McKinsey: driving value in digital procurement
With the emergence of digital offering a pl...
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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EU and US agree end to Airbus-Boeing supply chain tariffs
The EU and US have agreed to resolve a 17-year dispute over aircraft subsidies, suspending tariffs on billions of dollars' worth of goods that have plagued procurement leaders on both sides of the Atlantic.
Under an agreement reached by European Commission Executive Vice-President Valdis Dombrovskis and US Trade Representative Katherine Tai on Tuesday, the tariffs will be halted for a period of at least five years.
It will bring an end to punitive and disruptive levies on supply chains that have little to do with the argument, which became embroiled in the trade battle. Businesses on both sides of the dispute have been hit with more than $3.3bn in duties since they were first imposed by the US in October 2019, according the EC.
The US imposed charges on goods upto $7.5bn in response to a World Trade Organisation ruling that judged the EU’s support of Airbus, its biggest aircraft manufacturer, unlawful. A year later in November 2020, the EU hit back. The WTO found the US had violated trade rules in its favourable treatment of Boeing, and was hit with EU duties worth $4bn.
In all the tariffs affected $11.5bn worth of goods, including French cheese, Scotch whisky, aircraft and machinery in Europe, and sugarcane products, handbags and tobacco in America. Procurement leaders on both sides of the fence were forced to wrestle with tariffs of 15% on aircraft and components, and 25% on non-aircraft related products.
Boeing-Airbus dispute by the numbers
- The dispute began in 2004
- Tariffs suspended for 5 years
- $11.5bn worth of goods affected by tariffs
- $3.3bn in duties paid by businesses to date
- 15% levy on aircraft and 25% on non-aircraft goods suspended
Both sides welcome end to tariffs
European Commission President Ursula von der Leyen branded the truce a “major step” in ending what is the longest running dispute in WTO history. It began in 2004.
“I am happy to see that after intensive work between the European Commission and the US administration, our transatlantic partnership is on its way to reaching cruising speed. This shows the new spirit of cooperation between the EU and the US and that we can solve the other issues to our mutual benefit,” she added.
Both aircraft manufacturers have welcomed the news. Airbus said in a statement that it will hopefully bring to an end the “lose-lose tariffs” that are affecting industries already facing “many challenges”. Boeing added that it will “fully support the U.S. Government’s efforts to ensure that the principles in this understanding are respected”.
The US aerospace firm added: "The understanding reached today commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action."
This week’s decision expands upon a short-term tariff truce announced in March this year. The EC says it will work closely with the US to try and further resolve the dispute, establishing a Working Group on Large Civil Aircraft led by each side’s trade minister.
Airbus last month signalled to suppliers that post-pandemic recovery was on the horizon, telling them to scale up to meet a return to pre-COVID manufacturing levels. “The aviation sector is beginning to recover from the COVID-19 crisis,” said Airbus chief executive Guillaume Faury, adding that suppliers should prepare for a period of intensive production “when market conditions call for it.”