Preparing today for tomorrow's procurement technologies

By Patrick M. Byrne -- Logistics Management, 7/1/2005

Procurement technology has come a very long way in a very short time. However, it's clear that additional, dramatic advancements are right around the corner, and high-performance businesses are already preparing for them now. This column outlines four of the most promising trends in procurement technology that any company focused on high performance should carefully consider today.

1. Maturing and scaling of procurement technology

Procurement technology's footprint will continue to expand. Early on, procurement technologies concentrated largely on the acquisition of indirect materials (those not related to the manufacture of the product). Later, solution providers expanded their range to address direct materials (those used in the manufacture of the product). Down the road, however, challenges pertaining to the procurement of services will drive the greatest changes in this technology. Already, more than 33 percent of a typical organization's spend is on services such as contractors, transportation and logistics, and training. Purchasing departments typically manage less than 10 percent of that spend, and compliance with preferred-provider programs often is low. New, service-focused procurement applications will enable companies to overcome these challenges by helping them curtail "rogue" spending, work efficiently with a wider range of suppliers, simplify the sourcing process, and actively manage total costs.

The role of e-sourcing also will continue to grow. Originally designed to support reverse auctions, e-sourcing capabilities are starting to find their way into core applications, including enterprise resource planning (ERP) systems. As this continues, sourcing will be optimized by more sophisticated workflow and knowledge management functionality. More powerful analytical tools will help companies proactively assess sourcing opportunities, identify alternatives, and evaluate proposals from prospective suppliers.

Similar innovations will occur in decision-support technology. In transportation, for example, buyers will be better equipped to present complex, multi-variant scenarios, including specific business constraints. Suppliers will be able to respond with multiple bid variants of their own, including price-break points and discount percentages.

2. Smarter business intelligence

It's equally likely that procurement systems will become even smarter about gathering, interpreting, and communicating information. Since procurement-reporting capabilities have traditionally been weak, the value of better analytics is enormous. For example, opportunities to aggregate spending across departments or business units will be captured more readily. Off-contract purchases will be identified and addressed more easily. In the near future, such capabilities will help companies perform more in-depth analyses in less time, maximizing their ability to negotiate with suppliers, manage supplier performance, and free up buyers to concentrate on strategic activities.

However, the greatest value will be improvements in the speed of decision making, with alerts, triggers, or reports customized by end users. When this happens, the procurement function will become more proactive, identifying problems before they become serious and flagging cost-reduction opportunities. In effect, higher intelligence will help ensure continuous improvement while "democratizing" companies' information management capabilities by putting more powerful tools in the hands of those who have the insight to leverage them.

3. Integration of procurement technology with other business areas

Companies also should expect that procurement technology will integrate more readily and completely with other parts of their organizations. Imagine tighter linkages to product life-cycle management (PLM) and the value such connections would bring to direct-material sourcing. After all, the relationship between product development and procurement is innate: Up to 80 percent of direct-material costs are locked up in the design and prototyping phases. Better linkages with e-sourcing systems would also enhance product development as well as improve reuse of parts, streamline item acquisition and availability, expand sources of supply, and streamline access to preferred vendors. All in all, more comprehensive integration means new chances to design costs out of new products.

Better linkages with planning and forecasting represent a similar opportunity, particularly when it comes to direct materials. Already ensconced in most vendors' pipelines, such innovations will help reduce costs by providing future materials requirements to suppliers. In turn, suppliers will be able to respond more quickly, without maintaining excessive inventories or extra manufacturing capacity to handle frequent crises.

4. Stronger influence of Web services on procurement

Lastly, companies should expect Web services to have a stronger influence on procurement practices. Today, procurement professionals access various portals to acquire materials, check status, complete transactions, research potential vendors, and manage e-sourcing events. Soon, however, more of those interactions will happen transparently between systems, using open-standard software to connect applications and data sources over the Internet. For example, when an item is ready to ship, a supplier's system will automatically generate and submit an advance shipping notice. Later, invoices will automatically be generated and forwarded.

Very soon, the focus of Web-services development will shift from infrastructures and standards to actual application components, such as industry-specific content. Shortly thereafter, early-adopting companies will be able to:

• Simplify connections between disparate systems to reduce connection costs and enhance collaboration with suppliers
• Readily access new applications, extending information transparency and granularity
• Share more procurement-related information with selected suppliers, thus reducing costs and fostering more long-term relationships.

Procurement-related economies have been well documented in recent years. Cost reductions associated with e-auctions, for example, frequently reach 15 percent of the relevant spend. Outsourcing the procurement function has been shown to yield even greater savings, in addition to cutting operating expenses, improving capital allocations, and generating new revenue streams. But as more companies upgrade their procurement capabilities, the competitive advantage created by mainstream improvements will shrink. By seeking opportunities that exist in tomorrow's procurement tools, early adopters can help ensure their success in today's markets and their positioning for the future.