The Digital (and not only) Transformation of Procurement

by Dr. Sotiris Gayialis

The Path to Transformation

Looking back in the late '90s, during my diploma thesis at NTUA, dealing with the reengineering of the Greek governmental procurement processes, I can recall some of the challenges faced by the process owners: Complex and ineffective processes with unnecessary bureaucratic steps and back-and-forths, large volumes of data on paper and in Excel files, systems that didn't communicate with each other, lack of transparency issues, significant delays in creating and executing procurement programs, higher costs than budgets despite centralizing purchases, dissatisfied clients (public entities), overwhelmed employees due to the workload, and generally a situation that seemed difficult to manage.

During the same period, electronic procurement models were being implemented in businesses as well as in the public procurement of other countries. Technology seemed to be the solution to the aforementioned problems. Nowadays, technological improvements prove to be a solution when combined with changes in processes, but even more so with changes in procurement strategy. Without these changes, the benefits of electronic systems are not perceived. Technology is the enabler of change but not the panacea for all problems. Therefore, one of the reasons (but not the only one) for the significant delay in adopting electronic procurement in public procurement was the absence of radical changes in processes and strategy.

These changes shape what is known as procurement transformation, which is the desired outcome for both businesses and the public sector. Procurement transformation includes a series of initiatives to improve process efficiency, reduce costs, increase transparency, and achieve higher quality of purchased products and services.

To achieve these changes, organizations will need to clearly define, understand, and analyze how they currently operate, adopt new strategic approaches and best practices that enhance the existing methods, and then proceed with the digital transformation of procurement, which will ensure the desired improvements.

Initiatives and Actions for Procurement Transformation

As mentioned earlier, transformation is certainly guided by technology, but not exclusively and not necessarily primarily.

Initially, new procurement strategies must be explored and adopted.

These could be strategies based on data analysis and demand forecasting, taking into account the categorization of materials and suppliers, applying the total cost of ownership analysis to determine the true cost of goods and services, conducting spend analysis, as well as evaluating supplier performance. These strategies can help organizations improve their relationships with their suppliers, identify new suppliers, or negotiate better prices for goods and services. As evident, procurement strategies should be linked to the overall supply chain strategy, and decisions made should explore their impact on the value chain of each organization.

Certainly, processes need to be improved and redesigned.

New processes may need to be introduced concerning the selected strategies, as well as the information systems that will support them (IT-driven BPR) since these systems often incorporate a multitude of implementations and best practices. The objective should be the efficiency of the processes, including those related to vendor management, contract negotiation, procurement execution until payment, and evaluation. Changes in the processes may raise the need for new approval policies, new monitoring activities for purchases, or the introduction of new tools and technologies for automating certain steps, such as those related to invoice management, result assessment, or risk management. In the analysis of the processes preceding their redesign. Business Process Mining tools can be utilized to gain insight into the actual execution of procurement and the different cases or exceptions that may occur.

Finally, the appropriate systems and technologies must be selected and implemented.

By identifying the manual activities within procurement processes or the activities reliant on inadequate systems, and by introducing new technologies and electronic systems, organizations can reduce the time and effort required for the purchase of goods and services, improve the quality of outcomes, and reduce costs. At the core of such initiatives are the modern specialized procurement systems that typically operate in the cloud and are integrated with the ERP systems of organizations. These systems can support procurement strategies as well as operational-level processes. The benefits of cloud-based systems are also well-known in terms of flexibility, accessibility, scalability, and real-time collaboration. A significant characteristic of modern procurement systems is their ability to facilitate activity monitoring, which can increase transparency and reduce the risk of fraud or corruption.

Additionally, there are process automation systems (known as Robotic Process Automation) that can execute standardized steps, such as entering invoice details, receiving products using Internet of Things (IoT) technology, executing repetitive procurement tasks, or calculating specific metrics and KPIs.

Machine Learning technology and Big Data analytics can provide real-time analysis of buying products and services, as well as spend analysis. They also support decision-making related to demand forecasts, selection of suitable forecasting models, inventory replenishment, and ultimately, the creation of the procurement plan.

More broadly, Artificial Intelligence technology can be used in various procurement-related issues. For example, in contract management issues by identifying critical information from large volumes of agreements, in detecting errors in data (e.g., from suppliers or payment terms), or in identifying risks and cases of fraud. It can also be used to guide procurement employees to the appropriate purchasing channels (guided buying).

Finally, Blockchain technology can enhance transaction transparency, product authenticity, and traceability, if these are critical business requirements. Smart Contracts, leveraging blockchain technology, can systematize, simplify, and accelerate transactions between the enterprise and its suppliers, as they streamline specific purchases in just a few steps.

Concluding

Procurement is a functional area where significant savings can be achieved while also contributing to the organization's value chain, leading to better results. The transformation of procurement is an ongoing process that requires careful planning and execution to be successful. It necessitates a strategic review of procurement, as well as redesigning of processes, and embracing modern IT technologies.

The factor of personnel training and the familiarization of the collaborating suppliers with the new processes and systems should not be overlooked. This ensures acceptance and adoption of the changes brought about by the transformation.

Organizations that implement the transformation of procurement can achieve improved decision-making, better expense management, increased efficiency, reduced costs, stronger supplier relationships, enhanced compliance with regulations and policies, and ultimately, improved overall performance.

Lastly, it should be emphasized that procurement should not be viewed as an isolated function that only brings local benefits to performance and cost. Instead, it should be seen as part of the organization's supply chain and the broader chain, involving partner suppliers as well as internal (e.g., production) or external customers of the purchased products and services. Any effort to change the strategy and processes must seriously consider the impacts as well as the benefits to the entire supply chain.