Business success increasingly hinges on supply chain innovation and procurement advantages
Apr. 26, 2014 02:00 PM
The power of data-driven business networks and the analytics derived from them are increasing, but how do enterprises best leverage that intelligence as they seek new services, products and efficiency? How do automation and intelligence enter the picture for better matching buyers and sellers?
BriefingsDirect had an opportunity to learn first-hand at the recent 2014 Ariba LIVE Conference in Las Vegas. To learn more about how business -- led by procurement -- is changing and evolving, and how to best exploit this new wave of innovation, we sat down with Rachel Spasser, Senior Vice President and Chief Marketing Officer at Ariba, an SAP company, and Andrew Bartolini, Chief Research Officer at Ardent Partners in Boston. The discussion is moderated by me, Dana Gardner, Principal Analyst at Interarbor Solutions.
Gardner: How is procurement maturing, and how do you see it expanding in terms of its strategic implications for any business?
Bartolini: Over the past 15 years, we really have experienced a procurement revolution, although at times it feels a little bit more evolutionary in nature.
In 2006, the average procurement organization, from our research, managed about 30 percent of their total spend. A mere seven-and-a-half years later, that number has doubled. So the average procurement organization is now influencing a majority of their total enterprise spend. The best in class, the leaders in the field, are now managing between 85-95 percent of total spend.
So procurement has risen in stature. There is now a chief procurement officer (CPO) or a single point of contact within a procurement operation at about 85 percent of organizations.
Procurement has stepped out of the back office and into the front ranks, and continues to gain in stature. As it gains in influence, it continues to guide organizations in making smart decisions within the organization and identifying the right business partners outside the organization.
Gardner: So procurement is really expanding, that it's growing up in a sense, not just a static business transaction, but something that is dynamic, living, and growing. Are more and more people getting involved with some of these newer technologies?
Spasser: If you think about the history of procurement, it really was a back-office function that was primarily focused on cost savings in a very tactical way for most companies. As we’ve seen that function evolve over the past 10 years, it has become much more strategic in nature, and it has an impact on much more than just cost savings for an enterprise.
There have been a lot of technological advances that have given the procurement professionals the ability to move from manual processes and manual tasks to automating those and therefore focusing on higher-order opportunities to deliver value to the company.
More getting involved
More people are getting involved. For the first couple of years, there were a lot of people sitting on the sidelines, watching what was happening and trying to understand how that could impact their businesses.
Today, people are embracing networks and embracing the opportunities that networks bring, such as e-invoicing. Today, something like 70 percent of companies are using e-invoicing in some capacity. That's a huge improvement and growth over even just a few years ago.
Gardner: We’ve seen the role and impact of social and community, of community vetting of processes, and people looking to their peers for trust and feedback. We know that’s impacted a lot of things. Is this playing a role in procurement as well? Is there a social factor here?
Spasser: There are plenty of opportunities in a couple of areas. First of all, from a risk-management perspective, having more information -- information that's both qualitative and quantitative -- is only going to help procurement organizations make better decisions.
When you look at the social and business networks, the community intelligence, and the data and the insights that live within that network, all of a sudden you’re providing infinitely more information and making the procurement executives smarter, enabling them to make better business decisions, and changing the nature of their game.
Instead of having to respond reactively to changes within the macro environment or within their supply chain, you now have the ability to arm them with information that can make them proactive in their decision making, and proactive in their approach to finding new suppliers, managing existing suppliers, and that really does change the game.
Gardner: It strikes me that the transparency and the ability to qualify and quantify have given us some really new and interesting services such as Dynamic Discounting, like the ability to create AribaPay, and also learn about innovation in the field. We have heard about MSC, where they’re pushing their ability to deliver inventory right into their customer's environment. So, it’s a very fertile time for business procurement processes.
Any thoughts about where the next level of analysis or insight will come?
Spasser: Absolutely. Just going back to your comments on Dynamic Discounting and AribaPay, when you look at procurement, both Andrew and I have talked about it becoming a more strategic function.
When procurement starts impacting the cash flow and the working-capital management of companies through opportunities like Dynamic Discounting or AribaPay, all of a sudden, it enters a completely different realm in terms of its importance and in terms of the amount of respect and inclusion that it gets sitting at the executive table within companies.
If you arm people with information, they have the ability to make better business decisions.
When you talk about what’s next, there are lots of different directions in which procurement can go with the information that they’re given. We talked about risk management, but as companies are coming up with corporate-responsibility mandates, whether that’s sustainability or green or fair labor practices, they can be negatively impacted if they don't truly understand every tier within their supply chain.
And we see this with companies like the Gap or Lululemon in the consumer packaged goods (CPG) and retail space, where these companies have really suffered severe brand damage as a result of having issues within tiers 2, 3, 4 and beyond in their supply chain. That’s one example, but it's a powerful example of how, if you arm people with information, they have the ability to make better business decisions.
Whether that’s a business decision related to offering a discount or whether that’s a business decision about choosing to do business with a supplier or not, based on what you know about them or their second and third tier suppliers, all of this is really important and it's changing the nature of procurement.
Gardner: You brought up governance, risk, and compliance (GRC). I had a very interesting discussion here at Ariba LIVE about InfoNet, using that in association with the data from Ariba Network, and reducing that risk by being able to predict using advanced algorithms and very complex and powerful analytics platforms to see into the future and predict when risks are unacceptable.
Andrew, you’re saying that procurement taps this intelligence, and things like InfoNet have predictive abilities. What is the market telling you, and how far are we into this? Have we just scratched the surface of analytics or are we into the third inning?
Early in the game
Bartolini: With the maturation of the procurement function, we’re still in the early part of the ballgame. If you look at the leading procurement organizations today, the characteristics of these best-in-class organizations are process, discipline, an ability to execute, and driving efficiencies and effectiveness.
What's now prized within the larger enterprise and within procurement itself is the ability to be agile and to drive innovation. This has effectively pulled procurement further into the spotlight, as it really does serve as a process hub within the organization and it really does serve as the prime relationship point for third-party suppliers.
The good news in all of this is that the technology that was introduced also around the time that we started thinking about the procurement revolution has finally started to catch up to the actual user needs, from a usability standpoint, from an integration standpoint, from a time-to-value standpoint.
We’re seeing organizations now move from the initial adoption, where they are just trying to get activity through their systems, to becoming more effective in their usage of these systems and technology.
The skills that reside within the average procurement organization are not where they need to be to be thought of as world class or operational excellence.
When you look at the challenges that a CPO faces, a lot of that is driven by the talent that resides within the organization. Sometimes that's doing more with less. It’s very hard for CPOs to get a new job requisition, even in very large companies, it's a challenge to get that investment in procurement.
Also, the skills that reside within the average procurement organization are not where they need to be to be thought of as world class or operational excellence.
Enter technology and automation. When you look at the reams of data that sourcing and procurement activity generate, the skills of the average procurement organization to go in and analyze and find the right trends, whether that’s pricing trends or identifying key risks, is still not where it needs to be. So, it’s early stages there.
But with things like InfoNet and business networks you’re starting to see the co-location of transactional information, communication that supports those transactions, and then an ability to analyze and make decisions based upon that, all within one central location. That's a very powerful asset for procurement.
Gardner: And not only in one location, but in a cloud environment, where information from an entire industry can be brought together with the proper anonymization, security, and privacy in place -- but then the insights can be global or scaled down to individual organizations.
Bartolini: This is an area where enterprises are finally opening up. I worked in this industry 15 years ago, and everything was very proprietary -- our requirements on certain products or items or how much we were spending.
The Internet has really opened it up. Information is at everyone's fingertips. Organizations are starting to understand that there is value that can be created by sharing information in an industry, and particularly with trading partners.
From our research, we’re seeing that organizations can invest in a business network today and get a payback within a year, just based simply on transactional efficiencies.
Where this gets more interesting is when you start to introduce other social aspects. When you start to introduce third-party specialists, who can offer services that add value to all of the participants in a network, it becomes a very interesting place to be. That’s why there's such interest and excitement around business networks.
Leveraging specific skills will be more important, whether that's through contingent workforce or through hiring to very specific skills.
Gardner: It strikes me too that procurement is expanding its importance to companies. When we think about some of the labor issues that many are forecasting with the workforce of the future, it’s going to be difficult to get a highly skilled full-time employee. Or you might want to have them for a shorter period of time. So procurement becomes a facet of hiring. It becomes a labor-acquisition process as well, and then, of course, it goes to more services than just products or merchandise alone.
Rachel, the question is how strategic do companies view this? Andrew says that we need to get more competency and sophistication in procurement. Do companies appreciate that this is really more and more a part of their core assets strategy and a core competency?
Spasser: Definitely. Even this morning, I was speaking with a number of CPOs who talked about human resources as a key factor in whether they’re going to be able to get to the next business level.
I would agree wholeheartedly with Andrew that the skill set is going to be different than it has been in the past. Leveraging specific skills will be more important, whether that's through contingent workforce or through hiring to very specific skill sets.
One of the interesting things that we’re seeing is that, in a lot of companies, the procurement function becomes a rotation within the executive ranks, as they’re bringing people up and training them to be in higher levels of management. We see many of our customers taking people who really don't have a traditional procurement background and cycling them through the procurement function.
In fact, SAP is doing that itself. Marcell Vollmer, who has been a great advocate of Ariba, is not a procurement guy by trade, but has really made a huge impact on SAP procurement because he brings a different skill set. He brings that analytic background, and he brings that general business and relationship management savvy.
When you look at the types of spend that companies are trying to attack today, you’re looking at complex services and you’re looking at a contingent workforce. Those take on a life of their own, because they are very, very different than buying a physical good.
We live in a service economy, and as that continues to evolve, it’s going to become more and more important to procurement and to companies as a whole.
Gardner: Andrew, thinking a little bit toward the future, we’ve talked about procurement now having a heightened role and a larger profile because of the analytics that are being brought to bear: The wider purview across services, and the impact with human resources, rather than just goods and materials and facilities.
As we get to more of a digital economy, a networked economy, like we’ve seen in consumer behavior, what do you see for companies when it comes to this notion of a shared supply chain -- that we’re all interdependent parts of a supply chain, and that we need to be thinking about it differently? Where is the shift in thinking that needs to come, and where does your crystal ball show you we’ll be in five years?
The consumer today really expects better, newer, and more innovative products in a rapid fashion and at a cheaper cost.
Bartolini: The consumer today really expects better, newer, and more innovative products in a rapid fashion and at cheaper cost. That's the world of procurement.
If you’re a procurement professional and your supply base looks much like it did 10 years ago, there are problems on the horizon. If your supply chain and your supply base looks like it does today come 10 years from now, there’s going to be questions as to the viability of your company.
The speed of business is most visible in areas like consumer electronics. You see the leaders in smartphones in one cycle are out of business five years later. This is happening in other supply markets. It’s not as visible, and maybe it's not as fast, but it is happening!
Organizations understand that the window of opportunity to generate a premium on their products and services has collapsed, and they’re increasingly relying on their supply chains to support capitalizing on those opportunities. That really creates a shift from net-sum negotiations to win-win negotiations. That creates a shift from managing contracts and service-level agreements (SLAs), to managing business outcomes. That really changes the view of a supplier from an order taker to one that’s a key collaborator.
Gardner: Rachel, thinking about organizations wanting to do this better, maybe they listen to this podcast or read this and they think, “I see procurement as more of a core competency, having a greater impact on our company. If we need to move at the speed of business going forward, we need to get better at this.” How do you start? Any ideas about resources, methodologies, and workshops? How do you get a new procurement competency process going in your organization?
Spasser: One of the greatest ways to learn is to learn from your peers. Conferences like Ariba LIVE really provide that opportunity, because you get the best of the best, and they’re sharing their true stories. And it's not just success. They’re sharing their pitfalls too, and they are sharing how they navigated through those to achieve the business outcomes that they sought.
Talk to peers
There are lots of books to read and experts to talk to, but I think that the best way to learn is to talk to peers who have been through the same process and who have candid feedback and candid advice to share.
Gardner: Perhaps identifying leaders and influencers in your field and following them on blogs or Twitter or other community-based and social-based interactions?
Spasser: Absolutely. There are plenty of communities, whether they’re on LinkedIn or whether they’re proprietary, like Ariba Exchange, and these discussions are happening everyday. I would encourage people to seek those out, participate in them, go to events, and really learn from those who are leading the way, because if they are not going to be on the train quickly, they are going to find themselves left way behind at the station.