Far from being a mere transactional activity, procurement stands as a critical and strategic business function that forms the very backbone of organizational efficiency and financial health. It encompasses the comprehensive process of sourcing, negotiating, and acquiring goods and services. This process extends beyond simple purchasing to include strategic supplier relationships, risk management, and cost optimization. A research paper titled “The Influence of digitalization on procurement efficiency” by Florian Bauer & Martin Gobl (University of Applied Sciences Kempten, Germany) indicates that digital transformation can lead to a substantial 10-20% improvement in procurement efficiency. In today’s dynamic landscape, the optimized procurement function isn’t just a cost-saving measure, but a key driver of competitive advantage, influencing everything from supply chain resilience to overall business excellence.
Procurement influences value analysis and cost savings. External spending, which is the primary domain of procurement, often accounts to 50-80% of organization’s total cost base annually (Resource). This highlights the massive impact of procurement on the overall costs. Strategic procurement initiatives can help companies reduce purchasing cost base by an average of 8% to 12% and deliver the additional annual cost savings of 2% to 3% (Resource).
In the age of AI and emerging technologies, businesses have recognized the need to strategically transform their operations to gain a competitive edge and enhance overall efficiency. Among these functions, procurement has undergone a significant shift. Traditional procurement processes, which were manual, time-consuming, and repetitive, are being replaced by modern, automated, and data-driven approaches that increase efficiency and effectiveness.
Additionally, the Digital Transformation Report by PWC outlines several factors that highlight the necessity for procurement transformation:
Digital Procurement Transformation is more than just implementing software, it refers to the holistic and strategic shift of the procurement function by leveraging a wide array of digital technologies such as AI, Machine Learning, Cloud Computing, and Data Analytics. This shift aims to enhance efficiency, lower costs, and make better decisions.
Digital procurement’s focus is more on encompassing broader and strategic transformation of the entire procurement function. It tries to achieve more significant outcomes beyond basic automation. It not only includes transactional aspects but also strategic elements such as:
Digitalization significantly boosts procurement efficiency through task automation, leveraging data analytics, and enhancing peer-to-peer collaboration. These digital factors help streamline the process, making data-driven decisions, and reducing errors and duplications ultimately leading to cost savings, improved team management, effective resource allocation, improved productivity, strategic sourcing and improved supplier relationships.
Digitalization factors that affect procurement efficiency can be categorized into several key areas:
The integration of advanced technologies like Artificial Intelligence (AI), Machine Learning (ML), and Cloud Technology automates repetitive tasks such as invoice processing and purchase order creation. Advanced AI analytics predict market trends and assess supplier risks, while cloud platforms provide real-time data, enhancing collaboration between suppliers and internal stakeholders.
Implementing robust Data Analytics tools can transform procurement into a data-driven function. These tools can analyze vast amounts of data to identify market trends, evaluate risks, which leads to making more informed decisions.
Robotic Process Automation (RPA) is another technology that is widely utilized to automate the regular, mundane tasks that are manual and time-consuming. RPA bots can learn from user actions and perform repetitive tasks such as purchase order processing, updating supplier data, and managing invoice approvals. By automating repetitive processes, RPA reduces human errors and speeds up the procurement cycle, allowing the procurement teams to focus more on strategic initiatives.
Digital procurement performance indicators are key metrics that measure the effectiveness, efficiency, and spending analysis of procurement teams, demonstrating the value of procurement to the business.
It’s crucial to have the right KPIs to measure the success and impact of digital procurement initiatives. Here are the KPIs that stand out:
It is the key performance indicator that measures the duration of the procurement process, from the initial need identification to the final invoice settlement. Procurement cycle time measurement can be a valuable insight into process optimization and cost reductions.
Minimal procurement cycle time can be achieved effectively by simplifying complex processes like acquisitions, detailed calculations, and negotiations that may take a period ranging from a few weeks to months or even years. The use of modern digital technologies like AI, ML, RPA, Cloud Computing, and Blockchain can efficiently help in optimizing complex cycles by automating repetitive tasks, effective data management, performing formula-based calculations, identifying errors, and getting them resolved.
P2P cycle comprises many steps, some of which are subsequent bottlenecks. Let’s divide this cycle into two phases:
This can be overcome by completely automating P2P process using digital transformation. About 86% of companies are already using digital P2P solutions for improving their process efficiency and cost-reductions (Resource). Automating P2P results into cost reduction, process transparency, improved efficiency, and risk management.
Spend Under Management refers to the percentage of the organizational total addressable spend that is actively managed by the procurement function. A high SUM indicates better visibility and control over spending. allowing organizations to identify cost saving opportunities, negotiate better terms with the supplier, reducing unauthorized spending, enhanced data-driven decisions, and increase operational efficiency through streamlined processes.
SUM can be improved by leveraging digital transformation to significantly achieve enhanced visibility, control and efficiency across procurement lifecycle. Data Analytics and Power BI tools can integrate data from various procurement and finance systems to provide deeper insights into spending patterns and supplier performance.
Expert Extend partnered with Berner Group, a leading European enterprise, to execute a strategic initiative focused on the intelligent automation of their master data management processes within procurement.
The digital transformation initiatives achieved a reduction in Full-Time Equivalent (FTE) from 1.2 to 0.4. The reduction from 1.2 FTE to 0.4 FTE signifies that the labour required for specific procurement tasks was drastically reduced. Initially, these tasks required the equivalent of 1.2 full-time employees. Now, they require only 0.4 FTE, less than half the workload of a single full-time employee.
The reduction in Full-Time Equivalents (FTE) carries significant strategic weight beyond mere tactical cost-cutting, yielding lower labour expenses and a notable surge in productivity as the same output is achieved with fewer resources. This improvement underscores optimized processes through automation, streamlined workflows, and the adoption of more efficient technologies. Consequently, the liberated FTE capacity allows for strategic resource allocation towards higher-value initiatives, ultimately bolstering overall business performance and enhancing the organization’s ability to scale efficiently without a proportional increase in staffing.
