Smart Cities Need Smart Procurement. Here's Why

E-Procurement as a Driver of Innovation in Smart Cities

As presented at ICMAC 2017 : Smart Cities In East Asia Conference, Bali 2017

By Kevin Ng & Anna Khanzhina: ThunderQuote E-Procurement Exchange & Association of International Procurement Technology and Standards (AIPTS)

Abstract:

Smart Cities need Smart Procurement, or risk ending up implementing the wrong solutions (Dumb Cities), or with resultant delays, implementing solutions which are obsolete by the time they are ready (Obsolete Cities).

In the world at large, and East Asia in particular, the evolving economic environment demands ever more from procurement in the public and private sectors in terms of identifying innovative solutions to support, evolve with and develop the organisation or business.

This thought leadership article addresses procurement issues and trends that fast-growing markets in East Asia face, and explores the potential of e-procurement initiatives to drive innovation and productivity gains in smart cities and communities in the East Asian region.

Introduction

With accelerating trends towards automation and digital disruption, many cities in East Asian nations are seeking to build up capabilities in fields such as software, e-platforms, VR (Virtual Reality), AR (Augmented Reality), Machine Learning, IoT (Internet of Things), among others. Many cities and business communities are also targeting to go completely paperless through implementing software or cloud-based systems in their organisational processes.

These initiatives require a strong and vibrant procurement function in said organisations, with world-class procurement capabilities and cutting-edge procurement and information technologies to help cities and businesses achieve their goals of digital transformation in the twenty-first century.

Current State Of Procurement In East Asian Cities & Businesses

Procurement is an oft-overlooked field due to its historically unglamorous perception primarily as a cost-centre for many organisations and businesses. Furthermore, in Asian markets it is often conducted through extremely manual and man-hour intensive processes of email, online searches and calls.

There is a high degree of information fragmentation within the current procurement space in East Asia, in part due to the absence of full digitalisation, which makes accessing information for comparison of choices difficult at best. This leads to miscommunication and misunderstanding between organisational buyers and sellers, resulting in wastage, under-performance as well as occasional non-performance.

East Asia as a whole tends to lag in several areas. Firstly, building up a strong procurement talent development pipeline, as evidenced by the lack of procurement bachelors’ and masters’ degree qualifications as well as a marked absence of Asia-centric procurement executive education and training.

Secondly, adopting best-practice procurement in areas such as category management, supplier reviews, procurement talent retention, technology trend analysis, stakeholder management, vendor development, and strategic sourcing practices. Currently, the market mostly focuses on improvements in operational and tactical practices rather than strategic sourcing and procurement.

Thirdly, utilising world-class procurement software, tools and systems in e-Sourcing, e-Procurement in the Source-to-Pay cycle to help increase productivity through digital tools and automation.

Fourth, the lagging acceptance of procurement as a strategic function, which is most pronounced among smaller as well as local organisations, indicating that local business and organisational leaders have yet to embrace the value of procurement. This results in less structured and effective procurement processes and systems in East Asian organisations.

Gaps & Analysis

The procurement practice gaps currently present in East Asia are at odds with the outsized role that procurement plays in driving innovation for new smart cities and digital transformation initiatives for businesses, especially in the new VUCA (Volatile, Uncertain, Complex and Ambiguous) environment.

Smart Cities are characterised by the deep integration of ICT (Information and Communications Technology) and IoT technologies to automate processes as well as provide superior data visibility and insight within cities. The resultant data visibility allows for deep analytics and optimisation of processes and better allocation of resources for city and business design decisions.

These projects are multi-million-dollar initiatives that are typically large, complex and involve vendor types and purchases that buyers are not familiar with, such as IoT, web development, mobile applications, enterprise automation software, VR and others.

With this lack of familiarity and information comes increased risk of wasted spending, as in the case of one city where an IT system was purchased without verifying integration requirements - resulting in wasted spending of over USD $300,000, and another example where service contractors were hired in duplicate, resulting in over USD $3 million in wasted spending.

With so many important and costly initiatives in organisational and city pipelines, procurement is a vital player in providing expansion of strategic options to organisations, as well as benefiting organisations through business case (ROI) analysis, cost control, risk management, identification of technological, system and process trends within the larger market. E-procurement allows processes and systems to be automated, allowing better resource allocation, increased productivity and flexibility of implementation without resulting in added workload.

At its best, procurement functions as an internal consultancy within the organisation, helping business units or organisational divisions conduct smart analyses and purchase implementation decisions to maximise their intended outcomes. E-procurement allows rapid implementation of Smart City projects and strategic business initiatives.

Hence, procurement systems and practices in Asia need to evolve to meet the growing and changing needs of the region. With the accelerating pace of innovation, manual and time-consuming procurement processes are a bottleneck which have been slowing down adoption of new technologies. As such, low productivity and inefficiencies in procurement processes culminate in slowing down city transformations.

Furthermore, information fragmentation and lack of centralised data in the corporate and public procurement spaces exacerbate the problems mainly due to experience and expertise with specific fields of procurement being non-transferable and locked into individuals combined with the lack of publicly available databases or even internal databases within an individual organisation for price comparisons and due diligence checks. This is a leading source of resource misallocation in both corporate and public procurement.

This lack of knowledge and data available to buyers also creates additional communications issues especially in terms of project scoping resulting in a large variance in outcomes versus expectations.

Lastly, the procurement field in Asia is still very much focused on operational work and the commonly-held perception by management and public officeholders of procurement as a cost-cutting method is a large stumbling block to changing the field. Procurement professionals should instead be concentrating on adding value through driving innovation and strategic level procurement instead of handling operational work which can be easily automated and digitalised.

Current Solutions

In order to examine how procurement can evolve to meet the growing needs of the East Asian market, the traditional procurement process needs to be examined and understood fully.

Procurement is traditionally seen as a back-office supporting role to the business in terms of supplier sourcing, supplier negotiations, supplier relationship management and manual order processing.

Out of all these areas in procurement, sourcing is one of the most overlooked and mostly done on a manual basis. It is usually done through manual search through internet sources and/or previous connections and acquaintances, which makes the process inefficient as well as unreliable in terms of proper control and accounting.

While most large companies have their own tender websites or official submission processes, the lack of awareness of these individual websites amongst vendors often causes lack of proposals. Research on the ground shows that most of the submitted proposals are manually sourced before requesting the vendors to submit their quotations through the official sites.

Overall, similar to the sourcing of suppliers, there is also a lot of manual and repetitive work at each stage of procurement combined with a lack of digitalisation which complicates the bureaucracy and paperwork required.

Possible Solutions:

In a chaotic business environment with many new innovations and even entirely new industries appearing on the market, there is an explosion in choices of potential and new suppliers claiming to be able to fulfil business requirements.

This has led to businesses tightening their procurement controls, enhancing their due diligence on supplier selection, while balancing it with the speed of doing business. It is important to note that the improvement of controls does not necessitate slowing down of processes, as technologies like e-Sourcing, e-Procurement, e-Invoicing solutions can be leveraged to automate and improve many business processes and in fact both improve speed while reducing cost and errors.

Furthermore, these solutions are the tip of the iceberg which have already been tried and tested for a number of years in the western markets and are long over-due for widespread implementation in the East Asian market.

While most companies do have some form of automation or solution implemented for the invoicing and, to a lesser degree, purchase order (PO), there remain many stages of the procurement process which can also be automated. These stages include: information search, sourcing, supplier evaluation, awarding and contract, delivery, supplier management and spend management.

As such, the market for e-solutions in procurement hasn’t reached its full potential and is under-estimated and thus under-utilized. There are a number of businesses already providing semi- or fully-automated business solutions which automate repetitive actions, digitalise records and centralise controls. Thus, helping to increase speed, improve control and save time at each step of a sourcing process. Examples of such include SAP, Sesami, GeBiz and ThunderQuote which are enabling digitalisation in this field and streamlining e-procurement practices.

In order to better understand these solutions, it is important to understand that they are often categorised into the different stages on which they focus. Source-to-pay or S2P is the entire end-to-end process involved in procurement. It spans every process, right from spend management, strategic sourcing and vendor management to purchasing, performance management and accounts payable. It can be divided into two main processes: S2C (source to contract) and P2P (procure to pay).

The P2P process starts from a selected vendor and the purchase order all the way through to payment and delivery. Solutions like SAP Ariba and Procurify assist to provide a seamless process that surrounds the fulfilment of the actual order and payment for the product or service in particular integrating with the financial systems with full digitalisation enabling ease of records and tracking.

The S2C process is the preceding process starting from need recognition to the selection of a vendor with solutions such as ThunderQuote helping to streamline need identification and information search, enabling better scoped projects and a central marketplace and database enabling transparent and efficient supplier sourcing and evaluation.

Singapore local solutions like Gebiz and Sesami provide an end-to-end procurement solutions but lose comparative advantage in the particular areas in exchange.

Regardless of chosen solutions, e-systems in general provide four main benefits.

1. Accelerated process time

As the repetitive activities are eliminated, with e-procurement companies can free up their resources as the internal process picks up the speed. Significantly, negotiation and getting the best price can be completed in just a few clicks.

2. Access to more global suppliers

E-sourcing allows easy access to more global suppliers, which opens the company to more possibilities and innovative solutions. Unlike the traditional process, this enables it to connect with a wide-range of suppliers not just locally, but also globally. Furthermore, it opens the company to new opportunities that usually means more competitive prices which makes it more cost-efficient than traditional procurement.

3.Higher productivity

Since it automates the process, companies don’t have to spend so much effort and time on unnecessary tasks. The whole process goes paperless, so the company can focus on other strategic tasks and function of their business. Thus, procurement becomes more value-adding and innovative.

4. Saves money on workforce and management, improves visibility within organisation

With e-systems basic tasks can be done by people without procurement experience and easily controlled within the system.

Trends

The quantity and quality of procurement professionals in emerging countries is rising, which will significantly impact the transformation of procurement of most industries in the coming years. As the younger generation gradually takes over with the workforce, the way businesses and procurement operate will change significantly.

1.   Rise of Procurement in Low-Cost Country (LCC) zones

Traditionally low-cost Asian countries such as Thailand, Vietnam, Cambodia, Myanmar, Philippines, Malaysia, and Indonesia are observed to have major improvements in procurement standards over the past few years. This trend will only continue in an upward direction.

Many multi-national corporations have recognised the potential in this trend and have set up procurement organisations in these regions. Globalization will play a major role in shifting procurement functions closer to the supply poles that are often located in LCC zones.

Being a primary source of supply in Asia, these countries will have to develop capabilities among procurement professionals to handle the increased demand for their function in the region. These include developing market expertise, understanding the unique risks within each region, and adapting to cross-cultural communication.

Overall, the trend of LCC zones transforming into procurement centres will be a natural shift. Subsequently, local capabilities of procurement professionals will rise to meet the demand.

2.     Digitisation & Automation

Globally, digitisation and automation are common trends. However, new evolutions in automation are gradually digitising procurement processes such as sourcing that were previously manual.

Now with a wide choice of solutions, e-procurement can be run in companies of different size including SMEs, and suppliers can easily get access to tenders including large government projects.

A result of rising digitisation is that decentralised and uncontrolled procurement will decline at a faster pace. Procurement tools and systems are all concurrently increasing their focus on better design and user experience. Being user-friendly and intuitive is gradually becoming a huge trend in procurement tools and systems, which opens up the usage of productive technology to anyone regardless of qualifications and experience. Lower value-added tasks can now be taken off the plate of procurement professionals thereby freeing up time for higher value-added tasks that compound benefits for the company.

3.     Blockchain

A blockchain is a public ledger of all transactions in a network. These transactions are linked and secured using cryptography.

Even considering how young the technology is, it has the potential to change the way we approach procurement fundamentally. One way to take advantage of this technology is via creating “smart contracts” – partially or entirely executable contracts that are enforceable without human intervention. A smart contract’s key objective – automated escrow, could potentially reduce moral hazards and streamline the entire procurement process from purchase order (PO), delivery and payment. Another potential use is in risk management. By having a permanent record of every transaction detail, blockchains will improve the due diligence process for checking subcontractors, origins of products and previous contracts of a specific supplier.

Developments in blockchain will also put a spotlight on Supply Chain sustainability, which is becoming a critical factor that directly impacts the reputation of companies and governments. Concurrently, procurement functions are moving from simple cost-management towards creating more social and economic value. Blockchain technology will play a big part in supporting this transition.

4.     Big Data and Artificial Intelligence (AI)

Big Data and Artificial Intelligence (AI) are significant steps towards better understanding and managing the processes. For Smart Cities, it means that many data points would be collected. The use of this data will allow us to recognise patterns - correlations, seasonality and trends and will eventually influence the quality of living. Artificial Intelligence is transforming the way we see and perform usual tasks. The most basic techniques of Machine Learning are already being used by some platforms that are studying and automating repetitive tasks. Considering that currently in SEA procurement departments are mostly not performing strategic sourcing, AI can study patterns in large data sets, helping conduct spend analysis. As an example of how AI can be used, at ThunderQuote we study the incoming requests for quotations (RFQs) and the clarifications sought by vendors. For the most common requests system adds the question into the questionnaire, so that all the following requests are getting more and more precise.

Vision

With these trends in mind, East Asia is poised to make strides in innovation, through improvements in procurement practices as organisations seek to implement stronger procurement practices and systems. The three most important items to adopt are

1)  Digitalization and automation of basic processes will help analyse and predict spend, which will positively affect the bottom line and budget allocation.

2)  E-procurement systems will analyse and forecast market prices, capacity and trends, as well as tracking the regulations and laws. The price advantages will be significant, and if we are talking about the scale of cities, the savings will be enormous.

3)  Development of a strong talent pipeline of procurement professionals who are freed up to concentrate on strategic procurement and develop expertise in various fields and industries to become the main drivers of innovation in Smart Cities to accelerate the adoption of new technologies and materials.

Considering the challenging environment, adoption of e-systems and e-tools will move forward together with workforce that will require matching skills. With a strong procurement talent base paired with cutting edge e-procurement systems and processes in play, cities and businesses in East Asia would have all the procurement information and trends at their fingertips, helping them be able to identify and analyse city or business needs, conceptualising and executing, at high speed, the digital transformation for East Asian cities into true Smart Cities of the future.