McKinsey: driving value in digital procurement
Supply Chain Digital examines McKinsey’s report ‘Driving superior value through digital procurement.’
With the emergence of digital offering a plethora of new opportunities in procurement, it’s vital that CPOs choose the right transformation for their organisation. But with so many options, which of the new digital solutions provides the most value? The digital applications that make a real difference are separated into two broad areas: tools that identify and create value and tools that prevent value leakage.
Tools that identify and create value
Spend visibility tools begin with solutions that pull historic purchase order (PO) and invoice data to create a spend cube. The prevalence of fragmented ERP systems means many multinational and multi-business companies still find it difficult to create even simple spend cubes. Some organisations are automating data cleanup and classification with algorithms that make use of artificial intelligence and self-learning methods.
McKinsey anticipates that solutions that are already available on the market will be added to with additional data sources and the inclusion of basic, category-level key performance indicators (KPIs). For example, they will be able to generate automated price and specification benchmarks across entities, such as price arbitrage analyses or facility management costs per square metre and per person. Prices will be correlated to material cost indices, or to product specifications through linear performance pricing (LPP). Category managers will have automatically generated dashboards and heatmaps at their fingertips to help identify and capture sourcing opportunities. By linking the spend cube solution to company budgets and profit and loss (P&L) planning data in real-time, next generation systems will help reach that procurement holy grail savings that can be tracked directly in budgets and in the P&L.
Despite many systems supporting transactional procurement processes, very few work-flow solutions currently support the generation of comprehensive category strategies and the systematic identification of savings levers. There are emerging solutions that are able to guide category managers through a configurable stage-gate process that includes every stage of a category strategy: understanding demand, analysing the market, generating savings and measuring the effectiveness of introduction.
Tools to prevent value leakage
ERP and transactional systems will manage the procure-to-pay process and performance management systems.
Procure-to-pay solutions were among the initial digital tools available to support operational and tactical procurement activities. Following their introduction in the early 2000s, they have evolved significantly in functionality, covering an increasing scope of the end-to-end process from sourcing, payment of suppliers and extending the requisition management to adjacent areas like expense management. The PTP tools of the future will use the extensive amount of order and invoice transaction data available to allow value generation for core operational activities. This will create predictive order configurations for repeat buyers, reduce processing time and encourage the use of standard order templates. They will also automatically work out potential suppliers for categories not covered by contracts or catalogues, supporting operational buyers by creating more competition.
For many organisations, particularly those with global manufacturing and service footprints, value leakage is still one of the main untapped sources of procurement impact. Advanced compliance management tools will act as an ever-vigilant watchdog that scans every procurement transaction, both structured and unstructured, to identify and quantify the leakages and drive the resolution.
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