Digital procurement transformation can change how your company obtains supplies while saving money and increasing efficiency. This article details the many benefits of digital procurement. It also provides insights into the challenges and how to avoid the pitfalls.
In this article:
- Direct benefits of digital procurement
- Strategic advantages of digital procurement
- Indirect benefits of digital procurement
- Challenges with digital procurement – and how to avoid the pitfalls
- A Digital Procurement Roadmap Example
Why Is Digital Procurement Important?
Digital procurement allows companies to automate many tasks, which increases efficiency and reduces costs. It also enables teams to analyze data better and find insights to deliver greater value.
Digital procurement enables companies to keep up with the impacts of today’s shifting global economy. For example, supply chain disruptions caused by the COVID-19 pandemic, geo-political challenges and regulations are unlikely to decrease. Digital procurement can provide businesses with the tools and intelligence to reduce risks or predict changes.
How Does Digital Transformation Influence the Procurement Function?
Digital tools can automate processes, improve communications and generate deeper insights across procurement. That transformation saves money, reduces errors and increases efficiency.
Digital transformation is influencing many areas across the procurement value chain. This includes:
- Spend management
- Supplier collaboration
- Contract lifecycle management
- Margin optimization
- Risk management
- Impact tracking
- Collaboration and knowledge exchange
- Procure to pay automation
- Accounts payable automation
- Strategic sourcing
- Category management
- Market intelligence
Advantages of Digital Transformation in Procurement
Using digital tools can improve a company’s procurement processes, such as helping organizations save money through improved purchasing or negotiation. It can also make entire systems more efficient and free up employees to do more strategic work.
“Digital tools have transformed how companies do procurement and do business,” says Aligned Automation CEO Nitin Ahuja. “We are reaching a new phase in business strategy, where procurement is no longer simply an enabler of cost reduction. Rather, procurement has the opportunity to become a creator of competitive advantage.”
Procurement is increasingly viewed as a connector across functions. The role of procurement is developing to unlock trapped value by collaborating across suppliers and their internal functions. Digital procurement facilitates information sharing across teams on volume forecasts, service needs, delivery schedules, payments, pricing forecasts and more. The seamless sharing of information allows both parties to plan and predictability unlocks value for all functions and parties involved.
Benefits of Digital Procurement
The direct benefits of digital procurement include better sourcing, forecasting and efficiency. Procurement teams can reduce costs through improved negotiation or staffing strategies. Ultimately, companies can have a better-equipped team, enhanced functionality and happier customers.
Details on digital procurement benefits include:
- Better sourcing: Digital procurement allows companies to understand their overall sourcing costs and strategy. That provides insights for smarter spending. Gaurav Gulati, a procurement practice lead for Aligned Automation, says digital procurement tools allow companies to do better supply chain management. In addition, the tools enable companies to analyze procurement strategies better.
For example, one common decision is whether to use one supplier or a small group of suppliers for certain materials. Using one supplier may offer large price discounts but using a few more suppliers prevents the risk of your only supplier having issues or going out of business.
“To make these choices, you use a lot of data points,” Gaurav says. “You use a lot of information from systems and analytics … to be able to guide towards what that category strategy should be. How much do they buy? From which sources do they buy? Where in the world are the products coming from?”
Gaurav adds that once a company makes those decisions, digital procurement helps assess whether they were the right decisions.
“If they choose to go with a particular strategy and implement it, they also need to see what results that strategy brought over a period of time,” he says. “You want to see one year, two years down the line – is it working? What tweaks need to be made to that?”
- Improved forecasting: Digital tools allow companies to forecast their demand and supply better. Predictive analytics that integrate historical data with market projections can inform and guide decisions. That allows for smarter planning and more efficient use of resources.
- Increased efficiency: Digital procurement solutions increase efficiency in many ways. Team members can eliminate repetitive paperwork, reduce manual touchpoints and process orders faster.E-procurement and other tools help your company “optimize how the entire process runs,” Gaurav says. Your company should try to make “as many transactions automated as possible. Organizations may have hundreds of thousands of transactions, so the goal is to make it as automatic – and as simple – as possible.”
- Lower staffing costs: Increased efficiency means reduced staff hours to do procurement well. Procurement Leaders, an internal network, researched this topic. It found that using complete digital procurement systems could save the world’s top 5,000 companies $86 billion annually in staffing costs. In addition, companies that spend $1 billion to $3 billion per year could save $12 million annually in staffing costs.
- Lower overall costs: Advantages like improved efficiency, sourcing and forecasting bring obvious benefits to any company’s bottom line. Digital procurement tools reduce costs in many ways. Most importantly, they allow companies to buy and spend in smarter ways.
- Faster procurement: The business landscape demands speed. Companies must be the first to identify and serve markets. They must also be the fastest to respond to changing influences.
Everything moves more quickly when you automate procurement processes, from purchase orders to invoices.
“From the time a purchase requisition is made by a plant person, to the time that the good is received into the warehouse and they can use it, it can take weeks or months for that to happen,” Gaurav says. “That process can happen in an automated way so there are less touches – it can happen as fast as possible. And the suppliers are paid on time. Once you pay the suppliers on time, then you have their trust, and you can ask them for further discounts. Otherwise, they never see their money coming into the bank on time and they are not interested in giving you a discount.”
- Improved supplier relationships: Suppliers play a critical role in the procurement value chain. Many companies rely on strategic partnerships with suppliers to innovate or create new solutions. Digital tools aid in building trust through transparency of information and actions across organizations and a single source of truth.
- Faster analytics and reporting: Digital systems can help your staff accomplish other tasks more quickly as well. For example, a Bain and Company report detailed how an IBM procurement employee created a bot through a digital procurement system that helped produce a regular cost savings report. The bot decreased the staff member’s time on the report to three hours – from three days.
- Fewer errors: Automation reduces human errors that often happen with manual entries. Additionally, effective digital procurement emphasizes a foundation of quality data. Clean, quality data can be trusted and run operations better. Fewer errors also mean less time correcting mistakes, which frees up employees for more strategic work.
For one customer, we implemented Intelligent Character Recognition, or ICR, to streamline and automate data intake from PDFs, scans and images. The legacy manual data entry of each field was heavily time intensive and subject to bottlenecks and error. This automation allowed procurement Channel Managers to shift their focus from manual work, such as searching data bases and opening individual PDFs or scanned images to match order specs, to higher value work, such as selecting high-performing vendors and creating new contracts.
- Standardization: Digital procurement enables better standardization of a range of company processes and workflows. That standardization lowers the risk of compliance issues and supplier fraud. It also can reduce the likelihood of maverick purchases outside of a company’s defined channels.
- Transparency: Digital procurement increases the transparency of a company’s supply and ordering processes. That transparency makes it easier to see waste or savings opportunities. It also aligns teams within the company. For example, the accounting and customer service teams can see details about a customer who is past due on the payment. Additionally, bid waivers are transparently initiated and sent through a uniform online workflow to ensure documentation of approvals.
- Customer satisfaction: Digital tools can give companies and their customers insights into the supply value chain. This includes real-time analytics and proactive alerts. For example, digitalization can help a company immediately tell a customer when a committed date of order delivery may be missed due to delays of shipments in underlying components from your suppliers. They won’t be surprised later by what they might consider a delay.
- Better work culture: As digital procurement tools improve processes and make them more efficient, employees’ jobs become less stressful. Their work takes on more meaning as they consider fewer work hours wasted.
Strategic Benefits of Procurement Digitalization
Digital procurement will bring strategic benefits. It can free employees from mundane tasks and allow them to focus on business strategy. And it enables workers and leaders to notice important trends they might not see otherwise.
Details on the strategic benefits of procurement digitization include:
- More focus on strategic work: Digital procurement automates invoice processing and other tasks that workers otherwise must do manually. When they no longer have to focus on these simple tasks, they have more time to think strategically and innovate. For example, they can research better, cheaper or more cutting-edge suppliers.
In one instance, petrochemical manufacturer LyondellBasell engaged Aligned Automation to create and execute a digital procurement strategy. Allen Yu, a LyondellBasell vice president and former chief procurement officer, says the strategy has gone far beyond saving money. It has given workers time to do more valuable work.
“All of that translates to our people doing higher-value things,” Yu says. “They’re not doing the boring transactional things. They’re doing things that are solving big problems, contributing much bigger value to the company that unleashes their talents and their contribution to the business.”
- Better insights into trends: Digital procurement tools that incorporate analytics and insights allow company workers and leaders to see trends or identify suppliers and other partners that are especially effective. That enables you to find savvy new partners and embrace innovations that are more productive and advanced.
- Resilience: Supply chains inevitably encounter problems, so companies must adjust. Forward-thinking companies adapt quickly and retain a competitive advantage.
“One thing that’s really important in today’s world is resilience,” Gaurav says. “When things happen in the world, are you able to respond to it in the best possible way? More specifically, are you able to analyze your options and make decisions based on data?”
Using the right digital tools can enable resilience in procurement.
- Sustainability goals: Sustainable operations are a must have, and more companies are focusing on sustainability goals. Digital procurement methods give companies the tools to make decisions on resources, carbon footprint and other areas. The right tools can also continually track whether your decisions bring the positive impact your company expects. The right tools used in the right way can drive sustainability in procurement through tracking commitments made by suppliers, tracking the commitment by the organization to their own customers and consolidating impact across the supply chain.
Indirect Benefits of Digital Procurement
Digital procurement brings indirect benefits over time. These include more agility, revenue and competitive advantage. These benefits stack on top of the direct benefits, such as better sourcing and productivity.
Details on the indirect benefits of digital procurement include:
- Business flexibility and agility: A strong digital procurement strategy allows companies to assess trends in suppliers, customers and the overall marketplace. That enables teams to react more nimbly to market trends. Also, it allows them to take advantage of those trends – to decrease costs or increase sales or both.
- Higher income and revenue: Digital tools help increase income by lowering costs. But the data and trends that digital procurement highlights can also help employees recognize opportunities for new or increased areas of revenue.
- Competitive advantage: The benefits of digital procurement will allow your company to create a structure and hone the processes that will give it an edge over your competitors. You will be more forward-thinking, notice trends more quickly, and race to the head of the pack.
Challenges of Digitizing Procurement
Challenges may arise as you add digital procurement tools to your operations. For example, you might underestimate the work required to engrain the tools in your processes. Also, your team needs to learn to use them properly, which takes practice.
Here’s a detailed look at the challenges of digitizing procurement – and how to avoid the pitfalls:
- Underestimating adoption: Organizations might underestimate the amount of work and focus it takes to adopt and execute digital procurement. They might purchase the right digital solution, but if employees don’t use it (or use it correctly) then a transformation is doomed to fail.
There are many ways to make transformation successful. For example, strong Change Management practices can help ensure stakeholder adoption. Either way, it’s important to understand it will take an investment of workers’ time and attention.
- Becoming overwhelmed with adoption: Many organizations can become overwhelmed with the new digital procurement tools. Often, companies try to do too much at once rather than building momentum in their digital vision.
To many organizations, “it appears too large,” says Gaurav Gulati, procurement practice lead for Aligned Automation. “It appears like too much to do.”
Gaurav says Aligned Automation tries to help clients with that issue by going in phases. “We go in and show a proof of value within 90 days of starting the engagement,” he says. “We begin the project and aim to demonstrate value every 90 days. And then we will get into the next 90-day cycle, incorporating feedback and ideas from the project team. You start small, you see the value, and then you scale it up as time goes on.”
- Not fully implementing the technology: Some companies buy a digital procurement solution but don’t fully use it because of misalignment or an unclear vision.
“They started doing something, but somewhere the priorities changed. Something happened, and then they never fully completed the implementation,” Gaurav says. “We see this quite often – that they have all the tools in the world because they are a big company. They’ve invested in a lot of technology. But they have not really implemented it in a way where it gives them the benefits that they need, or that they can get out of it.”
For example, Gaurav says that companies don’t use the technology to assess all the data on suppliers and don’t “actually go and get those discounts from the suppliers or get the right contracts in place.” Companies should have that end-to-end vision and follow through on outcomes.
- Getting too deep into details: Companies can also go the other direction: getting into too many elements of the digital procurement tools. For example, the tools may include data analytics and classification features that most companies don’t need. These might entice workers to use these tools unnecessarily. That can lead to confusion and many new tasks that don’t move the company toward the important analysis it needs.
- Using the tools for unsuitable purposes: Digital procurement tools can help with a wide range of actions. But some projects, large purchases or strategic suppliers require custom attention. Companies should make sure the business goals are clear and that processes are mapped before implementing change.
- Analysis paralysis: Digital procurement tools allow organizations to analyze and assess a wide range of data to make better decisions and purchases. But that huge amount of data can also cause “analysis paralysis.” It can cause you to delay decisions too long. Ultimately, analytics should have a clear, intentional purpose that help with making decisions easier and faster.
Benefits of Using a Procurement Transformation Roadmap
Companies should follow a transformation roadmap to embrace digital procurement’s benefits fully. That roadmap should include establishing an overall digital procurement strategy, adding digital tools to carry it out, and defining goals for success. The roadmap will help lead you to the multiple benefits covered in this article while avoiding the pitfalls.
Digital Procurement Roadmap
Aligned Automation: Your Partner in Reaching Your Digital Transformation Goals
Aligned Automation combines cutting-edge procurement knowledge with dedicated technical experts who can bring your company the digital transformation it needs to succeed and prosper.
We help you find and use the digital tools that connect disparate data and reveal new options and ideas. For example, we helped one global company find more than $100 million in trapped value in its systems. We helped another company use machine learning to adjust a process and save nearly a million dollars. Let Aligned Automation enable and sustain your journey to Next Generation Procurement.