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05/05/2017

Effective procurement starts with an “e”

Digitalisation is also gaining ground in sourcing. Many medium-sized companies struggle to keep pace with electronic procurement.

From Michael Dörfler and Jens Kemle

WHETHER CAR OR TOOTHBRUSH – when it comes down to it, every industrially manufactured product is no more than the sum of its individual components and processed raw materials. These days, a modern car consists of around 10,000 individual parts – depending on the manufacturer and equipment. While a toothbrush requires a much smaller number of components, technically sophisticated, highly complex multi-injection moulds are used in its production.

Components and machines for the manufacture of a product always had to be sourced. However, the procurement channels and options have undergone fundamental change in recent years due to the digitalisation of the supply chain: While an entire department was required for procurement in the past, it can be done with a few clicks today. The new electronic opportunities can be utilised for indirect procurement of production-related parts, the A and B parts, and low-value components, the C parts. While e-procurement has already become the norm today, experts predict that the procurement of the future will develop much further and evolve into fully-integrated supply chain management (SCM). This will include the entire value chain of a company – from procurement through production to sales – becoming electronic without any media discontinuity.

Fatally digital
Nevertheless, procurement in the digital era has not become simpler – in fact, the opposite is true. The new technologies and their tools open up a wealth of new strategies and business models. But when things are changing quickly, not every company can stay on top of it.

Here, the German Logistics Association (BVL) comes to the assistance: with a guideline that answers the ten most important questions in relation to the digital transformation in procurement. It shows that digitalisation in procurement is realised at varying speeds: “There has always been a gap between the technological possibilities and the digitalised processes actually applied in organisation,” states the BVL brochure. “But now that the speed of change is accelerating so strongly, there is a risk of this gap becoming too big for medium-sized companies, creating competitive disadvantages.”

In practice, it is clear: There is, in fact, a difference between the claims and the reality of digital procurement in organisations. That is also confirmed by a topical survey the procurement solutions provider Onventis published recently: It states that 85 percent of the companies surveyed considered digital supplier management to be important or very important. However, one fifth of the companies was not willing to invest money in it. “If 99 percent of the procurers consider supplier networking to be relatively important, yet 38 percent are not allocating any budget to it yet, we are looking at an enormous gap,” says Frank Schmidt, CEO of the Stuttgart procurement experts.

According to his observations, the willingness to digitalise in procurement is dependent on the sector. “Automotive suppliers are already positioned rather well, because they are often directly linked to corporations and bound by their specifications,” reports Schmidt. It is a very different story with contract manufacturers without a permanent customer base. Yet, automation of sourcing – for instance, through a procurement platform – is of benefit for all parties involved, because: “Electronic procurement processes and SCM provide the buyer with freedom to manoeuvre, allowing him to act more strategically.”

Leipzig University of Applied Science (HTWK) and the German Association for Materials Management, Purchasing and Logistics (BME) are researching the extent to which Smart Purchasing has been established in organisations. The most recent figures (from 2015) show that only one third of the small and medium-sized enterprises (SME) have almost consistently digitalised the steps in its value chain. Yet, four out of five medium-sized businesses consider the issue relevant.

Size at the forefront
The digital gap is smaller in large companies. “For around 91 percent of the companies surveyed, electronic data exchange in the supply chain is a key issue. And more than half of the large companies already process procurement and further processing completely electronically,” says Holger Müller, Director of Studies at HTWK. A recent study by Mercateo, a provider of solutions for electronic procurement, mentions that three quarters of the larger organisations have integrated their processes for sourcing materials not related to production.

The researcher Müller is not surprised by this lead: “Larger organisations have access to more resources for creating interfaces in the specialist departments, or absorbing the costs for a new IT infrastructure. This is why they can realise the digital transformation quicker.” If these resources are lacking or cannot be pooled, there is some catching up to do,” says Müller.

But how come a staggering fifth medium-sized company not consider digitalisation, e-procurement and SCM relevant, as shown by the HTWK study? The economy provides one answer: E-procurement does not pay off for every enterprise. On average, an SME achieves around 1,200 orders per year. That would be four or five a day. “Investment in a dedicated system to digitalise procurement processes usually only pays off after several thousand orders per year, or significantly more than 50 suppliers. However, cost-effective cloud solutions with limited functionality are already available for all procurement processes,” says Müller.

The transformation process often moves at snail’s pace, especially in SMEs. This is also due to a range of structural factors. Even if they were willing to conduct their procurement processes via a digital platform, they often source their components from suppliers which are even smaller. “The technical prerequisites for the introduction of e-procurement are not in place here. The SME would need to make advance payments to create them. But they are not able – and willing – to do that,” explains the expert.

Of course, many medium-sized businesses have no real choice, as the example of the Highclean Group shows. If the provider of cleaning and hygiene products wants to get on the books of a large customer, it must program the interfaces to the buyer’s ERP – at its own expense. That can easily amount to 10,000 euros. But there is no alternative, because: “In our business, you won’t get anywhere without electronic procurement anymore,” says Markus Karlisch, CEO of Highclean. The group comprises 21 companies with a total of 600 employees. Each company has expertise and competences in its specific field. For each buyer, around 200 articles need to be put together internally. However, the supplier presents itself as a one-stop-shop to the customer. This is only possible with close IT-supported cooperation via the internal order manager portal.

Baby steps
The delay in procurement digitalisation in many smaller companies is also attributable to a certain procedural sluggishness and overloading: Procurement is often in competition with other challenges of daily business operations – the managing director or owner often handles this package alone. Moreover, long-time employees can sometimes slow down or hinder the introduction of new processes and business models. “Sometimes, older employees see change as a threat to their lifetime achievement, or they resist letting go of heir decision-making powers,” reports procurement researcher Müller from Leipzig.

“Yet, implementing digital technologies at least in part is both helpful and necessary in order to organise the process from order placement to processing with purchase-to-pay without media discontinuity,” he emphasises and makes a drastic comparison: “If I have highly-automated production, and there’s a wheelbarrow somewhere in the middle, the potentials disappear into thin air.” He recommends that SMEs take small, logical steps in their digital integration, and remain focused on a clear objective.

The German Logistics Association’s guideline makes similar recommendations: “Pursuing a big comprehensive solution from day one means risking to never get it done.” There is no simple answer as to which area should take priority in the digitalisation of procurement. “For small and medium-sized enterprises, electronic catalogues already offer a good solution for simplified and uniform order process and bundling of requirements,” confirms Matthias Hedergott, partner of the consultancy Kerkhoff Consulting. These catalogues ensure that buyers are not required to negotiate with suppliers for indirect requirements and C items. Nevertheless, they benefit from the enhanced supply services. This allows digitalised steps to be simplified. They can be directly integrated with internet-based solutions at a low cost. Larger medium-sized companies can go a step further towards comprehensive digitalisation. In small steps, this can lead to full process automation or assumption of the procurement function. The more a product group can be standardised, and the larger the number of reference items that evolve, the higher the degree of automation for more sensitive requirements. The work steps are aligned with internet-based price indicators. They automate the procurement function in line with the market according to the best prices available on the day. “This helps to achieve transparent and compliant processes for the client and the supplier,” says the digitalisation expert.

Marcus Schüller, Head of Operations Consulting at KPMG observes another trend in procurement: Roughly for the last four years, medium-sized companies have been moving away from cost-oriented purchasing. “The gaps in the system are closing. A consistent process needs to be realised to achieve more than just cost reduction.”

This is particularly evident in the procurement of materials or services not required for production or the product – such as travel management, or the purchase of office supplied or IT equipment. An ordering and catalogue system – integrated into a web portal used by employees and suppliers – allows direct selection and purchasing. Only offers for which procurement has negotiated discounts, and those subject to company-specific terms are included in the catalogue.

Analysis required
Before a company starts to digitalise its procurement, it should analyse its processes in-depth, and specify its individual requirements, recommends Holger Müller from HTWK: “The question is: Where is the crunch? If a large number of orders are for very specific parts, catalogue management is helpful. If a clear picture of the suppliers is needed, supplier management is recommended. And a company subject to frequent supply disruptions or bottlenecks needs risk management.”

Of course, not every business can be organised in such a rational manner. Rudi Frank, Head of Procurement and Production for the recorder manufacturer Mollenhauer, has different priorities: “We need special tonewoods and packaging. Quality is paramount. We are willing to pay an adequate price for this.” Frank describes negotiations with suppliers as “very personal” and geared towards sustainable business relationships. Squeezing out the last penny is not on the agenda, he emphasises. Rather, the focus is on maintaining a stable relationship between the business partners. In particular, local specialist retailers and craftsmen are given priority even if their offers are not exactly the cheapest option. “The lowest price is not the key factor for us,” says Frank. However, the traditional company founded in 1822 takes a different approach when sourcing C items. Here, Frank will use an internet portal for office supplies, or electronic catalogues, such as Mercateo.

Peter F. Schmid, Managing Director of “Wer liefert was” equally has a very sober view of e-procurement. He recommends selecting the starting point in line with the greatest potential for savings: “They are at the start and the end of the supply chain – in purchasing and sales.” The Mercateo study calculates the savings potential in procurement as 40 percent – based on 7,000 orders per year. The Munich procurement specialists have examined the steps of an order for costs and time requirements. The findings: A manual process results in process costs of 115 Euro per order (see graphic above). This falls to 68 Euro for a digital workflow. However, researcher Müller emphasises that these savings have no “added-value effect”. The time savings – around one hour per procurement process – are immediately absorbed by other activities in business operations.

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