Leading Fortune 500 companies know that treating procurement processes strategically will give their business a competitive edge.
Once a company has decided to treat procurement more strategically, what do they need to focus on? There are three essential underpinnings of every successful procurement process:
Process - What insights can be gathered from x-raying your procurement process?
Technology - What Technologies can be leveraged to drive value?
Operating Model - How should a procurement team be structured to optimize its functions?
The smart first step is to identify where the gaps and weaknesses are in the procurement process. An X-ray using process mining will determine how close a company is to achieving value from this process.
Once the gaps are diagnosed, a company can focus on applying the right solutions – redesigning the process and implementing technologies to automate it. When combined with the best operating model, the process X-ray and supporting technology will elevate the procurement function to a strategic advantage. The best operating model for a business will define roles and responsibilities for procurement, such as how much decision-making to centralize.
Let’s start off by explaining the process X-ray.
1. Process and Value – X-Ray Your Process
A doctor wouldn’t perform surgery without an X-ray. Your business shouldn’t attempt to optimize the procurement process without one either. While the results aren’t as life-threatening as a surgeon operating without quite knowing where the disease is, “guessing” about how your processes are working is time consuming and often wrong.
With a process X-ray, a company will know exactly how its processes are functioning based on data. The X-ray will:
Provide an as-is assessment of the current process
Identify process variants
Discover bottlenecks between steps
Determine frequency of unwanted activities, such as rework
Once you understand your processes, you can nudge them closer to the happy path of how they should work (as shown in the image below). 2. Technology and Value: Choose the Right Tools The technologies exist to automate procurement, from digitizing invoices to using artificial intelligence to identify trends. Companies who don’t use technology to digitally transform procurement processes will never maximize those processes.
We’ll go into detail in a future post, but here’s a list of essential technologies for procurement automation and where they’re most often useful:
Robotic process automation (RPA)
Accelerate P2P workflows
Perform 3-way match to improve accuracy or automation requisition-PO conversion to decrease labor costs and improve cycle time
According to McKinsey, RPA provides an ROI of 30 to 200% in the first year of implementation
Intelligent Document Processing (IDP)
Use AI-based document classification, extraction, and validation to automatically understand and process purchasing documents and data
AI analytics
Use AI analytical tools to X-ray your current P2P process and conduct forecasting to optimize future procurement
Assess suppliers to develop a sourcing strategy and forecasting demand and supply trends
Discover process gaps and perform root cause analysis
Smart workflows
Use smart workflow solutions to manage and orchestrate business processes that combine the other technologies
Minimize process variation and eliminate undesired process steps
3. Operating Model and Value: Structure Your Team Correctly
How a company’s procurement department is structured affects the value that company can extract from procurement process improvements. There are three maturity levels for procurement team structure:
Decentralized
Centralized
Federated
Best-of-breed procurement teams usually evolve from a decentralized to centralized to a federated structure. As they mature, procurement teams will evolve the kinds of value they are working to improve (e.g., from keeping procurement labor costs low to obtaining components in a new market).
Decentralized procurement is typical in the beginning stages of optimizing processes. There isn’t a group procurement process and buyers report to their own business units. While some coordinated initiatives may be present between business units, there’s no coordinated strategy.
The next step up is centralized. Buyers report to a group procurement department that makes decisions over all procurement decisions and strategy.
The apex of procurement team structure is a federated approach (Oliver Wyman is a good resource here). As focus on value matures and level of sophistication in a company’s approach to procurement increases, best-of-breed procurement teams usually evolve to federated team. For instance, in a federated structure the procurement decisions about strategic materials may be centrally made. Local procurement teams could have more autonomy for procuring lower-value materials. The exact mix depends on industry, materials needed, supplier availability, and more. How should a company decide if a more centralized or federated procurement is a better fit?
That decision depends on a number of factors. But three of the more important variables are:
Supplier market
User needs
Company stakes
If your supplier market is global (or at least large), and your user needs are regular and standardized, and procurement is highly strategic – then your team should be more centralized.
Ready to Get the Most Value From the Procurement Process? We began this post with process and an X-ray. The next post in this series will take a more in-depth look at the process X-ray.
But why wait?
Doculabs can identify your procurement process gaps. We do this with a “Report Card” approach. It’s an X-ray of your current data based on a combination of Doculabs industry expertise and process mining from Celonis to:
Diagnose how well core processes are performing
Provide an executive summary report that includes process improvement recommendations to help you budget for 2023 and beyond