The Digital Supply Chain: How Should Procurement Respond?

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The future of procurement is digital — but how do we get there? In this first Spend Matters Conversation, Founder and Head of Strategy Jason Busch talks with SAP Ariba President Alex Atzberger about how to understand the digital supply chain and what strategies procurement can use to respond.

Jason Busch: It’s pretty hard to read an annual report these days and not hear the whole discussion around digital disruption. There are so many ways of looking at this, so I’m curious about your thoughts as an executive. How should we create and respond to digital strategies, and how does that begin to map into our supply chains?

Alex Atzberger: First of all, Jason, I absolutely see the same thing. Every company is impacted by digital. If you take Marc Andreessen's quote about “software is eating the world” it really means that every company is turning into a digital enterprise themselves. Why is that? It’s because obviously the way you want to serve the customer has changed dramatically.

There are so many examples out there of creative disruptions where a business model’s new way of doing business replaces old ways of doing business, and that’s actually leading toward competitiveness, more customer value, and it requires companies to change very quickly. I was just at a conference where GE was speaking about the work they’ve done with Quirky or Cisco with the acquisition of Flip, and it’s amazing that large companies aren’t afraid to fail in some experiments, because if you’re not failing you’re not really experimenting enough. This is really the essence of business. How can large companies take what they do at the core very well and rethink it in the digital world?

But what’s really happening there is the notion of the value of data and how data is the new oil today. Data is what actually changes a lot of business cases and scenarios. If you take the example of Dollar Shave Club, you actually are collecting information about shaving patterns directly from the customer in a way that other companies didn’t. You see the same with Tesla and the autopilot and all the controversy. It doesn't really matter as much as where the technology is today. What matters is that Tesla is collecting data of many, many drivers. I think that’s the power of digital. It gives the opportunity to rethink your business model, taking advantage of data, and that’s really what companies want to do.

I recently heard this wonderful Chinese proverb, and it says, “There’s winds of change. Some people are building walls. Others people build windmills.” The smart companies are thinking, how do I take advantage of what is happening, how do I become part of it, how do I change my business models? And that’s where the innovation is coming from.

JB: That can take us in a lot of different directions, and obviously how one will apply that to his own business will differ, but it also leads to my next question: ‘What is a digital supply chain?’

My quick thought on the notion is that we can break a supply chain apart into its various components. First, we obviously have the physical supply chain, the movement of goods between parties and everything associated with that movement — logistics, sourcing, material content and the like. Alternatively ,we can also be the services supply chain, which can be labor or the results of labor, such as deliverables and solutions, moving around as well.

Second, we have the transactional element of the supply chain. What are all of the data and metadata associated with our interactions with our suppliers, everything from some type of collaboration down to a plant audit, for example, and continuous improvements we can practice.

And then the third element, at least as I see it, is what you might term the financial supply chain — literally the movement of cash and credit between partners. Obviously, when these things are looked at in isolation, they don’t work as well together for all of the parties as they do when they’re looked at together. So one argument for what the digital supply chain really is revolves around the bringing together of the physical elements, the transactional elements and the flow of capital in one place.

AA: I think that model is a good way to think about it, and I think that digital brings the physical, transactional and financial together, but also adds conservancy, especially with the opportunity for value creation in each one of those. Stepping back one step more though, I think there’s also the question about why we should really care.

Companies want to have that supply chain conversation today because of two big topics. One is the trend toward end-user customization they want to be able to provide. At the end of the day, with the outsourcing that has happened over the last 20 years and so forth, what I think is important for companies dealing with significant bull winds ahead in the supply chain is being able to really have more transparency in the supply chain, which relates both to the physical and the transactional parts of the supply chain — and then also to be able to provide new value statements for end customers, be it customization of a product or more agility or responsiveness in the supply chain. A game like Pokemon Go happens, for example, it’s a success overnight with millions and millions of users. How do you ensure that your supply chain is responsive enough so that your toys in your store, one week, two weeks later, can actually fill the demand from kids who want to buy those products? So that’s one part, the agility in the supply chain.

The other part I see is risk. I was recently working with a large financial services institution and I met with their head of supply chain. Typically, a financial services company does not have a very complex supply chain, you might think, but it is actually about risk management and managing your vendors better. Each of these different components you mentioned of the supply chain, each of them has their own unique competitive differentiation and value creation opportunity. In the financial supply chain, we obviously see a lot trends where companies want to optimize not just working capital management but some companies, large companies in particular, are cash rich, so can they start to offer financing services to some of their suppliers or help in other ways? That’s an enormous opportunity for procurement to work with finance, to work with accounts payable together and actually create a profit center within the company, which is exciting.

If you look at the transactional bit, obviously there’s a lot of costs today in terms of how transactional collaboration is happening, so how can you bring that into a digital platform? In-context collaboration is a keyword in one of the areas we are investing in. Then obviously if you look at the physical supply chain, I am most reminded of when I am in my home of New York City and I look at the number of boxes that get delivered — there seems to be a big business in that as well. That’s the real value of the digital supply chain, honestly bringing transparency and information together to create more value for all of us within the supply chain.

Don't miss Part 2 of this conversation, in which Busch and Atzberger discuss why procurement is on the verge on entering a "golden age."

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