Procurement has languished toward obsolescence and will die without a transformation. Today’s chief procurement officers have just one job: adopt a future-focused model to meet users’ needs.
In many ways, today’s procurement organizations resemble white-collar versions of manufacturing in the 1970s. Manual processes still dominate procurement, even as automation transforms other business functions. If one would poll chief procurement officers today, they’d all say, across the board, that the solutions have failed to live up to what was promised. Bad user experiences, incomplete functionality, and a lack of advanced features were just a few of the many issues experienced. Call it PowerPoint Disconnect.
Most of us already know what a supremely helpful and responsive system looks like. As individual consumers, we shop on Amazon and Alibaba, which give us broad selection, product specification, visibility into price, shipping options, warranties, returns, and customer support. Buyers compare alternatives and make a decision based on their needs. They receive their deliveries instantaneously (such as digital content) or within hours or days with full accountability. Yet, these same users go to work and experience the most archaic, rigid, poorly thought-out systems that unsuccessfully make all of these decisions for them.
The sad truth is that, after nearly 20 years of technology deployment, most organizations still struggle to get a comprehensive view of their spend. Routine, labor-intensive transactional activities—pricing negotiations, contract awards, supplier performance monitoring—consume time and attention. Procurement workers also spend hours piecing together fragmented information flows from myriad transactions, a task technology could perform in seconds. Internal stakeholders, meanwhile, grow frustrated by what they perceive as slow service from procurement and yearn for self-service options and direct access to end-to-end data streams.
A lot of companies invested heavily in ERP applications. If one believes the PowerPoint messages, why wouldn’t you? I did. Across the board, these systems have proven to curtail progress and hinder excellence instead of enabling it. The low rate of supply chain digitization has much to do with the capabilities of the technologies that companies have had available until recently. In fact, in my opinion, ERP systems such as Ariba and Coupa have proven to be unqualified abject failures. Business users hate it, procurement users loathe it and even the technology vendors treat procurement functions as second-class citizens. Most organizations still struggle to get a comprehensive view of their spend (and some struggle with simply generating a basic view of supplier and category expenditure). The systems are rigid, complicated and only solve a fraction of procurement’s requirements. Technology has become a convenient replacement of lack of skills and a lack of intellect. Issuing an RFP is not strategic sourcing. Most organizations still don’t have visibility into their supplier lists, never mind performance or risk management. What these technologies didn’t yet provide, though, were transformative capabilities for supply-chain management: linking and combining cross-functional data (for example, inventory, shipments, and schedules) from internal and external sources; uncovering the origins of performance problems by delving into ERP, warehouse-management, advance-planning, and other systems all at once; or forecasting demand and performance with advanced analytics, so planning can become more precise and problems can be anticipated and prevented.
And, at the same time, the fire-fighting drills typical of everyday work leave too little time for thoughts of continuous improvement or prototyping of innovative ideas.
The promise was to create completely smooth operations, optimized and transparent from the customer through to the supplier. The all-too-frequent reality: restrictive, siloed cultures insert a long list of functional intermediaries between demand and supply, each theoretically accountable for decisions that they do not fully own. And, at the same time, the fire-fighting drills typical of everyday work leave too little time for thoughts of continuous improvement or prototyping of innovative ideas.
Today – The case for specialized point solutions
How did we get here? Today’s procurement technology landscape is based on a linear concept of sourcing activities on the left and procure-to-pay activities on the right, with analytics and governance wrappers. It’s a nice neat package that looks great on paper. Unfortunately, it reflects little about the realities and complexities of day-to-day procurement.
Enterprises have paid, and continue to pay, for multimillion-dollar contracts and multiyear implementations for systems they hope will be “one and done”. If procurement later buys a new tool that isn’t embedded in the suite, whatever innovation it promised goes by the wayside. Thus, big suites end up woefully underutilized, based on old architecture and functionally inadequate. Don’t blame the tech vendors entirely, however, because the collective procurement industry has turned a blind eye to the phenomenon. Even top-flight benchmarking firms base their market evaluations on a rigid and misguided framework focused on breadth of offerings and completeness of vision instead of looking at actual business user satisfaction (as represented with net promoter scores, for instance).
What these technologies do not provide, though, are transformative capabilities for supply chain management: linking and combining cross-functional data (for example, inventory, shipments, and schedules) from internal and external sources; uncovering the origins of performance problems by delving into ERP, warehouse management, advance planning and other systems all at once; or forecasting demand and performance with advanced analytics, so planning can become more precise and problems can be anticipated and prevented.
Clearly, the death of supply chain management as we know it is on the horizon. The managers and companies working to update their skills and processes today are the ones who will come out on top.
The Platform of Tomorrow
All of this technology has become a means unto itself, a way to justify its existence in the world instead of solving the one requirement on which all of procurement should be based. Successful procurement technology has one job, a north star: to provide a robust yet easy-to-use system for transforming needed goods and services into value for a company so that it can excel at its own business.
Such a system puts the procurement power in the hands of the user, rather than the user being at the mercy of the system or a rigid and unnecessary procurement process. The more users are empowered with full transparency and analytic insights, the more likely they will adopt the desired behavior.
Most of us already know what this supremely helpful and responsive system looks like. As individual consumers, we shop on Amazon and Alibaba, which give buyers broad selection, product specification, visibility into price, shipping options, warranties, returns and customer support. Buyers compare alternatives and make a decision based on their needs. They receive their deliveries instantaneously (such as digital content) or within hours or days with full accountability. Yet, these same users go to work and experience the most archaic, rigid, poorly thought-out systems that unsuccessfully make all of these decisions for them.
The Revolution Begins
It may be tempting to dismiss AI and other recent advances as just another wave of hyped technologies that won’t fundamentally change procurement. Today, few procurement processes are fully automated, and end-to-end information transparency is limited in most categories.
Despite the bleakness of the suite solutions, a number of procurement technology start-ups have emerged during the past few years.
Scout burst onto the scene in 2014 with a fresh take on sourcing tools built on modern architectures and updated sourcing concepts. The sourcing functionality compares to previous systems, but it is much more intuitive, faster, and easier to use.
Then, building off the analytics revolution, advanced analytics companies such as Tamr began to apply machine learning to challenges such as spend management and complexity reduction. Consequently, the once-onerous analysis of tail spend is vastly sped up and simplified, potentially unlocking tens of millions of dollars in opportunity. These companies represent the most current and advanced technologies. We estimate collectively they have raised nearly half a billion dollars in investment funding with more likely to come.
The Technological Tipping Point is Here
AI, blockchain, and the Internet of Things (IoT) transform how users interact with technology. And they’re converging to form fully autonomous procurement tools that will run the entire procure-to-pay process, including contract generation.
Amazon is building a system that will automatically solicit bids, evaluate responses, and award business. Data input and classification will become much more accurate when intelligent systems start executing transactions independently; some companies already use AI to classify spend. Even more impressive is the potential of AI and blockchain to track contract compliance in real-time, a feat nearly impossible for today’s archaic systems.
The Digital Revolution in Supply Chain Management and the Implications for Procurement Departments
Implications for procurement organizations are profound. For a glimpse of the future, consider technology’s impact on corporate IT departments over the past 20 years. Automation didn’t disrupt IT overnight but encroached slowly and subtly. Back in 2000, data centers were staffed by well-paid systems administrators with advanced technical skills who kept IT networks running smoothly. It was hands-on work overseeing fleets of on-site servers that were manually racked and locally managed. Most companies employed one systems administrator for every 10 servers. Ten years later the ratio had dropped to one system administrator for every 100 servers, as virtualization and cloud computing transformed IT infrastructure. Humans were still involved, but automated systems made basic tasks such as deploying new servers and responding to problems as simple as point and click.
Today’s IT systems are largely self-managing, self-diagnosing, and self-repairing. Artificial intelligence tracks usage, decides when to add more capacity, deploys new servers, spots trouble, and fixes broken machines— all without human intervention.
Today’s ratio of systems administrators to servers? One to 35,000. The few remaining systems administrators keep tabs on automated systems that do the work they used to do. In less than two decades, technological progress has all but eliminated a lucrative, high-skill career.
Procurement is moving down the same path. Automation and information transparency continue to expand, especially in categories where companies have the economic leverage to force vendors to adopt new technologies. The future looks bleak for procurement workers who handle the low-value work of basic negotiations, writing statements of work and churning out reports. Software will take over these tasks and empower users with the information they need to make their own decisions in real-time.
As employment levels shrink, talent requirements will shift, favoring people who know how to solve problems and work effectively across functional boundaries. Procurement’s focus will turn to categories where suppliers have more leverage, increasing demand for skills such as rethinking specifications and managing negotiations and alliances.
Moving Toward Pivoting Supply Chains
The path forward mirrors the advance from paper road maps to modern GPS systems. The earliest GPS was essentially a digital map that led drivers through a predetermined route faster and with greater ease than a paper map. But as early GPS could not account for traffic jams, road hazards, or other variables, it did not warn drivers to pivot or course-correct to account for the unplanned.
The supply chain is the heart of a company’s operations. To make the best decisions, managers need access to real-time data about their supply chain, but the limitations of legacy technologies can thwart the goal of end-to-end transparency. However, those days may soon be behind us. New digital technologies that have the potential to take over supply chain management entirely are disrupting traditional ways of working. The traditional functions we framed out in the rigid linear process are now distributed through an extensible ecosystem that allows for very precise, and even overlapping, employment of best-of-breed technologies. For example, one might use Sievo for spend analytics but also employ Tamr for tail-spend management. It is important to note that traditional systems such as procure-to-pay (P2P) are still required and will not go away, but instead of being closed systems, they will open up into a broader more flexible ecosystem.
Basically, this architecture evens the playing field. The suites will have to compete on a best-of-breed basis instead of relying on arcane, non-value-add features such as ERP integration.
With a digital foundation in place, companies can capture, analyze, integrate, easily access, and interpret high quality, real-time data — data that fuels process automation, predictive analytics, artificial intelligence, and robotics, the technologies that will soon take over supply chain management.
Robotics or artificial intelligence are introduced to digitize and automate labor-intensive, repetitive tasks and processes such as purchasing, invoicing, accounts payable, and parts of customer service. Predictive analytics are helping companies improve demand forecasting, so they can reduce or better manage volatility, increase asset utilization and provide customer convenience at optimized cost.
Sensor data on machine use and maintenance are helping some manufacturers to better estimate when machines will break down, so downtime is minimized. Blockchains are beginning to revolutionize how parties collaborate in flexible supply networks. Robots are improving productivity and margins in retail warehouses and fulfillment centers. Delivery drones and self-driving vehicles aren’t far off. Rio Tinto, the global mining-and-metals company, is exploring how digital technologies can automate mine-to-port operations. Using driverless trains, robotic operators, cameras, lasers and tracking sensors, the company will be able to manage the whole supply chain remotely — while improving safety and reducing the need for workers in remote locations.
A key concept is the “digital control tower” — a virtual decision center that provides real-time, end-to-end visibility into global supply chains. For a small number of leading retail companies’ control towers have become the nerve center of their operations. A typical “tower” is actually a physical room staffed with a team of data analysts that works full-time, 24/7, monitoring a wall of high definition screens. The screens provide real-time information and 3D graphics on every step of the supply chain, from order to delivery. Visual alerts warn of inventory shortfalls or process bottlenecks before they happen, so that teams on the front line can course correct quickly before potential problems become actual ones. Real-time data, unquestioned accuracy, relentless customer focus, process excellence and analytical leadership underlie the control tower operations of these retail operations.
The control tower flags potential supply issues as they arise, calculate the effects of the problem and either automatically correct the issue using pre-determined actions or flags it for the escalation team.
Blockchain and Supply Chain
The economic advantage of using blockchain to unlock the potential of Internet of Things (IoT) is still evolving. The qualitative benefits of a solution that combines blockchain with IoT in operations tracking and visibility have been extensively discussed.
While supply chain pairing of IoT with blockchain is still in its infancy, the ability of these technologies to help companies reduce their dependence on intermediaries, minimize reimbursement delays, and enable more efficient batching and routing could deliver substantial returns.
By adopting blockchain in an IoT-enabled supply chain network, a billion-dollar manufacturer could save many millions of dollars each year—a determination that’s based on an examination that was limited to supply chain logistics and storage and excluded other elements of the traditional supply chain.
PAIN POINTS IN A TRADITIONAL SUPPLY CHAIN
Let’s focus on those pain points for which blockchain with IoT can generate incremental value. The typical supply chain comprises numerous elements, including planning, procurement, production, logistics and storage, sales, and after-sales service and returns.
Although blockchain with IoT can assist at every point along the supply chain, in this report, let’s focus on the logistics and storage stage, aware that overall savings across the supply chain could be substantially higher. For example, plurality of interests and asymmetry of information are inherent in ecosystems. Despite companies’ interdependence, each business within a supply chain is optimized toward its own profitability, making opacity an advantage that leads to classic principal-agent challenges. However, this and other similar ecosystem challenges and resulting benefits are not covered in this report.
Six key challenges typically confront those engaged in the logistics and storage phase of supply chain management:
1. Inefficient Inventory Management. “Visibility gaps” in the location and status of shipments lead to inefficient routing and inventory management problems, which result in higher costs, shortages, and unhappy customers who expect on-time deliveries.
2. A Costly and Time-Consuming Letter-of-Credit Process. Banks and the fees that they charge are a supply chain fact of life. Letters of credit—guarantees of payment in return for shipped goods—are needed to establish goodwill between buyer and supplier, but they eat up time and result in additional costs.
3. Delayed Reimbursement for Damaged Goods. The inability to track damaged goods and file claims in real-time means that working capital is tied up for long periods of time.
4. Dependence on Brokers. Regulatory requirements and complex processes gave rise to customs brokers, who help prove the authenticity of documents, mitigate risk, minimize delays, and help businesses avoid fines. Nevertheless, they also add friction and extra costs to the shipping process.
5. The Extra Costs of Fraud and Pilferage. Thefts raise supply chain costs. An inability to assign accountability for pilferage can compound the problem and result in significant dispute resolution costs.
6. Inefficient Batching and Routing of Goods. Companies’ inability to automatically and efficiently batch products for shipment results in suboptimal container utilization and higher shipping costs.
BLOCKCHAIN TO THE RESCUE
Some of the challenges we’ve mentioned boil down to a lack of visibility: the difficulty of knowing where a product is at any given moment. IoT solves that problem by providing real-time traceability across the supply chain. Any company with an IoT-enabled network can always know exactly where a product is.
Blockchain helps unlock the potential of IoT by introducing a shared, distributed ledger into the equation. Still, visibility offers only a partial solution. Device data stored in a central database that is neither accessible to other stakeholders nor trusted by them has limited capacity to ease supply chain pain points and drive economic efficiencies. That’s where blockchain comes in and why it will prove so valuable to a wide variety of businesses. Blockchain helps unlock the potential of IoT by introducing a shared, distributed ledger into the equation. When a product shows up at a warehouse and when it leaves can be recorded in a verifiable event log to which supply chain participants have access.
The trend is clear: Technology is replacing people in supply chain management — and doing a better job. It’s not hard to imagine a future in which automated processes, data governance, advanced analytics, sensors, robotics, artificial intelligence, and a continual learning loop will minimize the need for humans. But when planning, purchasing, manufacturing, order fulfillment, and logistics are largely automated, what’s left for supply chain professionals?
In the short term, supply chain executives will need to shift their focus from managing people doing mostly repetitive and transactional tasks to designing and managing information and material flows with a limited set of highly specialized workers. In the near term, supply chain analysts who can analyze data, structure and validate data sets, use digital tools and algorithms, and forecast effectively will be in high demand.
Looking further out, a handful of specialists will be needed to design a technology-driven supply chain engine that seamlessly supports the ever-changing strategy, requirements, and priorities of the business. To keep that engine running, a small number of people must be recruited or trained in new skills at the intersection of operations and technology. Since the skills needed for these new roles are not readily available today, the biggest challenge for companies will be to create a supply chain vision for the future — and a strategy for filling those critical roles.
Clearly, the death of supply chain management as we know it is on the horizon. The managers and companies working to update their skills and processes today are the ones who will come out on top.