Procurement As We Know It - will disappear
Over the past decades the sphere of procurement has expanded in many directions. Procurement professionals are more and more entrusted with crucial decisional responsibility which is compendiously known as strategic sourcing.
Further, as the globalization enables us to source from virtually any company around the globe, the challenge of finding and selecting the best supplier has immensely intensified. Back in those days, when we were restricted by geographical boundaries, we had to choose from a supplier base that was limited in size and complexity. Nowadays, the potential suppliers for our sourcing projects are only limited by the restrictions we impose on ourselves (apart from sanctions imposed on specific companies or countries).
Moreover, in the course of the digitalization new fundamental competencies are required by procurement managers to cope with the requirements arising in this era of change. Whereas direct procurement of products, necessary for production, (only) needs to reevaluate the existing market of potential suppliers, indirect procurement, or more precisely the procurement of complex products, demands an at first glance overwhelming set of new competencies. In this realm of procurement, it is not enough to compare costs, consistency, the financial situation of the suppliers and other typical factors known from direct procurement. Here, the resulting products can differ to a huge extent even though all requirements are met. Additionally, you might lack the required competencies to sufficiently write requirements specifications or to evaluate each proposed solution.
As an example, compare the sourcing of screws for the production of chairs with the procurement of a software for the planning of you chair production. Former would be rather easy to decide, as you know exactly which characteristics the screws must have to support your intent. The most important selection criteria would certainly be costs. The latter procurement task is comparatively hard to decide. Even if you have multiple proposals which guarantee the same outcomes, you must consider a huge number of factors which can all decide if your investment into the new solution pays off or if you lose painfully large assets. Further, as you are a furniture manufacturer your company probably lacks the required capacity and competency to adequately evaluate production planning software systems.
During my experiences in procurement as well as in sales of complex products, I got to know many existing problems on the customer as well as the supplier side. The differentiated viewpoint enabled and provoked me and my team to start something to improve the procurement process in a way that enables procurement professionals to use their abilities to full capacity.
1. Problems the suppliers face
As I have observed during my past experiences, there are fundamental problems in the procurement process on both the customer as well as the supplier side. At first, I want to examine one specific problem that especially the supplier side encounters, as I think it is a key source for following problems relating to this entity.
The problem I am talking about is the supplier’s lack of knowledge about the specifications issued by the customer. The impact of this matter is further enhanced by the fact that those specifications are nowadays the primary limitation at hand in the whole procurement process. Hence, the correct formulation by the customer as well as a detailed understanding of the customer’s restrictions by the suppliers are the most crucial and important parts of a tender process.
The first significant difficulty occurring on the supplier side is, when we stick to the sourcing of complex products, that the customer will have less knowledge about the technology than the supplier has. This may become apparent by the wrong usage of technical terms in the specifications, unclear context descriptions and so on. Often those unclear formulations of specifications are further accompanied by missing or incomplete goal formulation of what the customer expects from the product, leading to a broad scope left open for interpretation. Thus, an unclear goal formulation often leads to less adapted and accordingly less mature solutions. Reason for that is, that the supplier is not able to provide a well-tailored solution within a given framework, even though the supplier would have a better solution at hand. In my previous professional career in the sales department of a software-based start-up, dealing with unclear RFXs was not only a rare phenomenon. I would say at the time where the customer base got broader, this was a problem we had to deal with on a daily basis. At this time our strategy to deal with the broad scope of interpretation was to try to determine extreme solutions to the problem that still fit the given restrictions. Based on those extreme approaches, we then built different adjusted cases like all the big consulting companies do, when they are predicting phenomena in the future. After examining all the options, we could offer in respect to the framework of the customer’s specifications, we handed in more than one offer to account for possible variations in the interpretations of some points. Another way of dealing with poorly specified RFXs was to just not go into detail on some points instead of examining exactly what we had in mind as there were too many ways an experienced professional could perceive the specifications. Most commonly, we then used the magical security factor to account for the uncertainty, included with such general approach, which in turn imposed potentially unnecessary costs on the client.
As those solutions are very time consuming and unsatisfying, not only for the suppliers trying to meet the requirements of the customer, but also for the customer themselves who must consider increasing required effort to evaluate the proposed solutions, there must be a better way to handle this problem.
2. Problems from the customer’s perspective
The impact of the problems on the customer side are often underestimated as we perceive the customer as the leading partner in the relationship just as we perceive them to be the ‘king’ in a classic B2B environment. In order to deliver a solution benefiting all involved parties, the problems on the customer side need to be considerer in their entirety and evaluated in detail as well.
Looking at this entity, the process begins with a solely report of a demand somewhere in the company. In terms of complex products, the report of demand then proceeds to the procurement department, where the internal demand usually transforms into a RFX, seeking a solution to satisfy this demand. Now there is the first key challenge with complex products. A procurement professional needs to apply his limited knowledge to formulate a specific and technically sophisticated RFX. Based on the fact, that Make or Buy decisions always rely on either capacity or knowledge bottlenecks, the formulation of a well specified tender will most likely occur to be problematic in the second case.
As many medium-sized businesses are very focused on a small amount of highly specialized products, there seems to be a significant amount of cases, where a company decides for sourcing a complex product or service, due to an internal knowledge gap.
That means, neither the procurement specialist nor any of the faculty staff is able to provide sufficient knowledge to create realistic, technical correct and constructive specifications. As a result, the creation of a RFX is tremendously hard and often leads to either imprecise formulated restrictions and an inadequate description of intentions behind specifications or to decent formulated restrictions at the expense of pricey consultants.
Next to the above-mentioned matter, some companies may not wish to create tenders accessible for everybody. In such cases, there are even more unpleasant issues arising. The first problem however remains the formulation of a specified demand description. In addition, the creation of a list containing possible suppliers brings more difficulties as the selection of suppliers of complex products and services is often not as easy as it is, for example, with direct products. Main reason this is more complicated is because those products or services are often highly individualized. Thus, any information on the supplier’s website or any other general information material, will rather unlikely enable procurement specialists to decide whether the supplier oversees resources and competencies to fulfil the customer’s needs or not. Especially because it is very hard to estimate exactly what would be necessary to deliver a satisfying solution. Accordingly, a first long list will contain many suppliers that may not even be active in the areas of the customer’s need and others that may be active in the representative area but cannot exactly execute the demanded requirements. Furthermore, the process of creating a list with potential suppliers often takes a lot more time than previously calculated, leading to unnecessary expenditures in time and money.
3. General problem: intra- and inter-company information flow (children’s game of telephone)
After addressing a selection of difficulties for each side respectively, there is a matter that can be observed simultaneously in both entities for both direct and indirect, simple and complex products, that worsens the situation in general.
To gather the insight in this case, we need to look at the process as a whole. We then can observe a cluster, tree structure behind the two main connection nodes between two companies, the procurement department and the sales department of the supplier. All the information from the initialization of a demand to the final execution plan, need to run through each side of the cluster before ‘crossing the bridge’ from either the customer to the supplier or vice versa.
What I mean by that is, that before an RFX is created, information exchange takes place in-house. Regarding the customer side, for example, between the quality assurance department, the speciality departments and the procurement department. On each transition of communication, information gets lost.
We can compare this phenomenon to the children’s game ‘telephone’ (or in German ‘Flüsterpost’). Oftentimes the information that the last participants in the communication chain receive differs significantly from the information that was expected to reach them. The more nodes existing in the chain, the higher the risk of information loss and the higher the possibility for misunderstandings.
That is for sure an issue with direct and simple products as well but certainly this affects the procedure of the procurement of complex products even more. What we need to achieve in order to prepare the procurement for an even more complex environment is to optimize the flow of information and thus allow procurement to generate meaningful and constructive tenders on a vivid informational basis.
4. Direct communication and supportive AI
Often these challenges for procurement still lack the attention they deserve. It is very important to stress the importance of our procurement professionals and their unique skills, but at the same time we must move to revolutionize the tools and processes which accompany their duties and future challenges. Considering the future possibilities, the procurement department will gain in importance as organization unit within the company leading to extended area of responsibility for procurement professionals.
In particular, this implies we must give them the possibility to complement their abilities with the specific technical knowledge required by a distinct sourcing project at the right time. And all this in a convenient way which stimulates and encourages each procurement professional to adapt to the unavoidable changes we are facing these days.
Based on these challenges and the unsatisfying ‘solutions’ in place, me and the two other co-founders of Prospeum thought of a multi angle approach to these elementary problems. In order to deliver a complete solution, we recognized we need to improve both the customer supplier relationship as well as company internal differences. Our way to tackle this variety of challenges is based on AI and aims to ease the development of RFXs and efficiently connect all relevant dots for purposeful sourcing.