Why Procurement is likely to follow the path that Financial Trading has taken

Our thanks to Dr. Alan Holland, CEO and Founder, Keelvar, for this insightful post on  how sourcing could undergo a sea change in performance, automation and tendering -  a change in philosophy similar to that we  have previously seen in Finance. 

Financial trading underwent a period of seismic change in the first decade of the new millennium. Trading pits with screaming traders waving pieces of paper in a state of hysteria gradually emptied. A new order appeared in its place and the first investment banks to grasp the significance of the change made the biggest gains.

This new order consisted of a wave of PhD graduates from Ivy League universities who began to apply scientific techniques borrowed from mathematics and physics to better understand financial markets. The pioneers of this new field of “Quantitative Finance” realised there were some fundamental connections between existing scientific knowledge that had previously been applied to understanding chaotic systems such as how smoke particles dispersed. The mathematical models for such phenomena could be applied to understand patterns of price fluctuations in financial markets.

This step change in trading techniques depended heavily on the new field of Quantitative Finance. Traders began to rely on support from "Quants" that helped them to price instruments such as Options, calculate Value at Risk and understand the trade-offs. The mathematics for modelling dynamic systems are complex, but for those who invested the time to better understand this complexity, the benefits were enormous as they made better informed trading decisions. Over time, an increasing number of trading houses placed even greater reliance on these quantitative models and software programs began to receive autonomy to make trades without human intervention. Speed and accuracy were of the essence so intelligent software made a huge impact in investment banking.

Win-Win Approach to Dealing With Suppliers 

Sourcing will undergo a similar step change in performance levels and automation that was previously witnessed in Finance. Tendering exercises will see a change in philosophy whereby buyers no longer engage in ‘Lot Design’ or feel the need to be prescriptive. Instead, the supply community will increasingly be invited to communicate packaging options, economies of scale, and innovative variant offers etc. The benefits will be profound, as easy-to-use software will enable CIPS/NAPM procurement officers to avail themselves of powerful yet affordable optimisation techniques to determine best value-for-money outcomes.

The next wave of sourcing tools will allow buyers to balance non-price objectives such as supplier numbers, incumbency switching tolerance, risk, quality and other factors. Decisions can take a ‘wait and see’ approach because there will no longer need to be as prescriptive in the tender design and simply list the number of contracts on offer. For example, a Facilities Management exercise can list all the locations and services at each as individual contracts. Suppliers can bundle geographically or by verticals to offer attractive tiered package discounts reflecting their individual synergies. This end result for buyers is that less labour is required both in advance and after the bidding stage. Suppliers enjoy greater freedom to play to their strengths in a truly win-win outcome.

The Science  

The advances being introduced to steer intelligent sourcing and automated buying stem from the fields of Game Theory, Mechanism Design and Artificial Intelligence. The key to efficiency lies in better communication of preferences from both sides. Smart sourcing involves mechanisms for eliciting more expressive information from all sides about their key constraints and cost drivers. An engine to explore the myriad combinations and present a clear picture of the outcome landscape will allow buyers to assess trade-offs and be much more strategic and of greater value within their organisations.

With recent advances in computing power and scientific discoveries related to intelligent mechanisms for buying or selling goods and services, the improvements in sustainable performance, speed and efficiency change will be compelling. The rate of change will also be faster than in Finance because the agents of change will adopt cloud computing techniques and Software as a Service (SaaS) to deliver immediate improvements to willing CPOs and sourcing executives.

Advanced Sourcing Made Easy Through the Cloud  

Sourcing optimisation (or market-informed sourcing) is one application that is beginning to gain traction, and in most instances it leverages many of the above advances. It is also typically delivered through cloud-based software solutions, which allow buyers to leverage the skills of PhD level graduates but within an easy-to-use self-service application.

This next wave of tools will be able to generate a return on investment of 50-200X the initial outlay. Firms willing to embrace the power of these new solutions won't need to recruit or manage PhD level experts. Instead they can simply access these solutions online as and when the sourcing exercise would benefit from the use of more powerful engines. And much like the gains early adopters in finance elicited from the use of such tools, those that jump in early have most to gain.

 

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