The term procurement is a tricky one. It may be an essential process for businesses, but few have a full understanding of it. In fact, it’s often used interchangeably with purchasing, despite the two occupying different roles. While purchasing is a very cut and dry practice – it focuses on money spent and goods acquired – procurement is a much broader responsibility.
In the simplest sense, procurement is the management of purchasing and everything involved with acquiring third-party goods and services. It deals with the brokering of trade agreements. It looks for ways to secure products at the lowest price. It makes sure purchased goods make it safely to the premises. It counts the cash. And it vets vendors for reliability.
So it should be clear why procurement is so important. Without a dedicated department for acquiring goods, operations would stall. Project managers would need to make their own arrangements, and this opens the door for errors, losses and delays. The question is: what makes digital procurement different? Why has it become a buzzword for businesses?
The Relentless Rise of Digital
The digital revolution has changed everything we come into contact with, from telephones to doorbells, cat doors, heating systems, watches and even our favorite books. It’s no longer a surprise to hear that something has gone digital, whether it’s designed for the consumer market or big business. Procurement is no different.
That said, it’s moving at a slower pace than the rest. According to the Hackett Group, 84% of procurement departments believe digitalization is the next step for their industry. However, a mere 32% has created a plan for getting there. This is a risky strategy, because we know a digital takeover is inevitable. At some point, your business will have to adapt or die.
The first step on the road to digital procurement is a proper understanding of what it entails. You’ve got to be aware of the latest terminology and trends coursing through the industry. Often, words like “digitization” and “digital transformation” get used incorrectly, and this makes it hard for businesses to strategize effectively.
Creating a Chain of Transformation
For instance, the terms digitization, digitalization and digital transformation are often used interchangeably. However, they have distinct meanings, particularly in the context of manufacturing and procurement. They can be treated as steps in a chain, starting with a literal conversion and ending with the creation of new markets.
Digitization refers to the conversion of analog processes into digital ones. This is where digital procurement starts, with a basic switch. You could, for instance, incorporate automation by investing in software from Coupa, Ariba, Sunsmart Global or another vendor. This is often the most costly and time-consuming part of digital procurement.
Digitalization refers to the use of active digital procurement processes. At this stage, you’ve made the switch, and it’s having an impact on operations. Now you should be monitoring every task and process to make sure that software or other technologies are having a positive effect. Automation in particular should save the company money each month.
Digital transformation happens at a later point when a company has invested heavily in digital technologies. At this stage, a “digital first” model is adopted, and the business commits to a full and all-encompassing transition. Eventually, the digitalization of business processes will become ubiquitous, so unacquainted companies will be forced to catch up.
The Future of Digital Procurement
The biggest impact of digitalization is increased speed. With automated procurement processes, everything moves much faster. This includes both supply and demand, a scenario that’s very tricky because they don’t always move in the same direction. For procurement teams, life is a perpetual push and pull between internal and external forces.
Software can help with this, but only if a company has clear goals. In order to realize the full potential of the digital revolution, procurement teams must restructure their entire philosophy and align it with these new technologies. The following objectives are an integral part of the journey towards digital transformation:
Firstly, it makes sense to work with suppliers that are heavily invested in digitalization. In fact, preference should be shown to those with digital products and services. It’s a good idea to have a team monitoring digital competitors and keeping an eye out for new inventions.
Supplier Relationship Management
This is already a key part of business processes. However, digitalization requires laser precision when it comes to supplier management. The use of business intelligence and analytics can help identify promising prospects. It can also be used to empower stakeholders and accelerate big decisions.
The term “VUCA” is used to describe markets that are volatile, uncertain, complex and ambiguous. Depending on what industry you operate in, this could very well describe the commercial landscape at certain points of the year. It’s necessary to meticulously monitor the value chain across all tiers in order to maintain a competitive position.
Selecting the Right Tools for Digitization
It’s important to remember that digitization is not an end in and of itself. Rather, it’s a way of generating a measurable benefit for procurement teams. Crucially, the key to achieving this is selecting the right tools and software. The following technologies are worth considering if you’re trying to bring procurement processes into the 21st century:
Data and text mining uses algorithms to analyze information. Business intelligence plays a central role in the optimization of operational processes. It can be used to identify risk, support decision makers and forecast market demand.
Smart contracts are digitally signed guarantees that are executed by software code built on blockchain technology. They allow contracts to be automatically adjusted to suit a range of circumstances.
Sensor tracking is a great way to monitor the movement of raw materials and finished products. This increases operational visibility, reduces the capacity for error and gives customers and suppliers peace of mind.
Ultimately, procurement is about more than purchasing goods and services from outside sources. It relies on strategic planning and careful observation to meet cost targets, deadlines and quality standards. It’s a vital part of business for any company that wants to grow fast and stand the test of time.