Trends Redefining the Procurement Function

Ayush Garg, Associate Vice President, The Smart CubeProcurement, as a core function, directly impacts a company’s bottom-line through reducing costs and optimising spend and buying behaviours. Organizations which are efficient in the source to pay cycle generate a 1–2 percent reduction in total spend year on year, says a Genpact research. According to the research, this happens to be the output of 'average' sourcing and procurement organizations, which focus on simple efficiency from source to pay. The 'best in class' sourcing and procurement organizations, on the other hand, create up to a 4–5 percent reduction. What makes them 'best-in-class' is process effectiveness, and there are certain commonalities in the way they work to establish process robustness.

Here are the key trends that are shaping the procurement function:

Predictive Analysis for Better Spend Management
For most Chief Procurement Officers (CPOs), meeting their 'spend and savings'targets is the biggest objective. Deloitte's Global CPO Survey 2016 found that cost reduction is the top priority for 74 percent of CPOs. Tools and technologies have aided and abetted the procurement function in conducting spend analysis, making it more efficient over the years and in fact CPOs are planning to make the maximum technology investments in spend analysis,according to Deloitte.

However, the focus has largely been on dissecting historical data to segment spend into categories and sub-categories,suppliers, business divisions and geographies. But this visibility cannot always help prevent cost escalations caused by factors such as volatility in commodity prices and currency exchange rates.

In order to avoid unforeseen spikes in spend, companies are increasingly using predictive analytics to forecast changes to their cost base. For instance, a soap manufacturer can use predictive analytics to forecast the future cost of palm oil. If a rise is on the horizon, the category manager can stock up on palm oil, thus preventing the business incurring higher costs. Predictive analytics is also being adopted for indirect categories now and will increasingly do so. For a large global pharmaceutical client, The Smart Cube has developed a solution to forecast 200+ commodity prices and 50+ currency exchange rates, which informs cost changes for several key categories of spend, and enables the company to make strategic forward looking buying decisions.

Centralized Buying, Enhanced By Technology
To centralize or not to centralize?
Procurement departments have long grappled with this debate. With the availability of advanced technology solutions, organizations are increasingly moving away from decentralized buying to achieve greater control on spend and improve bargaining power. Tools from e-Sourcing to reduce sourcing cycles while running global events, to virtual meetings for enhanced collaboration,to online catalogues, are all enabling this shift.

New technologies are enabling procurement to enhance its role as a value generating function through two main routes Increased effectiveness of traditional procurement activities, and Introduction of new possibilities that were never thought of earlier

A top 5 global pharmaceutical company adopted a centralized approach by developing an online marketing content catalogue, and the marketing team was required to leverage existing content unless there was a valid business case for not doing so. This enabled the company to reduce the number of creative agencies globally from 26 to 9, and a stronger negotiating position contributed significantly to reducing the overall category spend.

Enhanced Traceability of Materials Because of Blockchain
Blockchain - the technology behind the world's first unregulated decentralized digital currency Bitcoin - is now being considered for supply management. Blockchain can enhance the traceability of sourced materials, which is particularly important in industries such as food and pharmaceuticals. The world's largest retailer, Walmart, has tested blockchain to track pork in China and mangoes in the U.S., from ‘source to store’, including details of the farms, batch numbers, processing data, expiration dates and shipping details. Walmart was able to trace data in a couple of seconds using blockchain – a process which previously took up to a week. The highly accurate and automated nature of blockchain also enables smart or self executing contracts, through the single ledger, which enhances trust and reduces workflow complications. This technology also has the potential to link upstream S2P and P2P with downstream supplier processes,there by automating supplier payments.

Looking at all these attributes of blockchain, companies are slowly starting to adopt it in the procurement function. Bitcoin may soon gain popularity in the sourcing and procurement world as well after having won over countless netizens in the past decade.

Gazing at the future
New technologies are enabling procurement to enhance its role as a value mgenerating function, through two main routes-Increased effectiveness of traditional procurement activities, and Introduction of new possibilities that were never thought of earlier. Emerging technologies such as artificial intelligence can be used for analysing purchase orders, contracts and internal policies, to discover hidden spend and reduce off contract spending, and will steadily become integrated with the procurement function. Self trainable chatbots will also start to be commonly used in buyer supplier conversations about sourcing practices & policies, purchase orders requirements, and others, to reduce the possibility of human errors.

Scalable algorithms are already being applied to the procurement universe. One particular proprietary machine-learning algorithm being utilized by The Smart Cube for identifying risk, continuously tracks news from 200+ sources for select suppliers. This algorithm filters out relevant news based on defined parameters and uses sentiment analysis to further filter news that will have a negative impact on the client’s sourcing processes.

In the not too distant future, repetitive and predictable tasks will be handled solely by technologies such as Robotic Process Automation and algorithms, freeing up people to play a strategic role and apply their time in generating value for the business.