In a world full of buzzwords, it’s important to separate hype from reality with some structure and lay out a practical, usable path to purchasing modernization.
What is procurement?
For many people, purchasing is still a somewhat dusty corporate department that mercilessly drives down prices without regard to quality or personal sensitivities. In reality, purchasing is now an integral part of the product creation and production process and the value chain of most companies. Today, more than ever before, OEM supply networks are collaborating to bring innovative products and services to market quickly. That’s why it takes someone who can build, manage, maintain and make these supplier networks profitable. That’s procurement.
Before we can talk about trends and opportunities in the digitization of purchasing, however, we need to take a closer look at purchasing. Basically, we distinguish between direct and indirect purchasing.
The direct category includes all goods or services that flow directly into the end product. For example, raw materials, preliminary and partial products and tools. Direct purchasing is of course of crucial importance for production companies – not only because the profit margin of the end product can be directly influenced via the purchase prices of these products. In fact, it is also about the quality and quantities of the purchased products, which can indirectly increase customer satisfaction, reduce warranty ratios, avoid storage costs or supply bottlenecks.
Indirect materials are everything that is needed for the company’s operations but is not processed in the final product. This includes, for example, tables, chairs, marketing, insurance, logistics, recruiting, facility management, after-sales services, IT and telecommunications, and many other things.
What both categories have in common is that, from a process point of view, early involvement of purchasing and trusting long-term cooperation with the specialist department are the decisive keys to success. In the past, purchasing was often called in as a last resort before the order was placed. That’s like inviting Matlock in for closing arguments only. It can be done, but most of the time it’s not very effective.
It is also equally important for both categories that business transactions be fully documented. After all, we are talking about purchase orders, tax obligations and a lot of money. Every company that accepts invoices in digital form is legally obligated to create transparency and auditability in the procurement process (Art. 957a OR, source). Digital tools help immensely in this regard.
Here I would like to interject that, in my experience, the degree of digitalization in purchasing is completely independent of the size and reputation of the company. There are many very well-known companies that are still working with tools from the last millennium and are only slowly realizing that they will reduce their competitive disadvantages if they allow more modern methods.
Trends and truths
If you look around on relevant portals and websites, you get the impression that soon the entire purchasing will be done only by artificial intelligence. Again and again, it is pointed out that AI in purchasing is the most important trend. However, more than half of the companies with more than 200 employees do not even work consistently with digital tools such as eSourcing and eProcurement. Wish and truth don’t seem to be quite aligned here.
Purchasing is something that relies heavily on interpersonal interaction. It’s about negotiating, it’s about creating a win-win situation, it’s about creativity, it’s about finding a suitable partner for the company or project. Machines will support us in this, but they will not be able to replace us in the long term.
However, there are a number of areas in purchasing where automation and even machine learning can be used in a very targeted way. Here are a few examples:
- In direct purchasing, parts or raw materials must be procured to match product sales. If too little is purchased, there is a risk of a production standstill. In addition, however – especially in the case of raw materials – the development of market prices must also be taken into account, as this can significantly increase the margin. However, sales cycles, storage and refinancing costs and a large number of external factors must be taken into account here. As you can see, it is an extremely complex equation that has to be continuously recalculated in order to be able to purchase the exact right quantity at the exact right time. Here, it is almost impossible to get by without intelligent and adaptive systems.
- In operational purchasing, which manages purchase orders, purchase order changes, goods receipts, and invoices, automated matching is used to handle the large volumes. With 15,000 purchase orders sent by a company per year, good algorithms are needed to identify and manually check suspicious orders.
- A medium-sized company processes a good 25,000 incoming invoices per year, sometimes considerably more. Here, automation is used to automatically match purchase orders, goods receipts and invoices, and to forward matching invoices directly to the accounting department for payment, without manual intervention.
- In indirect purchasing, the focus is on process efficiency and automation of routine work. A strategic buyer should be able to concentrate on negotiating with suppliers, maintaining relationships and obtaining the best possible contract conditions for the company. The more routine work that can be done through automation, the better the buyer can focus on their core tasks. But this has nothing to do with AI.
The foundation of digitization in procurememt
Digitization in purchasing is important because it automates or accelerates non-productive tasks. Since purchasing must also increasingly face the question of costs and benefits, it is an essential step for successful purchasing managers. Moreover, the level of business process documentation required today can only be ensured with digital tools.
So that’s where we start. The first step in digitization is to create an efficient platform for procurements (eProcurement) and tenders (eSourcing). This is fairly easy to implement, especially for mid-sized companies. There are a number of cloud-based tools for these tasks that are quick and inexpensive to implement. Another advantage is that many suppliers for standard products have already implemented a connection to the catalog systems in these tools, for example for office supplies.
Such an eProcurement solution can be used entirely without an ERP system, or it can be connected to a variety of different ERP systems via interfaces. Most systems today include smartphone apps that can be used to create orders, check the order status and issue approvals on the move.
With an eProcurement system, the following things are ensured:
- Multi-level release
- Audit-proof documentation of release and procurement
- Traceability of purchase orders
- Determination and tracking of shortfalls
- Allocation of received invoices to dispatched purchase orders
- Ensuring a basic contractual framework
- Transparency of procurements, financial volume, accruals and deferrals
An eSourcing system starts before this and documents the selection process for providers. It serves as a common platform on which several internal stakeholders can jointly formulate their requirements in a structured manner and distribute any number of possible providers. When it is well implemented, suppliers can enter their offers in such a way that they can be automatically compared with each other, supplemented with further (qualitative) factors and compiled into a list of favorites. The buyer then only needs to deal with these favorites in detail, while the other providers receive an automated rejection.
Once an RfQ has been created in the eSourcing system, it can be repeated at any time. In this way, companies can regularly retender services with little effort in order to benefit from the latest market prices.
Learning from data
Once this basis is established in the company, the data from the orders is recorded in a structured manner and can be evaluated on a regular basis. Without such an evaluation, purchasing can only passively wait for someone in the company to ask for support. With the information – experts speak of a “spend cube” – purchasing can actively search for areas or suppliers where negotiations are worthwhile.