Digital Transformation Ensures Tight Integration between Procurement and the Supply Chain

In a world of disruptions, digitization, shorter innovation cycles and individualized products, companies are focusing on value creation, end-users’ experience and driving digital transformation throughout the entire organization. Supply chain management (SCM) spans the range of processes involving customer demand, sourcing, production and fulfillment with an eye toward creating value by building a competitive infrastructure, leveraging worldwide logistics, matching supply with demand and measuring performance. Procurement entails providing all goods and services needed at every step of the supply chain, including manufacturing.

What exactly is the role of procurement in supply chain management? Let’s start by distinguishing among procurement, purchasing, supply chain management and logistics — and who will become the future value driver of his enterprise or networks:

• Purchasing is the buying of goods and services, whereas procurement is broader and includes market research, category management and analysis as well. These terms are often used interchangeably, but we suggest differentiating them by considering procurement as the term covering strategy to execution from sourcing and operational procurement to settling whereas purchasing is the transaction itself.
• Supply chain management is the flow of goods and services, financials and information from the point of origin to that of consumption, so it is much more than just physical movements of goods from A to B or smaller sub-processes like inbound or outbound logistics.
• Logistics derives from the ancient Greek term “λογιστικ? (logistikē),” referring to the weapons, horses and food provided for the ancient Greek and Roman armies. By ancient times it was already a vital factor in conquering foreign countries and extending competitive advantage.

Fig. 1: Supply Chain and Source to Settle Process

A helpful mnemonic for understanding the supply chain is the SCOR (Supply Chain Operations Reference) model. (See fig. 2.) It consists of 5 core processes which are plan, source, make, deliver and return. This covers planning (e.g. S&OP), sourcing (procurement), making (i.e. production/in-bound logistics), deliver (i.e. delivery, outbound logistics) and return (i.e., returned goods, complaints).

It is important to note that this model does not focus solely on the firm, but rather on the entire supply chain, extending all the way to the suppliers’ suppliers and the end-customer. So, what does it mean to achieve end-to-end transparency through digital value chains?

It means there isn’t a single interface or function — e.g. procurement — managing a company’s direct/tier-1 suppliers at the “source-deliver” interface or logistics team managing the delivery to a wholesaler at the “deliver-source” interface. Instead, an organization digitizes the entire chain of supplies across all production steps through delivery to the end-customer. This holistic approach is not new, but thanks to advances in cloud-based technologies, procurement leaders can now manage many more of these planning, sourcing, production and distribution steps in parallel and in real-time.

Fig. 2: SCOR Model

Uncounted Supply Chain, Procurement Excellence Programs, Six Sigma, Lean and outsourcing initiatives have been run throughout the past 2 decades, reducing lead-times, capital tie-ups and risks. Supply chains have become much more agile, adaptable and aligned, according to the “Triple A” principle from Prof. Hau Lee (Stanford).

The challenge facing businesses — to deliver customized, high-quality products, fast and at reasonable costs — can only be achieved when approached holistically, evaluating the supply chain in detail (including research and development) across all companies involved.

What does this mean for procurement leaders? When they focus on strategic, value-generating activities, like driving supplier innovations, risk management and securing a sustainable supply chain, the future Chief Procurement Officer (CPO) might become a “Chief Value Officer” or a “Chief Collaboration Officer,” with a defined and differentiated role to the existing “Chief Supply Chain Officer.”

Today’s sequential processes, where procurement occurs in isolated steps, will be outdated soon, as information sharing and hyper-connectivity rapidly enable companies to serve customers much faster and more individually (one-piece flow).

The digital transformation of procurement and supply chain management has already started. Are you already part of the global transformation to become future-ready?

Marcell Vollmer is chief digital officer of SAP Ariba and the former chief procurement officer of SAP.

SAP is the market leader in business applications; and SAP Ariba is the world’s largest business network, linking together buyers and suppliers from more than 3 million companies in 190 countries.

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