As visibility horizons shorten, industry boundaries blur, and technology continues to dictate the future, how can procurement evolve to meet changing demands?
We speak to Kelly Barner about the challenge, and necessity, of deconstructing procurement as we know it.
As visibility horizons shorten within procurement, the need to increase agility, whilst still reducing risk, is becoming more crucial. How can companies not only prepare for the unknown, but actively work it into their strategy?
‘Historically, procurement strategies have been focused around consolidation. The first step taken in any sourcing project would be to gather all the elements and establish the most cost effective way to put a contract in place. Usually, this would mean rationalising the number of suppliers down: concentrating more of our volume with fewer suppliers, allowing us to leverage better per unit pricing. Alternatively, we would put long term contracts in place. These methods pushed procurement towards the concept of lower prices and higher savings, but problems arise when you consider the shortening visibility horizons.
None of us know with any accuracy what the landscape will be like in any given industry, or product or service category, five years, perhaps even three years, from now. We’ve had to accept that there is great variation in the markets, and we’re focusing on changing procurement’s approach; not only to respond to this change, but to turn it into an opportunity.
We are actively deconstructing many factors that have, until now, been reliable fixtures within procurement. For example, it was considered a best practise to have a limited number of suppliers providing any given product or service. We now recognise that in some cases, this elevates the level of risk; if there’s a disruption, we won’t have any prequalified suppliers under contract that we can use as an alternative source of supply.
The actual processes that we follow within procurement are also being deconstructed. For a long time, if you were to ask someone within your organisation “What is procurement? What does procurement do?”, the answer would often centre around technology or processes. We were identified as being the eProcurement system, the contract system, or the supplier performance system. Over time, strategic sourcing became a bulleted checklist that we followed anything but strategically. Our aspiration for influence and top line impact had fallen out of alignment with how the rest of the organisation saw us: as the owners of transactional systems and processes.
We are now seeing the deconstruction of these processes, so that companies are willing to look at their sourcing process and say, “The strategic thing to do right now is not the traditional three bids and a buy, it’s a thorough market assessment, looking at the suppliers we are currently working with, and approaching some of those incumbent suppliers to develop new contracts.”
This new approach may include changing the structure of the contract altogether. In the past, particularly in services categories, we’ve specified the qualifications of the person to be hired; now we are changing our approach to outsourcing. Instead of prescribing to our suppliers what they must do, we may say that provided they satisfy our requirements regarding time, quality, and pay, they are free work out the specifics based on their demonstrated expertise.
Alternatively, Robotic Process Automation (RPA) can further our agility, removing the need for any humans to be involved in completing a task. To be more agile, we need more acceptance that there will be variation. We need to respond quickly, without worrying that our actions don’t adhere to the planned process. We need to seize these opportunities as they present themselves, and procurement as a field is waking up to the fact that some of the processes that may have felt comfortable and reliable in the past, are hampering our results. By being willing to break down some of those traditional methods, we allow ourselves to be more responsive.
We can also consider the hierarchy of organisations. Whilst a hierarchy gives us stability and communication channels, it can also stifle innovation. You may have an individual at a junior level with a unique perspective who has an exciting new idea, but because of their position in the organisation, they are unable to communicate their idea to the person who has the authority to make it happen. With the increased priority of innovation, and viewing the disruption it brings as a positive, some organisations are now working to deconstruct hierarchies, allowing ideas to flow up and down more freely.’
How can procurement achieve greater agility and transparency through working with other organisational functions?
‘If there’s any function within the organisation that procurement has a somewhat dramatic history with, it’s finance. In some cases, procurement reports into finance, in other cases they’re functioning at slightly different levels but in parallel chains of command within the organisation. There are currently two things that are bringing procurement and finance’s objectives a little bit closer. These are Supply Chain Finance and the Financial Supply Chain.
Under Supply Chain Finance, companies make lines of credit available to their suppliers either from their own capital, or through banking relationships that they’ve put in place. Many companies have put payment terms in place that push out the deadline on paying their suppliers, often leaving the suppliers choked for cash. There are companies who want to see innovation from their supply base, and work with small and diverse suppliers to ensure new ideas are introduced. However, at the same time they are waiting for as long as possible to pay these suppliers, which diminishes their ability to innovate.
Then we have the Financial Supply Chain. If you’re a procurement professional who has mapped out a supply chain, you’ll be looking in both directions, ideally from raw materials all the way to the end consumer. You’ll be considering many factors: the number of steps, diversity, geographical risk, opportunities to increase efficiency. In many cases, goods are moving with greater efficiency than the payments for them. We need to look at the flow of capital as a parallel (not intersecting) component of the commercial ecosystem.
There are initiatives under way, many of them sponsored by governments, encouraging companies to pay their suppliers sooner. It can take a leap of faith for companies to make this decision; just as procurement has become accustomed to the processes and requirements that make us feel safe, companies want to have enough capital available so if they face a time of difficulty, they can ride out the storm. Paying suppliers sooner does deplete the capital that companies have available, but the fact of the matter is that they are working against themselves: paying suppliers sooner will allow those suppliers to make responsible choices about how to invest that capital in their own supply chain, or their own innovative efforts, to make better products and services available to you as the customer.
It starts with transparency, and asking questions: What are the payment terms? Where are the bottle necks? Which point in your supply chain is the most starved for capital? You may have to look a few tiers down to find the company that’s being pinched through payment terms, and that’s something that needs to be addressed because it is a breeding ground for risk.
Procurement and finance can work together to achieve greater visibility. Through understanding of the cash flows, they can ensure that they’re not working against themselves by sitting on this cash. It would be an investment decision to pay suppliers sooner and ensure this approach continues down the chain, to keep innovation working its way back up.’
It is anticipated that the evolution of technology and data will deconstruct the role of talent within procurement. What changes do you expect to see, and what can professionals do to adapt accordingly?
‘Deconstructing the role of talent requires a greater level of not only business judgement, but also a solid understanding as to how the company itself functions. On one hand, we’re allowing things to break apart to give us a greater deal of flexibility. On the other hand, our perspective needs to be elevated; procurement needs to focus on more than maximising savings, minimising risk, the number of contracts, and rationalising our suppliers. We need to connect it all the way back to what it truly means to the organisation.
Some years ago, I was taking a college English class, and we were set an exercise to consider the objectives of the characters. Each character needed to be focused on what they were doing, pretending that they didn’t know the bigger storyline. For example, consider the famous scene from Hamlet in the graveyard. The gravedigger is trying to dig a grave, whilst Hamlet and Horatio are walking back and forth, discussing their problems. If you stopped the scene and asked the gravedigger ‘What is this play about?’, the right answer in his context would be that he is trying to dig a grave so he can go home to his family, but the other two men keep getting in his way. Nobody would say that’s what Hamlet is about, but from that gravedigger’s perspective, that’s the whole picture.
This is exactly how it is in procurement; if we allow ourselves to be siloed, we block out the bigger picture. We need to elevate our approach to the point where we recognise that procurement is not just about savings. We need to understand the market forces that our company is responding to: the opportunities, the five to 10-year strategic plan. Where are the competitive pressures and where are the risks? Ultimately, we may not address these things directly, but everything we do needs to be in line to ensure that our priorities, our understanding, and how we select suppliers, is positioning the organisation to hit the five or 10-year plan, without getting entrenched in savings.
Another area that is evolving at a rapid rate, is the role of automation and AI. Procurement has a great opportunity to be the front leader in terms of introducing these technologies. For any technology-related purchases a company is considering, the question needs to be asked: what is the opportunity to involve automation or AI? This also applies to services. We can develop a more expansive outsourcing arrangement, or use software to either learn how to do this directly or to serve in an auditing capacity.
We need to embrace the fact that technology is going to directly change the way procurement works. In the past, we did a lot of work that today is completely addressable by technology. The spend analysis process is a typical example; the quarterly refresh process was painful for companies to go through. Now, it is far more frequent than quarterly; some companies are performing it monthly, some even closer to real time.
By teaching systems how to help us with the categorisation, it becomes more of a detailed refinement process than a month after month or quarter after quarter repair process. The technologies can also offer us insights; we’re still driven by needing to have an idea first, then seeing if the data supports it. If we’re not explicitly looking for something, there may be a pattern in our data that we’re missing. Technology, on the other hand, can be trained or written to find these patterns; we can then decide whether they represent relevant opportunities in how the company uses its resources.
Procurement needs to transfer as much as possible to technology, but without losing sight of how it works. If you’ve ever truly going to leverage the full capabilities of this technology, it can’t be a blind process, trusting that the machine has given you the right answer. You still need to understand the underlying technology and the logic that makes it work. If we can let go of some of these processes, our role can evolve to better match the needs of the organisation.
It’s more change, but it’s exciting; we’re no longer babysitting our data and technology. We’re building the best technology foundation we can, and then we’re standing on it, allowing us to reach further towards those organisational objectives and further into the real heart of the organisation, where the business is taking place. I think there are some huge shifts coming in the talent area, and not everybody will make the decision that this is for them. For anybody who is interested however, the opportunities are limitless if you have the right attitude towards the technology, and the right aptitude for making that shift in the skills needed for procurement.’
How are emerging trends towards disruption in procurement connected to bigger trends at a company and industry level?
‘At an executive level, organisations are seeing this concept of deconstruction. Companies can no longer expect to know who their biggest competitors are; it’s no longer a steel company against a steel company, or a consulting firm against a similar firm. We’re now seeing companies taking a more objective driven approach, and jumping industries.
I was recently reading an article that discussed consumer use of AI, and how Steve Jobs originally had the vision for Siri and acquired a company to propel Apple into a leadership position in this space. Although it has been improved, Siri is still relatively limited. Apple knew what they wanted to create, but they couldn’t do so as fast as they wanted to. Their vision, as much as it was progressive, didn’t really evolve. Now we have Amazon with Alexa and Google with their Home smart speaker, who have completely outstripped Apple in terms of AI capability. Their vision was bigger and they kept moving forward.
This is not simply an indication of a company that perhaps didn’t prioritise a certain piece of functionality. You would not necessarily say that Amazon, Apple, and Google are in the same industry; they are certainly in the same tier in terms of size and global brand, and there’s a lot of overlap in their customer base, but these are three very different companies. Fifteen years ago, if Apple had been performing a threat analysis to establish who they needed to watch in terms of being a threat to Siri, Google may have been considered, but I suspect Amazon would not have been at the top of their list.
Procurement can’t just focus on procurement, we need to be looking down and up at all times, and companies can’t limit their view of the business environment to traditional competitors. They need to look across industries and try to anticipate where the next competitive threat will come from. It’s probably not the obvious answer, and it’s difficult to know who’s going to come up with a competing solution or something completely different that relegates your solution to the scrap heap. You need to take a broad perspective, and this is another area where procurement can benefit. It is not enough to simply find the four companies closest to yours. You need to ask yourself: what are their core capabilities? Who are their target customer base? Consider other companies with similar capabilities in different industries, and other companies addressing the same customer base, because they may be moving in.
Procurement can leverage this breaking down of industries, but it does increase the amount of information we need to obtain from our suppliers. You may ask, “Who else is buying a similar mix of products, or using a similar mix of services as us?” They may be moving into a competitive position. This is an example of suppliers becoming a key source of intelligence, but it’s also another way for us to look at leveraging them. It’s not just about changing demand or specs to save more money, it’s considering what markets they are trying to break into. Companies who are buying the same mix from your suppliers could very quickly move across and put together a product or service that competes with yours. You need to keep your eyes on all factors, and have a broad understanding on every level of the organisation, to be prepared for the changes that are coming.’
Kelly Barner is Owner and Managing Director of Buyers Meeting Point, an online resource for procurement and purchasing professionals, and the Director of Intelligence for Palambridge, a virtual platform of on-demand procurement experts, technology, and intelligence.