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Digital Sourcing: The Magnificent 7 is Back

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Spend Matters welcomes this sponsored article from Stefan Dent, managing director at Simfoni.

There’s no ignoring the advent of digital technologies. The strategy consulting firms call it the “Fourth Industrial Revolution,” and they prophesize a rise of machines and the demise of traditional roles performed by humans, which are being replaced (to a degree) by robotics and artificial intelligence.

So what does this mean for sourcing and procurement operations? Over the next two to three years, we will see a dramatic shift, as more organizations embrace new technologies.

The fact is that the technology is already here, and indeed it has been around for quite some time. However, the ease and cost of adoption has dropped significantly, accelerated by the migration to cloud-based solutions, which will greatly increase the pace of change. The visionaries are already doing this, and have made the switch to digital platforms, so it’s really time to wake up for those organizations that have yet to make the move.

Digitized sourcing and procurement operations will also drive changes in the function’s structure and its roles and responsibilities. Tomorrow’s sourcing and procurement function will be characterized in four ways:

  1. Structure: A lean but highly intelligent sourcing function will oversee strategy and performance
  2. Technology: Adoption of digital analytics, reporting and sourcing tools, which facilitates integration of demand planning with sourcing and inventory operations, with external data feeds on commodities, markets and supply risk and reputation used to inform dynamic decision-making
  3. Separating Core from Transactional: Transactional purchasing will be separated from strategic spend and managed through delivery partners, who will also provide on-demand support for strategic initiatives
  4. Position: Sourcing and procurement operations will become fully integrated with finance and general operations, which may see a change in the position of the function within the enterprise

The sourcing and procurement function will be restructured, as its role within the enterprise is redefined. Over the past decade, we saw the rise of category management and the growth of large procurement teams whose primary objective, one could argue, was to wrestle control over spend away from the business.

In previous posts, we used the term “The Magnificent 7” to describe this new lean but intelligent capability, which will be at the centre of this change. Whether the new team is really a team of seven or 50 doesn’t matter — the point is resource numbers in procurement will shrink by up to 50% in most organizations as technology comes into play and line roles are redefined.

Category management is still relevant, but the focus must be on relevance to business needs. It is critically important that sourcing and procurement focus on effectiveness over efficiency. If procurement is not adding value through innovation, cost leadership or risk management — or ideally a blend of them all — then it’s time to question its relevance and even its existence.

If you recognize any of the following traits in your organization, then you most probably need to review your procurement modus operandi:

  • Procurement is perceived as a bottleneck, with layers of approvals, such that users are circumnavigating the process
  • Spend and performance reporting is largely a manual exercise using rudimentary Excel-based analysis to report company spend
  • Sourcing activity is paper-based or, at best, semi-automated using emailed attachments and the like

If you operate within a competitive industry, there’s no doubt your competitors will be making the move. Circumstances will differ by business, but an action plan would consider the following:

  1. Adopt spend analytics to understand what is being spent with which suppliers, and at what cost. ERP reporting can be slow and clunky; however, there are low-cost cloud-based solutions available that can be up and running within days, pulling data from multiple sources and providing insightful reporting using easy-to-navigate dashboards
  2. Review the level of low value transactional tail spend purchasing activity and determine a solution to radically reduce the cost of managing this area
  3. Migrate sourcing and purchasing activity onto digital platforms. In the same way that spend analytics has moved onto the cloud with offerings at a fraction of the cost of ERP solutions, the same is true of sourcing and purchasing technology, which includes automated PO to e-invoicing solutions.
  4. Restructure the sourcing function, reducing or even removing the transactional staffing element and upskilling the retained lean and intelligent capability.

Understanding the relevance of sourcing and procurement to the business must underpin this change. This may differ by industry, but the direction remains the same. To remain relevant, procurement must turn digital or run the risk of becoming obsolete.

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