Procurement takes the lead in building the P2P value chain
Digitalization, Procurement, Source-to-Pay, eProcurement
When building the foundation for the optimal financial and operational performance of the whole organization, the procurement function is uniquely positioned to raise the game for everyone. A modern procurement department leads organization into close collaboration with suppliers in a way that enhances processes, improves compliance, and cuts costs. It is time to put the emphasis on the first P in the purchase-to-pay chain!
It is usually all about cost. Sustainable cost reduction has found a permanent place as one of the most important objectives of the procurement function. This was obvious in a recent survey OpusCapita conducted among European organizations: cutting costs is clearly the most commonly used KPI when measuring the effectiveness of the procurement department.
“And why wouldn’t it be? It is a great indicator of how well the department is performing,” says Rowan Lemley, Head of Product Marketing at OpusCapita. He speaks with more than 10 years of experience in the purchase-to-pay area.
“But one should not lose sight of the strong strategic role procurement has to play, both in terms of supporting business operations and making it possible for the accounts payable department to excel as well. Procurement is uniquely placed to do so much more for the whole organization.”
The impacts of inefficient procurement flow downstream in the P2P value chain and cause significant challenges in many organizations today. For instance, AP departments are struggling to improve their e-ratio and engage suppliers to send electronic invoices, when procurement could take the lead in solving the issue earlier in the process. The finance function is pushing for extended payment times in order to optimize their working capital, when in fact procurement would have the trump card to play in payment term negotiations by offering suppliers supply chain finance options.
“Procurement can push for company-wide policies for on-contract spend and mandatory purchase orders for payments. They can negotiate to get e-catalogs from suppliers and demand that they accept e-orders. The early stages of the buyer–supplier relationship determine a lot, but it is not a one-off thing. More and more organizations understand that constant supplier engagement is value-adding,” Lemley says.
Surprisingly, even large global companies are still making do with procurement processes that can be in large part or even completely paper-based and require manual workflows. According to Dirk Fischbach, Head of Purchase-to-Pay Solutions at OpusCapita, the difference between top-level organizations and median performers is considerable.
“The leading performers are focused on the end-to-end value chain, from strategic to operative procurement, and all the way to invoice handling and payments, topped with analytics. Another increasing trend is that companies are abandoning best-of-breed thinking with multiple solution providers and looking for one best-in-class partner for their whole purchase-to-pay,” says Fischbach, who has worked for almost 20 years with different organizations to solve their procurement challenges.
In addition to the systems supporting the end-to-end chain, big buyer companies are increasingly looking for ready supplier connections integrated into their procurement solutions in common standard product categories, such as office supplies.
“Purchasing organizations want to shorten implementation times and be able to gain benefits from automated processes quickly. We at OpusCapita have our own ongoing initiative of ‘procurement in a box’, providing pre-negotiated contracts for major commodities and pre-designed workflows.”
Enabling supplier collaboration is at the center of smooth and smart procurement processes. Rowan Lemley points out that if, for instance, supplier information is maintained manually, the procurement department is already wasting a lot of time on tasks that do not add value. With a modern solution for supplier information management, the organization can alleviate its own headache of master data management and offer suppliers an easy way to update their bank account information, for example.
“The purpose of an e-procurement system and all the solutions linked to it is to bring agility and efficiency to each of the steps in the P2P value chain: finding the right business partner, sourcing and contracting, buying, paying, and eventually closing the loop by rating and evaluating both the supplier and the products and services. Collaboration is becoming more and more important, and we support Service Entry Sheets, for instance, with which suppliers can report the services provided,” Dirk Fischbach describes.
Lack of flexibility and electronic workflows in supplier information management may result in the organization having fewer suppliers registered for different categories in the first place. On the other hand, if the procurement system does not provide support for effortlessly creating sourcing events, the professional buyers have a hard time revisiting pricing with their existing suppliers.
“Organizations are stuck with outdated pricing, and simply end up paying too much for their products and services. In addition, many lack the ability to rate the performance of their suppliers in their systems, which yet again prevents continuous improvement,” Lemley states.
The trends in consumerization are driving the need for transparency, as people are accustomed, in their private lives, to an Amazon-like shopping experience with product ratings from other users. According to Dirk Fischbach, professional buyers are now expecting this type of information from their peers in their product catalogs.
Another topic originating from the B2C world is usability. If the employees of an organization are given an e-catalog with poor search capabilities, for instance, it will not be widely accepted and will not result in automated purchase orders, approvals, and electronic order flows as intended.
“Usability is one of our main goals. We have implemented catalog and purchasing solutions for organizations with tens of thousands of employees, and no user training has been needed.”
“The electronic, automated processes are only as good as the data provided. Most procurement professionals and category managers will agree that data quality is one of the biggest challenges in creating streamlined processes.”
According to Fischbach, suppliers still prefer punch-out features in their web-shops over e-catalogs, but the situation is changing.
“Providing solid self-service options and portals for suppliers to share their up-to-date product and pricing data is a key element. The legal requirement and compliance regulations force organizations to ensure content integrity, for instance to prevent purchases of hazardous goods. Therefore it is also important to develop automated ways to enrich and improve the content provided by suppliers.”
OpusCapita is already investigating the use of machine learning algorithms in improving, enriching, and validating product information, and developing intelligent ways to improve supplier invoice matching.
In a complex business environment, one of the biggest challenges for purchasing professionals is to get a grip on the requisition of non-standard products, services procurement, and other forms of indirect spending. A closer look at on-catalog spend often reveals that it covers only a minor share of the entire spend. And what is more, the average cart value of a purchase made from a catalog can be a couple of hundred euros, whereas the price tag of the non-catalog purchase can be measured in thousands.
The long tail story is well known, but when put in concrete numbers, it still takes many by surprise. Lemley and Fischbach emphasize that organizations do not have to settle for the easy wins, as a modern procurement solution can also automate complex categories and bundled products. In practice the complexity can be harnessed with smart forms, for instance. Smart forms help to minimize free-text orders that are typically used in these situations and that cause a lot of manual effort for the professional buyers, who have to sort them out to create the actual order.
“For example, a company using a lot of temp labor was able to increase compliance with the frame agreements with agencies by establishing smart forms, and this brought the spend category under control at the same time. Managing workwear orders, handling mobile phone plans, or ordering a laptop with suitable equipment are other good examples of complex orders that can be made simple.”
“The more complex the commodity category is, the more benefits you gain through saved time, lower process costs, and increased compliance.”