Applying lessons from previous transformations to digitalisation

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Procurement is on the cusp of a historic change: digitalisation. Like almost every type of business function, the cumulative advancements around electronics, communications, computing, data science and artificial intelligence are poised to reshape the way business is conducted. But it is a change unlike any that has affected procurement previously.

 

Transformations here will be very different to those that have come before. The question is what must procurement functions do differently to capture the benefits on offer without damaging their reputation and strategic gains?

 

The digital transformation of procurement is essential, says Heiko Schwarz, founder managing director at riskmethods, a company that focuses on reducing supply chain risk. “This isn’t an easy shift to make. But with the right approach to people, processes and technology, it can be done,” he says.

 

Schwarz suggests the priority for a CPO to successfully digitalise procurement is to align the team and cross-functional stakeholders from logistics, finance, compliance and quality, among others.

 

It is not, however, simply a matter of flipping a switch and sitting back.

 

“This isn’t just about the CPO. It’s about your strategic purchasing department, supplier management department, commodity managers and operational buyers,” he says.

 

“To succeed, you must communicate the goals of your digitalisation proposal and explain why it will make everyone’s jobs easier. That can be a hard sell for jaded corporate workers, especially those who are convinced technology is all about eliminating jobs.”

 

This means getting your team and cross-functional stakeholders on board, he says.

 

Unlike previous transformations, such as the implementation of enterprise resource planning (ERP) systems 15–25 years ago, digital transformation requires teams to develop processes, rather than just ‘computerising’ existing ones. It will take time to design and master those changes.

Changing mindset

 

To ease the transition, CPOs must carefully think through and document the processes they want to change and what needs to be added, as well as what must be removed.

Then, they must communicate those changes. “You can’t overcommunicate such an important shift; keep your stakeholders up to date and regularly share changes and improvements,” says Schwarz.

 

He suggests CPOs contextualise their plans to demonstrate value and shows how new processes are going to help achieve the function’s existing goals. In other words, a transformative change requires more communication and ‘hand holding’ than before.

 

It may sound obvious, but the most important part of this is making the right decision over the types of technology the function goes after. Don’t do digitalisation just for the sake of doing digitalisation; CPOs must do their homework and ensure the technology decisions they make are the right ones for your organisation.

 

“It isn’t a simple matter of picking the first solution you see or one that is highly rated,” says Schwarz. “Procurement technologies are not created equal, so ensure you identify your needs and pick a solution that meets them all.” Additionally, he warns CPOs against buying into the big-suite solutions that claim to do it all.

 

Mickey North Rizza, an analyst at market intelligence firm IDC, says her organisation has focused on the impact of digitalisation and anticipates an $18.3tn economic value-add globally over the coming years.

 

But she says it also requires a big shift in mindset to ensure the function is digitally determined, rather than digitally distraught.

 

According to North Rizza, the determined are those with a plan and a commitment. The distraught, on the other hand, are those who have been stuck monitoring transactions.

 

“They have so much brain power, but focus it on constantly creating new processes and ideas and building from Excel and databases,” she says.

 

“You don’t want to lose that intelligence and ability, you want to transfer it. Instead of your team constantly using effort to make up new tools, they will be able to utilise what is already there, while having that built in with digitalisation,” she says.

 

In other words, buyers won’t have to laboriously build analytical tools for an individual task. Instead, they will be able to have a discussion with a computer and their co-workers and achieve even more.

 

It is also not just a matter of simply replacing human talent, but more about enhancing it, North Rizza says. Companies need to acknowledge people have done a great job in the past and they can now go further with the help of technology.

Roadmap to success

 

In terms of implementation, unlike the ‘big bang’ that often came with adopting an ERP or material requirements planning (MRP) systems, thought needs to be given to how digital technologies are implemented and adopted.

 

North Rizza says digital technologies are typically being embedded through specific use-cases, which are being pieced together throughout the organisation.

 

Companies are typically picking an area to start with, such as inventory planning. From there they start to build a wider digitalisation roadmap.

 

“CPOs should ask themselves what their strategic goal is. It could be digitalising sourcing, or it could be implementing a digital Kraljic model, [for example, following the approach Peter Kraljic and his Kraljic portfolio purchasing model, first described in the Harvard Business Review in 1983] to maximise supply security and minimise costs,” she says.

 

But is there a danger of trivialising the huge effort of digitalisation by doing small projects? No, says North Rizza. With technologies developing at a rapid pace, it is important to keep the process moving forward even if it is in these small steps.

 

Hugo Evans, VP in AT Kearney’s procurement and analytics practice, says: “It doesn’t matter if a company is centralised or decentralised. The fundamental fact is if you have a thousand people in procurement today, by tomorrow you will probably have 100.”

 

For example, he says procurement teams soon won’t need category managers because marketplaces will handle what they have done previously. In fact, he says, you might want to put procurement people with the product lines because having a central body that decides what to buy will be “obsolete”.

 

The command and control capability will be engrained into MRP, ERP and other systems, which means leaders should pivot their attention to their staff. “You will need people who can actually stitch systems together. Although they’re not admitting it, technology providers realise you can’t just buy one system anymore,” he says. This is because the underlying technology is changing; it is no longer the one-stop-shop system. If you are in one shop, perhaps you will have four or five systems. But tomorrow, it might be 25 systems. You need someone to architect, manage and work to coordinate that, Evans says.

 

“Whether that’s someone from IT or not, it’s a role that doesn’t exist today,” he says, so organisations will need to hire someone to push for that.

 

This all comes while consumer platforms are setting a high standard. “If you go to Amazon you can order almost anything in 60 seconds because there is full information transparency. They will even bubble up what they think is best, whether it’s for shipping or warranties, and I get to choose,” Evans says.

 

Unfortunately, no corporate procurement system does that. At best, CPOs may have designed a ‘buying experience’ for business users, but there is an implicit disconnect. Users hate it and complain.

 

“Procurement might do a great job on 16 things but this one thing may make them look bad,” he says. The vendors that produce the underlying systems will simply propose you need to re-engineer your processes or retrain your workforce, but that’s not the answer, according to Evans. And it is certainly not the right approach for digitalisation.

 

On a brighter note, North Rizza says much of the technology for digitalisation can now be cloud-based, potentially reducing both initial and ongoing costs. Furthermore, she says, IDC has made predictions about intelligent ERP. It sees this capability emerging from multiple lines of business applications working together – and that can only help smooth the shift to complete digitalisation.

 


The digitalisation conundrum


The good news is that with digitalisation, “the job of the procurement officer is much easier to get right,” says Nate Masterson, CEO of Maple Holistics, a company that focuses on sustainable personal care products.

 

The bad news is complexity, especially at the beginning. “Thanks to the digital age there’s so much more to keep track of,” says Masterson. In other words, implementing the new tools of digitalisation will yield more information, more choices, more opportunities and more responsibility than ever before.

 

This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.