The most important principle for procurement is lowering cost quickly: Partner & MD, BCG, Düsseldorf

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Recently, CPO Innovation talked with Daniel Weise, Partner & Managing Director, Boston Consulting Group, Düsseldorf on setting up a Digital Roadmap vision for Procurement organizations for 2020, advantage in Adversity (AiA) in the downturn, and usage of digital tools like AI Negotiation coach, Savings Guard for procurement.

Daniel Weise leads BCG’s procurement business line globally and is part of BCG’s global Operations Practice Area leadership team. In supporting his clients globally and across industries, Daniel focuses on value delivery, operating model redesign and digitization programs. He joined the Düsseldorf (Germany) office of BCG in 2003 and is a partner and managing director.

Here are the excerpts of the interview.

In a complex landscape of digital tools, CPOs need to find the right starting point for their organization. So, according to you what’s the right point and right time to start with and what digital tools CPOs should use in this journey of digital transformation in procurement and supply chain?

Now is the right time for CPOs to start their digital journey. There is immense value potential. We expect that digitalization will enable cost savings of 5% to 10% and a 30% to 50% increase in efficiency. Digital procurement will rise to the top of CPOs’ agenda to achieve value targets for their organization. The toolset will include robotics for operational tasks, artificial intelligence for decision making and big data will be at the very centre of a highly tuned purchasing function. 

What should be the strategic priorities of Digital CPO and based on these priorities how can the right tools and applications be chosen?

To begin with, Chief Procurement Officers need to prioritize their digital focus and create value where their organization needs it most. Typically, procurement can deliver value in five areas: savings, quality, speed, innovation, and risk. Depending on the strategic priorities, the CPO needs to select the most appropriate tools to achieve his strategic objective. The key lies in industry-specific positioning. Based on the industry, we work with our clients to think through and create their own pitch. 

For example, for an automotive client, the focus lies on savings delivery and technical innovation. It starts from leading the way from combustion engines to electric powertrains, trying to move from old school trucks to autonomous vehicles, etc.

For a fashion retailer, speed is what matters most. CPOs need to make sure that the most desirable articles—designed in the EU, produced in Asia—are getting into stores before they go out of fashion. The focus on speed leads to higher automation levels in operational procurement.

Define your procurement’s digital roadmap based on strategic priorities, maturity, ease of implementation and benefits.

Indeed. Clear business case must be tied to strategic priorities. For the next 3 to 4 years, the key enablers for the digital roadmap include technology, people and a clear vision of where the procurement team needs to invest to build the required capability and how to get the procurement organization ready for digital. 

In order to fund the digital journey, companies may want to start with pilots immediately, however, one needs to carefully consider the interdependencies of use case implementations. They can adopt efficiency solutions such as automation and RPA for operational procurement and selected big data business cases such as tail spend in the early phase of the journey. 

Economic downturn can change the entire landscape of procurement function. Can you please explain it how? How CPOs should drive procurement in downturn?

The constitutional change has been quite dramatic in recent times. The economic environment is changing at a faster pace. For example, Automotive industry is at a very crucial stage in time where it is becoming electric and autonomous. 

CPOs need to have a clear understanding of the business situation and review there spend cube regularly to anticipate changes of the demand patterns and adjust their strategic procurement team accordingly. In particular, they need to anticipate, if the importance of new categories increases or if existing categories disappear. Coming back to the automotive example, OEMs bills of materials will change by 50% just over the next few years,

CPOs are on the hot seat, as they are required to deliver. That can only happen with the support of organisation. Therefore, prudent CPOs use the downturn pressure to enlarge their seat at the table.

According to you what are the key principles for procurement to approach the next downturn?

The most important principle is lowering cost quickly. Another one is leveraging your suppliers’ intelligence to be the front-runner on innovation. The clear objective is to use the supplier eco-system to increase the speed to market and the prominence of the innovation. The two key aspects are execution and digitization. Digitization can be a game-changer because it facilitates things that could not be done before. One example is BCG’s AI Negotiation Coach, which recommends best practices negotiation approach based on up to 15 questions. It challenges the way strategic buyers prepare themselves for negotiations and recommends the most effective approach yielding up to 15% higher savings. 

‘Procurement must build supply chain flexibility to be adaptable to changing conditions and mitigate risks.’ Can you throw some light on this statement? What should be the framework required to mitigate supply chain risks and compliances?

Industries such as fashion and automotive have global supply chains. Car manufacturers have set up their supplier and production footprint to leverage the best factor cost possible. The globalisation of the value chain was taken under the light of free markets. Over the last couple of years, this set up is challenged due to protectionism, trade wars and tariffs. A regular review of the own supply base and upcoming tariff changes, as well as the ability to adjust the supply chain, is quickly required to avoid unforeseen increased cost. 

How do you see technology as a disruptor in procurement? Are there any new trends you believe will emerge and become integral in procurement industry in the near future?

Technology has now become crucial for procurement and is an integral part of the procurement processes. For example, AI-based decision making enables strategic buyers to free up time they would otherwise spend on operational tasks and automation of operational process has made operational buyers obsolete. Technology delivers tremendous value to procurement and enables buyers to make informed decisions for their categories. Besides deciding on the most effective and efficient tools, CPOs need to ask themselves how to set up their organizations to best leverage these new solutions and tools. They need to think holistically. Every role will change, from strategic buyers to purchasing controllers. Some, like robotic maintenance engineers, will emerge and others, such as operational and transactional buyers, will largely disappear. Leading companies that actively transform their procurement organizations gain a substantial strategic advantage over their peers due to the much broader value they generate.

With business strategies inextricably linked to technology, organizations are rethinking how they envision and deliver technology solutions. Re-engineering and digital operating systems hold huge potential to bring down functional cost. Could you please illustrate with examples how companies can build new IT delivery models in their procurement function to make it more optimized. Also, please tell us a bit about BCG’s re-engineering model. What reforms BCG has adopted to transform its procurement unit towards digitization.

Digitization has brought about a revolution globally. When we think about Procurement function, the overall FTE reduction for transactional activities for P2P processes has gone down and has resulted in overall reduction of approx. 30% of today’s procurement team. By digitizing processes, organizations have become more capable of building up and strengthening their strategic procurement capabilities. More and more companies are investing in building procurement supporting teams who can provide analytics and big data support for their buyers. In early phase of the transformation, some organisations might integrate Robotics Maintenance, AI Programs or even Digital Change Agents in procurement to ensure a close link up to those capabilities.

While technology is changing the landscape, let’s not forget that change management can work only if the analytics and tools deployed are tailored to the specific context. In our experience, simply buying tools from market doesn’t help. It needs to be a customized tool tied to your digital roadmap vision and should be able to fulfill your specific organizational needs and priorities.

Delivering more procurement value requires collaboration between procurement and other functions. When we talk about collaboration, the main focus comes around collaboration between CFOs and procurement function. So, how important is this collaboration according to you? How Digital age CFOs and procurement functions can deliver more cognitive procurement solutions?

You very rightly mentioned that successful procurement in this digital age is cross-functional. Procurement experts need to engage with production and engineering to understand how the product and services they are buying has an impact on the product line of the company. The CFO is at a very unique position here, as the finance team can actually clarify which P&L bucket of the company’s bottom line can the procurement savings be seen. CFO’s support is imperative in influencing the relevant stakeholders to believe in the procurement savings and at the same time, it also empowers procurement to have impact on budgets. E2E visibility on the cost of supply chain will enable procurement to get credits of savings beyond old vs new price comparisons.

As CFOs and procurement functions embrace strategic imperatives such as exponential business value and risk management, they need to start their cognitive adoption journey. So, according to you, from where they should start their journey of cognitive adoption?

CFOs are developing a keen interest in the procurement journey. Throughout the planning process, they should ensure that procurement function is involved so that the company plan can be anticipated. Achieving immediate goals by implementing contract management solutions will only help with compliance. Digitized contract solutions bring much more transparency on legal issues, compliance to KPIs and contract durations which help CFOs become more compliant and efficient. 

We all are now aware of the possibilities of AI in procurement and supply chain and how this technology can give a boost to all procurement functions and operations. And now, AI can give an edge in negotiations as well. AI is capable of performing many tasks that enhance human labor and thinking. Can it provide an advantage in the negotiation process as well?

Since we are talking about AI’s role in negotiation, can you throw some light on BCG’s (AI)-based Negotiation Coach and its functioning?

AI-based negotiation coach uses cutting edge technology to revolutionize company’s procurement strategy. It leverages Game Theory and Artificial Intelligence to recommend answers to buyers on best Go-To-market approach to talk and negotiate with the suppliers. Every textbook we read, we know there are many more ways to talk to your supplier and negotiate based on should cost model, LPP, wargaming around the negotiation outcome, and so on.  What we have done now is to create a client-specific tool for every category which will advise the buyer by answering business questions that are automatically pouring data from the ERP – for e.g. what is the best way to go to the market? If auctions, what kind of auctions? Is it Dutch, English, Japanese, etc.? This will be answered by the AI coach and the coach will give clear indications on strategies to stay healthy in the market.

We have deployed this tool for many multinational clients to help buyers make the right choice. We typically integrate the tool into the procurement suite of the company. During the buying process, the buyer goes to the coach to get information about opportunities or pose specific questions. The coach then recommends best way to go to the market. Since the coach is AI-based, it gets better over time and provides better recommendations. It continually adapts to recommend best approaches and tools to deliver maximum savings based on the experience of hundreds of buyers.

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