Digital Procurement: The Dawn of the Digital Age in Procurement

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Digital Procurement: The Dawn of the Digital Age in Procurement

Hardly any other factor has shaped the business-to-business landscape over the past few years as strongly as digital transformation. Formerly dismissed as a "buzzword" and "trend", digitalization has become increasingly important in the business sector as part of future projects such as "the industrial internet of things" or "Industry 4.0". The manufacturing industry has been able to develop previously inconceivable potential, for example, through additive manufacturing and the networking of robot systems. Other industries, such as logistics, have also recognized the advantages of digitalization and are benefiting from it by means of (semi-)autonomous vehicles and automated notifications. Experts see a great need for procurement to catch up. Here, companies are still in an experimental phase. Digital procurement - a new development in procurement – should help change this in the future and unfold undreamt-of potential.

Digital Procurement, e-procurement and e-sourcing

But what exactly is digital procurement? The term digital procurement is often mistakenly equated with e-procurement and e-sourcing. e-procurement describes the electronic procurement of goods and services at an operational level. The use of the Internet and information and communication systems such as EDI and ERP systems automates paper-based processes within a procurement cycle. This eliminates many analogue process steps, resulting in increased efficiency. In a sense, e-sourcing is the counterpart to e-procurement: unlike e-procurement, e-sourcing describes strategic procurement using electronic tools.  By formulating company-wide requirements and preselecting suitable suppliers, it provides a framework for action within which e-procurement operates.

Digital procurement, on the other hand, is a superordinate term that includes e-procurement and e-sourcing. It takes advantage of disruptive technological achievements to simplify procurement for both buyers and suppliers and thus make it more efficient. Such solutions already exist and appear in a variety of forms. For example, machine learning can now be used to categorize and manage purchases in real-time. By using artificial intelligence, reliable demand forecasts or smart contracts, a fully automated process of agreements can be guaranteed. The network Procurement Leaders found that the 500 top-selling companies in the world could save around $86 billion if they used fully automated digital procurement technologies. Many companies are aware of the potential of digital procurement. They are therefore increasingly investing in the development of new digital technologies. According to management consultants Bain & Company in cooperation with database provider Crunchbase, global investors invested approximately $475 million in digital procurement solutions in 2017, compared to $378 million in 2014.

New Procurement Technologies are on the Advance

Today, there are numerous digital procurement solutions. They differ in certain aspects, such as their technological maturity or their degree of diffusion. Deloitte distinguishes three classes of procurement technologies: "core", "maturing" and "emerging" solutions.

Core solutions are those systems that have found their way into numerous procurement departments and technically well-developed. In addition to above-mentioned e-procurement and e-sourcing, they also include electronic invoices and digital catalogues.

Maturing systems require little investment, but due to their still high maturity potential, they are not very widespread in procurement. However, maturing technology can develop into a core solution if it unfolds its full potential through innovation efforts and becoming more attractive for its users. One of the better-known maturing solutions is computer-controlled process automation. As software it recognizes and learns patterns in procurement, derives rules to support the purchasing process or automatically executes defined activities within the process. 3D printing technology could also experience a major breakthrough in the near future. In 3D printing, a physical object is generated layer by layer on the basis of digital design data.  At present, this type of production is mainly used for prototyping and could, therefore, help with make-or-buy decisions in the future. It is also imaginable that the system could be used to manufacture spare parts for production, which in turn could bridge delivery times and avoid production downtimes. 

Another increasingly popular maturing class technology is digital B2B platforms that overcome language and geographic barriers by bringing together buyers and suppliers from around the world via the Internet. Often, these platforms are driven by innovative start-ups. As pioneers, they combine the know-how of digitalization and the expertise of their industry in order to use their (meta-) search engines and marketplaces to drive digital progress in their field and minimize the time required for product research. Users appreciate these network platforms above all for the high information content and the high transparency of relevant product and provider information. They also make the research and discovery processes for products and providers simpler and more efficient.

Emerging technologies currently have the smallest influence on procurement. They are mainly used as niche applications in procurement. However, there is also great potential, which still has to be developed through research and development activities in order to influence future procurement behaviour. Blockchain and cyber tracking systems, for example, can be assigned to emerging technologies. For the first time, blockchain received a lot of media attention in the context of the cryptocurrency, Bitcoin. As a cryptographic data structure, however, its areas of application are more diverse than previously assumed: in addition to auditing and use on the capital markets, blockchain is mainly used in supply chains.  In procurement, the secure peer-to-peer network of blockchain technology can be used to check and confirm purchase-to-pay processes and then automatically release payments. Today, cyber tracking technologies are used in procurement as part of supplier management. This involves monitoring the online activities of vendors or suppliers during their delivery process and measuring and evaluating their behaviour and performance. The data collected can then be used not only to make more accurate predictions about suppliers but also to identify and eliminate weak points in the procurement process.

Digital Procurement will Change Procurement Significantly

The increasing demands of end consumers, environmental challenges and the growing complexity of supply chains as a result of globalization challenge procurement specialists. However, innovative digital technologies can help overcome procurement barriers. Digital tools enable better networking and evaluation of existing inputs such as physical documents (e.g. contracts or invoices) as well as data on suppliers and their performance. This not only allows to make better purchasing decisions in the short term but also to increase the efficiency and quality of procurement in the long term. The widespread use of several digital procurement solutions also enables more sophisticated strategies, improved process management, more accurate risk assessments in supplier selection and cost optimization in procurement. For many companies, this means that they have to deal with digital procurement and its technologies and trends to stay ahead of the competition. Some pioneering companies are already benefiting from innovative procurement solutions in the form of precise demand forecasts, automated purchase-to-pay processes and proactive supplier management. In addition to their tireless development efforts, they have internalized the logical assumption that digital change is not a trend, but rather a long-term corporate task.

Published on 2019-12-02 at 10:15 by chembid

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