in any category. Secondly, it’s not “cost avoidance” it’s “need avoidance“. It’s not just about saving money. In an age where your carbon footprint may soon be more important than your bank account, you don’t want to buy anything you don’t need, and you don’t want to waste anything.

In fact, today, the top ten things that Procurement should be doing are likely the bottom 10 things on the response pyramid, which were ten of the best responses such a survey could have included! Procurement is more than savings, cost avoidance, risk management, and theoretical sustainability (as most organizations won’t let Procurement spend a penny more than necessary to meet a need, even if that penny is to a much more sustainable supplier — there’s a lot more bark in the marketing then there is bite in the implementation; the doctor is aware of many surveys and has had many conversations where, if the buyer could pay 1% to 3% more than the lowest cost, sustainability would be substantially more; the reality is that, at most organizations, it doesn’t matter if the lowest cost is from the dirtiest, most unethical, supplier on the planet — the CFO wants cost reduction, the CEO wants profit, and the buyers were told to meet the targets and make the investors happy, not do the right thing. Hopefully more countries will pass carbon caps, carbon taxes, and sustainability laws because only then will Procurement get to serve the Purpose it wants to serve).

Procurement is the enabler that can transform the organization. And to demonstrate that, let’s review the bottom 10.

  • Supplier Diversity and Inclusion (16%): while you shouldn’t have arbitrary targets (as there is no one magic number that’s the right number), you should always look for diversity that you can include to widen your horizons — you never know where the next big idea, product, or saviour (when your strategic supplier becomes unavailable as the result of an unexpected event) will come from
  • Developing Team Skills and Talent (16%): while the first line to be cut from the budget is always the training budget when it should be the last line to be cut (when the world evolves faster everyday than the day before, and the job you do today will, in some ways, never be the same job in the future), Procurement can maximize the budget you have, find the right partner to improve your skills in a fair exchange (they train you for free if you use their products or services), and even train you on better processes and practices on their own
  • Digitalisation (11%): while this is not a conversation we should be having in 2023 (when Nicholas Negroponte told us all we should get used to Being Digital in 1995), most departments in most organizations are still woefully behind when it comes to technology (and the average employee has more modern apps on their personal smartphone than on their work computer), and that’s where Procurement can help as it needs to digitize to manage its sourcing, procurement, and supply chain and has already been through (part of) that process
  • Improving Cash Flow (11%): Procurement is in the best position to optimize outbound cash flow, balancing payment terms with cost reductions with risk minimization, and can even use that knowledge of cash flow optimization to help Finance select the right terms for short term investments, loans, or even factoring on the organization’s invoices to big, slow, clients
  • Contributing to Revenue Growth (11%): Procurement’s analytics skills that it uses to predict demand can also predict the products/services that are the most popular and the ones that the organization could use to grow revenue by shifting production, marketing, and sales focus to those product lines
  • Improving Product/Service Quality (7%): Procurement can do more than just find new suppliers, they can help with product innovation and service improvement; they can identify suppliers with alternate designs that use alternate, more sustainable, materials that can build a better product and consultants with more experience and expertise to offer a better service
  • Drive Innovation from the Supply Base (6%): Procurement is the perfect partner to drive innovation; it is the first, consistent, and for better or worse, the last department to interact with the supplier, and in order for it to keep the CEO and CFO happy (and get the mythical savings which, after a certain point, don’t exist), it has to develop suppliers to an extent — no reason it can’t be helping you drive innovation
  • Support Mergers and Acquisitions (5%): let’s put it this way, if there’s no synergy in Procurement, there’s no synergy in the companies, and the company being considered should NOT be a target; so at the very least, Procurement should be one of the first sniff tests; it can also determine the synergy potential, the cost avoidance and efficiency potential, the innovation potential from an improved supply base, etc. etc. etc.
  • Demonstrate ROI to the Bottom Line (4%): Procurement NEEDS to be better educating the C-Suite on how its activities hit the bottom line across the board, not just on a few categories it finds savings in
  • Asset Disposal Activities (1%): We need to move towards a circular economy, and that means buying goods that meet as many of the R’s (refuse, reduce, reuse, repair, recondition, refurbish, remanufacture, repurpose, recycle) as possible, which will always include recycling when it’s impossible to get any more value out of the asset, and Procurement, which understands the product best, will understand how best to dispose of it to ensure it is recycled and all of the raw materials reused in the most sustainable method possible

And this is where Procurement should be focussing. Let’s hope Procurement gets there sooner rather than later.

Efficiency Is In The Process, NOT THE MARKETPLACE!

the doctor really should stop reading the “news” and “best practice” articles the internet pushes his way because most of them are rubbish and just make him angry, but then again, if he didn’t get angry, what would he have to write about?

One of the articles recently was about how procurement can push efficiency and sustainability into the organization. The sustainability advice of “look for eco labels or EPA ID or products with recycled content” was pretty abysmal (because, duh!), but the efficiency recommendation of “create an e-marketplace to give your buyers an online catalog of goods and services” was just appalling.

That’s only efficient for organization end-users charged with restocking the supply cabinet in the office or keeping the MRO stock levels high enough to guarantee the production lines keep going when the store room gets low. That’s not injecting ANY efficiency into the Procurement process.

When you consider even the most basic strategic procurement process, you have to:

Identify the Need
and efficiency here is an intake management solution that allows you to collaborate with the end-users / end-sellers to make sure you’re procuring the right products for them to ply
Identify the Potential Suppliers
and efficiency here is a solution for supplier discovery, evaluation, and onboarding
Identify the Evaluation Requirements
and efficiency here is an orchestration solution that allows procurement to integrate all of the requirements from the users, the business, and the organizational goals
Evaluate the Bids
and efficiency here is an RFX solution with integrated analytics
Negotiate and Sign the Contract
and efficiency here is a contract lifecycle management that at least supports the contract negotiation process with complete document (and version) tracking and preferably also includes support for initial contract creation from award, key issue tracking, and e-signature integration
Determine the Appropriate Ordering Strategy
and efficiency here is determining whether the best fulfillment is regular shipments (if the factory uses X thousand units a month), auto-reorders on inventory level triggers (if the usage is/sales are irregular, but the product can be pulled quickly), or (managed) catalog-based orders as needed
3+-Way Match (against an invoice)
and efficiency here is a solution that makes it easy to ensure the invoice matches the goods receipt that matches the PO (at a minimum, and you also want to make sure the PO matches the contract etc.)

Efficiency is injecting efficiency into this process, not just setting up a marketplace!

Of course e-Auctions and Smart Procurement Can Help Beat the Current Chaos …

… and when the doctor saw yet another obvious headline that was something he would have expected to see two decades ago, he was quite tempted to click past it as he’s already seen forty plus regurgitations of the same message over the past two decades. However, the subheading was something new … “CIO’s should engage with their procurement colleagues to understand how they could benefit from more sophisticated IT purchasing“. Many an article touts the value of Procurement, especially in tough times, and many more tout the value of IT Procurement (with a modern emphasis on SaaS), but not many tout the importance of collaboration, especially in tough markets. So seeing this subheading at the top of a recent article on The Stack was welcome.

The reality is that if organizations want to get through these tough times, every department that has to buy needs to work with Procurement, and we mean work, not just use. It will require a mix of category expertise, market expertise, process expertise, and procurement platform expertise to be successful. Procurement can bring the procurement platform, process, and some of the generic market expertise, but it will need the category experts in the various parts of the business to bring the expertise on supplier capability and the category expertise it is missing.

IT Procurement is not easy. A modern organization has to procure:

  • SaaS solutions — where you have no idea what you should be paying (without a SaaS market specialist, who can only get you within a range)
  • cloud computing / rack-space — to run your back office, store your documents, build your custom cloud offerings — and you have little idea how much you should really be paying here either (without a specialist, as all you know is the public quotes)
  • office computing equipment (laptops, tablets, smartphones, etc.) — and while you get plenty of “market intelligence” on public sites like Amazon, Walmart, Best Buy, etc.), how accurate is it when you sometimes see $400 discounts on a $1000 machine … you need to know the specs, the warranty, etc. and how they compare to similar machines … and how much better an i7 is compared to an i5, and if you even need an i7 when all the machine is going to do is access SaaS solutions and run Microsoft Office

And IT is not the only category where the right mix of Procurement know-how and category expertise from the end-user is needed. Most categories in engineering, back-office, maintenance, pharma, etc. require a lot of specialist expertise.

But with the right expertise, success is guaranteed. Prices might go up (that’s what happens during inflationary times), but Procurement can keep those increases to a minimum, and at a point less than what the competition is seeing. And that’s the worst case. In the best case, inflation has not yet hit the category and good processes and practices actually reduce the cost. And in both cases, the supply will be stable, secure, and of at least standard quality. So use Procurement Processes and Practices. They can only help.

Dear (Software) Vendor: If you Missed the Ten (+ 2 Bonus) Best Practices for Success, Time to Catch Up Now!

  • Part 1 Best Practices #1 to #3
  • Part 2 Best Practices #4 to #7
  • Part 3 Best Practices 8 to 10
  • Part 4 Bonus Best Practice #1
  • Part 5 Bonus Best Practice #2

In twenty years as an independent analyst and consultant, the doctor has never encountered a small/mid-size vendor who wasn’t doing at least one of these, usually there were a couple they weren’t doing, and the lack of these practices (and knowledge) was (and sometimes still is) holding these vendors back. In other words, you definitely should read these. We are only posting these articles once.