Getting Your Procurement Organization Ready for Digital

Written by Nina Haidinger, Dr. Wolfgang Schnellb?cher, Dominik Steffani and Daniel Weise

Digital is transforming procurement at an unprecedented pace. Robotics are taking over operational tasks, artificial intelligence is driving decisions, and big data is becoming the must-have backbone of every well-oiled purchasing function. CPOs need to ask themselves how to set up their organizations to best leverage these new solutions and tools and they need to think holistically. Every role will change, from strategic buyers to purchasing controllers. Some, like robotic maintenance engineers, will emerge and others, such as operational and transactional buyers, will largely disappear. Leading companies that actively transform their procurement organizations gain a substantial strategic advantage over their peers due to the much broader value they generate.

We have identified five key strategic value dimensions for procurement: savings, quality, speed, innovation, and risk. CPOs need to consider the strategic priorities of their business and the impact of new technologies in supporting their value priorities. While savings are important in most procurement organizations, the priority of the other dimensions varies depending on the needs of the individual business. For example, the priorities of an automotive OEM currently might be savings and securing the most innovative solutions for e-mobility or autonomous driving. Procurement-driven innovation requires building up supplier-scouting capabilities, such as a technology radar. For a fashion retailer, speed is what matters most. CPOs need to make sure that the most desirable articles—designed in the EU, produced in Asia—are getting into stores before they go out of fashion. The focus on speed leads to higher automation levels in operational procurement.

After prioritizing strategic value, the design phase of what constitutes best practice for digital procurement organization can begin.

Starting Position: What Makes a Conventional Procurement Organization Excellence?

 When reviewing their organizational design, CPOs strive for excellence throughout the entire procurement process, from the business partner to the supplier. Strategic buyers define how a category is to be sourced and perform tasks spanning the entire planning-to-strategy (P2S) and source-to-contract (S2C) processes. Equally, the optimal procurement organization needs to take into account the categories sourced as well as the geographic location of business partners and suppliers alike. The objective of strategic procurement is to fulfill business requirements while maximizing the value delivered from the supply base. Operational procurement provides support and drives the procure-to-pay (P2P) processes. In addition, process design often provides support for procurement control and research. To gain a holistic view, CPOs should be mindful of six elements of excellence when defining a best-in-class procurement organization: strategic buyers, operational/transactional buyers, support teams, role definitions, cross-functional interfaces, and the overall sizing. Each of the six excellence elements is made better by digital procurement.

Figure 1: The six elements of excellence in procurement organization

1. Strategic buyers: The objective of strategic procurement is to satisfy business requirements while maximizing the value delivered from the supply base. There are two core tasks in the organizational setup. The first is to find the right number of strategic buyers. Typically, a third of the employees in the department are dedicated to strategic tasks. Second, these strategic resources must be allocated to the categories where they can create the highest value for the business and within the respective geographies—in most companies meaning the highest savings success. In advanced procurement organizations, the understanding of value creation goes beyond savings and includes quality, speed, innovation, and risk. This requires different activities, like regularly screening of suppliers for innovation to fulfil other priorities. The significance of strategic procurement is boosted by digitization, which opens up numerous possibilities for generating value. The following outlines a brief list of examples:

• BCG’s AI negotiation coaches increase savings by telling buyers which approach to use in go-to-market situations, leading to significantly increased cost savings and increased speed.
• AI-based mechanisms improve quality, as they can predict the category group and supplier with which the next incident is likely to occur.
• Robotics makes procurement three to five times faster, increasing speed in even conservative scenarios.
• AI is helping us identify which supplier has the highest innovative potential and how to incentivize it best.
• Blockchain helps us to prevent risk in several links in the supply chain. For instance, with BCG the De Beers Group launched the blockchain platform Tracr. The platform traces the procurement path of diamonds end-to-end to allow a diamond’s natural creation, provenance, and ethical sourcing to be authenticated. Employing blockchain technology, Tracr creates trust among the various industry players and instills confidence in the end-to-end traceability of diamonds.

Consequently, based on these new possibilities strategic buyers will have to be relocated among categories where the highest value can be generated. In the automotive industry, for example, the sourcing of new technologies has become a core task in the advancement of e?mobility or UI and UX. Strategic buyers are delegated to categories with a small spend but high innovative potential, leveraging big data and other solutions to find the most promising suppliers—even among smaller start-ups. Every CPO must frequently review where this must be done, taking advantage of new tools and solutions such that the highest value can be generated for their company and allocating their strategic buyers accordingly.

2. Operational/transactional buyers: The team of operational buyers needs to be set up intelligently. Their activities include operational tasks, such as smaller negotiations and supplier follow-ups, as well as transactional and repetitive activities, such as processing PRs to POs. The operational/transactional teams represent by far the largest group within the procurement department. They need to not only be the correct size, they must be equally well integrated into strategic teams. Operational tasks often closely follow strategic activities. Conversely, transactional tasks have strong potential for economies of scale and are therefore organized using different steps in the value chain such as invoice checking. CPOs place particular emphasis on efficiency here, as operational and strategic buyers typically make up two-thirds of the procurement workforce. Therefore, transactional activities are often outsourced or offshored in fully shared service centers to ensure the greatest economies of scale, leveraging labor arbitrage as well.

When digitalizing procurement, automation is our new best friend for operational and transactional activities, as they usually include repetitive, manual tasks. These tasks can either be taken care of by simple robotic solutions, such as invoice checking, or they can be replaced by robots working in conjunction with AI where the latter works alongside the robot; for instance, to determine whether an order is being placed in the right category based on heuristic algorithms. Overall, the operational buying staff can be reduced by approximately 50% compared to today’s levels. It will be critical that all stakeholders, within and outside of the procurement department, learn to interact with automated machines in their day-to-day life; for example, replying to requests issued by machines, accepting answers from machines to their questions, and reactivating robotic processes that might be stuck because a piece of information is missing. CPOs should not only actively drive the transition to automation by introducing robotics and finding new tasks for the resources this frees up, they must also prepare the remaining operational buyers, suppliers, and internal business partners to work with robotics for everyday tasks.

3. Support teams: Today, procurement support functions typically consist of controlling, process excellence and research teams. These teams are smaller than those of strategic and operational buyers. Purchasing controlling is responsible for financial data, especially in the field of savings generation. A best-in-class setup makes the category-independent controlling team the only credible authority for any savings approvals and, therefore, the only one capable of validating the savings successes of buying teams. The process excellence group not only defines working procedures—strategic and operational in nature—but is also typically responsible for the existing system landscape. Lastly, research teams are specialized in finding information for category teams, be it about suppliers in LCC countries or market trends in commodities or the overall risk in supply chain markets. Each support department needs to be well integrated into category teams. This integration is a core task for CPOs.

Digitization will significantly enhance the support departments: They will grow in importance and size with about 100% more employees, who will be working in new roles dedicated to helping the entire department grasp the potential of the digital process. Master data teams will ensure all relevant information is not only collected but also stored centrally so it is accessible for core analytics. They will define and monitor data collection processes and, if necessary, new ways of working that ensure all necessary information is stored. The teams will also define “sources of truth” in clarifying which information is correct in the event that there are several contradicting data points. AI programmers will help buyers derive the right conclusions based on the existing data. They need to be as close to data analytics procedures as they are to procurement tools and tasks. Programmers of AI negotiation coaches, for example, need to know the different negotiation approaches including their strengths and weaknesses. Robotic maintenance engineers will program and maintain the bots used in operational process steps. While the existing support team will maintain both their importance and size, these new roles will have to be added and CPOs must actively look for qualified employees who are able to fulfill these tasks. In larger procurement organizations, in addition, a digital change agent should be put in place temporarily to head the digital changes.

4. Role definitions: Although roles in procurement are currently not all that diverse, many companies struggle to find the right distribution within their teams. Strategic buyers in particular are often not provided sufficient time to drive forward significant value levers because they are continuously dragged into operational issues such as following up on undelivered stock, coordinating deliveries with small suppliers, or even clarifying unclear orders. Leading organizations implement a clear role split as reflected in the well-known RASCI matrices. Each role has the obligation to focus on assigned delivery fields ensuring sufficient time and responsibility is dedicated to them.

In pre-digital times, CPOs had to ensure strategic and operational buyers had clear distinctions in the description and execution of their roles. Now that a variety of new roles have been introduced (see previous section), this task is becoming more challenging. In addition, the existing role portfolio is also experiencing a shift in the required skill set, with operational buyers needing to be able to handle RPA, and strategic buyers needing to leverage big data, digital analytics, and AI to their advantage. To make matters more complex, the shift is not equal between categories. Just as value generation changes in different categories, so too do the required skill sets for buyers. IT buyers need to be able to handle AI to stay on top of innovation potential; MRO buyers need to leverage it for quality control. Office supplies, on the other hand, need catalogue solutions and RPA, while consulting might require no change in profile at all. It is therefore important for procurement to determine only the currently required profiles throughout the specific categories and functions while also anticipating future needs and reflecting them accordingly in the portfolio. CPOs will have to proactively manage the increased complexity in more diverse and, at the same time, more agile role descriptions. The new profiles, such as AI programmers, need to be included and clearly differentiated in their tasks from other digital roles (such as master data teams) and conventional roles (such as the buyers working with the AI algorithms). At the same time, role descriptions need to be kept agile to ensure they can be adapted intelligently in reaction to new technologies, such as new robotics taking over tasks in operational purchasing, or AI mechanisms opening new value creation fields in strategic procurement.

5. Cross-functional interfaces: In leading organizations, cross-functional collaboration is orchestrated through tandem teams of buyers and core business partners. Tandem targets for these teams ensure collaboration toward a uniting goal. This mechanism shifts procurement up to a strategic partner, which acts as a peer. A new organizational structure is required to reflect the closeness to business partners. One model used by leading procurement organizations is to introduce dedicated key account management (KAM). To establish effective, powerful procurement key account management, it is essential that it mirrors the business partner’s setup and agrees on common targets, cascaded down in both parts of the organization; otherwise a sense of connection will be lost through friction in daily operations.

Through digitization, the value delivery of procurement expands and interfaces become more dynamic. More so than ever before, digitization enables procurement to upgrade its role from transactional service provider to strategic business partner on an equal footing. For IT, for instance, procurement can help spot innovation, while manufacturing will benefit from procurement’s prediction of supplier-related quality failures. Interfaces are therefore broadening in scope, which requires procurement to understand the right value drivers for each business partner, the most powerful digital advantage, and the resulting organizational anchoring. As digitization expands, CPOs must ensure a laser focus is put into a thorough understanding of the value the business partners really expect from procurement.

6. Total sizing: We have defined the best split between operational and strategic procurement above. The total sizing now defines the ideal number of FTEs for the procurement organization as a whole. The objective is to have a spend range that strikes the ideal balance of being low enough for the buyer to achieve strong results but still high enough to justify salary and total cost. Typically, the managed spend per buyer is a common indicator. For indirect procurement, CPOs should aim for a managed spend of €22–25 million per FTE. When distributing the resulting FTEs across departments, a relatively even distribution between strategic procurement and operational/support teams has proven best.

As we have seen, digitization significantly affects all parts of the procurement organization, from strategic category managers and operational buyers to the support teams. While in the strategic category we can expect to see buyers moving primarily between categories based on new opportunities for added value, in operational procurement we see a drop of about 50%, and in the support team an increase of 100% on average. Naturally, the ideal size needs to be determined by each CPO individually depending on industry or geographical determinants, based on the specific impacts of digitization in value generation opportunities as well as increased efficiencies. Overall, however, the total size of procurement organizations will decrease—primarily due to automation in operational procurement and AI in tactical procurement. The reduction potential will amount to around 30%. CPOs need to ensure the right positions are built up to drive their function into the future. Simultaneously, they need to ensure the HR budget of operational and transactional buyers is freed up in a socially sustainable yet effective manner. Figure 2 combines all the described changes into one comprehensive overview.

Figure 2: Overview of changes to the digitized procurement function

Digitization puts procurement at the crossroads of success and failure. One of the most crucial factors that determines which road a procurement function will take is its ability to seize the opportunities provided by digitization in their organizational setup. This cannot be done without rethinking that organizational structure in the digital context. Procurement has long fought to earn a seat at the table. Establishing a digital organization will not only ensure it keeps that seat but also increase its influence. After setting their strategic priorities, CPOs need to review their procurement organization to get it ready for the digital age.