In this guide, we’ll explore procurement management in the digital age, from top to bottom.
Among other things, we will look at…
- What procurement management is
- How it relates to similar disciplines, such as supply chain management and logistics
- Why procurement management matters
- How digital disruption and transformation are affecting procurement management
- How to stay current and relevant in the digital age
This guide is suitable for beginners who want to learn more about procurement management – as well as veterans who want to gain a better understanding of digital procurement management.
Procurement Management: Key Concepts and Definitions
To start off, let’s look at the basics of procurement management and related concepts:
Procurement management is a business discipline that is charged with obtaining the necessary goods and services for a business to fulfill its aims.
These duties include:
- Obtaining the necessary materials for a project
- Meeting deadlines, costs, and quality expectations
- Development of procurement management policies
- Mitigate and manage risk
- Develop goals, objectives, and performance metrics
- Optimize procurement over time
- Maintaining relationships with suppliers
When procuring products and services from vendors, procurement managers must make decisions around:
- Whether to procure. In some cases, it is cheaper to make, insource, or work around.
- What to procure. The decision of what to procure requires evaluation of vendors as well as the actual materials.
- How to procure. Different types of contracts carry different levels of risk, based on cost type, payment methods, and so forth.
- How much to procure. The amount of services and goods delivered has a significant impact on budgets and outputs.
- When to procure. Lead time, logistics, project schedules, delays, and other variables can have a significant impact on the outcome, efficiency, and costs of a project.
Procurement management naturally centers its efforts around the procurement process itself.
The Procurement Process
In short, there are a few key stages to procurement management:
- Plan the procurement
- Execute the procurement
- Manage procurement
- Close procurement
Throughout this life cycle, procurement managers handle issues such as:
- The procurement plan. A procurement plan is an overall strategy for obtaining a set of required goods or services. It outlines what to buy, where to source it, when to buy it, and more. Stakeholders can evaluate the plan together and use it to make determinations about the different aspects of the procurement process, such as contracts.
- Contracts. Contracts are agreements between the buyer – in this case, the procurement team – and the seller. In typical procurement processes, there are a number of common contract types, each of which stipulates different pricing structures, timelines, and requirements for both buyers and sellers.
- Solicitation. During this stage of the procurement process, procurement departments will requisition information, proposals, or quotations.
- Bidding. In the bidding process, vendors will submit specifications, proposals, and quotes. At times, negotiations take place instead of bids when, for instance, the purchase is too complex or requires ongoing effort on the part of both parties.
- Evaluating bids. Once bids have been submitted, the organization that solicited those bids will evaluate them fairly and openly, examining factors such as price points and vendor specifications.
- Contract signing. After a bid has been accepted, both parties will sign the contract and the purchase process can move forward.
- Contract management. It is common for contracts to evolve over the course of a procurement process – that is, one or both parties may propose amendments as the process moves forward.
- Logistics management. Logistics (see below) manages the transportation of goods and services into and out of the organization that is doing the procuring.
Due to the complex nature of large-scale enterprise projects, procurement management is an indispensable business function that has a large impact on the bottom-line efficiency and ROI of a project.
Supply Chain Management vs. Procurement Management
Procurement, as we have seen, is the process of acquiring the goods and services needed to fulfill business objectives.
The supply chain, however, is the entire network of vendors and suppliers that helps get an organization’s products into the hands of the end customer, including procurement and delivery.
Procurement, in other words, focuses on the first half of the supply chain – suppliers and vendors.
Delivery focuses on the latter half of the supply chain – sellers and customers.
Supply chain management is aimed at overseeing and managing the activities of the whole supply chain, to ensure that it is operating efficiently, effectively, and responsibly.
It involves areas such as:
- Quality control. It is important to evaluate and manage the quality of procured materials, since that quality can have a dramatic impact on an organization’s ability to operate effectively.
- Procurement. Being able to procure required materials also directly impacts organizational output and performance, which is why it is so critical to obtain those materials in a timely, efficient, cost-effective manner.
- Market research. The supply chain landscape is dynamic and continually changing, so supply chain managers must understand the landscape available to them, including available suppliers, competitors’ suppliers, marketplace trends that will impact the supply chain, and so forth.
- Sourcing. Sourcing refers to choosing and acquiring suppliers for products, materials, services, or goods for business activities.
- Logistics. Logistics specifically focuses on the planning, transportation, and delivery of goods to and from an organization – as well as the management of information related to logistics.
An inefficient supply chain will end up inflating costs for any activities that rely on that infrastructure, such as procurement.
Purchasing is closely related to procurement, but they are distinct.
Procurement, as mentioned above, focuses on vendor selection, setting payment terms, contract negotiation, and purchasing of goods.
Large-scale enterprise purchases often revolve around:
- Defining a need
- Inviting tenders
- Shortlisting potential suppliers
- Qualifying and evaluating candidates
- Awarding contracts
- Contract management
- Approval and payment
More straightforward purchase approaches simply involve acknowledging a purchase order, providing advance shipping notice, sending and recording invoices, and paying the supplier.
Regardless of the complexity of the purchasing process, however, it is a relatively straightforward and routine process – at least when compared to procurement.
Logistics vs. Procurement
Logistics, like procurement, is one activity within supply chain management.
Here are a few characteristics that separate logistics from the other functions mentioned above:
- Logistics focuses only on the movement of goods and supplies in and out of an organization
- Inbound logistics concerns itself with the procurement and transfer of goods and supplies into the company
- Logistics and supply chain management include traditional logistics activities focused on transportation, inventory management, and procurement, as well as “newer” supply chain management activities, such as marketing, finance, and customer service
As with every other supply chain activity mentioned here, logistics is an essential business function that manages costs while ensuring successful delivery of products and services.
A Procurement Management FAQ
Next, we will explore three of the most important and commonly asked questions about procurement management, starting with…
Why is procurement management important?
As briefly mentioned above, procurement management is a necessary business function.
Among other things, an effective procurement function:
- Ensures that businesses have the required goods and services needed to provide services to their clients and customers. Naturally, if an organization lacks the goods and services it needs to operate, then its operations and marketplace performance will suffer. Procurement management ensures that an organization has the materials it needs – on time and at cost.
- Keeps costs manageable. Supplier management, sourcing, logistics, procurement, and related functions are all expenses that can be managed and reduced. By keeping costs low, procurement and other supply chain functions can free up more budgetary resources for the rest of the organization.
- Prevents expensive mistakes. Mistakes can be costly and even damaging to an organization’s performance. Delays, for instance, can impact the production of goods or services, which can hurt sales, profit margins, and more.
- Creates more streamlined workflows for employees. Procurement can also impact the employee experience, especially in cases where their jobs rely on efficient procurement.
- Increases preparedness. Unforeseen obstacles or market developments can cause major problems if organizations are not prepared. Having a deep understanding of – and healthy relationships – with the upstream supply chain can prevent such problems.
To name just a few benefits.
However, developing and maintaining an effective procurement function in the digital age is no easy matter. It requires in-depth planning, coordination, and execution on multiple levels.
Additionally, organizations must be prepared to fully adopt new digital products and technology, as covered below.
Who handles procurement management?
In smaller companies, a single person, department, or division may be responsible for procurement, purchasing, supply chain management, and related functions.
In larger organizations, procurement management is a department that operates under the supply chain management umbrella.
Enterprises with their own procurement departments will have job positions such as:
- Procurement manager
- Supplier and relationship manager
- Contract administrator
- Procurement professional
- Inventory manager
In short, the larger the business, the more specialized the job function.
How is procurement management changing in the digital age?
Today, innovation is driving digital disruption and transformation in the supply chain, which naturally impacts procurement.
According to a survey by Jabil, for instance:
- Increased labor costs, demand, and supply constraints are three of the biggest factors impacting supply chains
- Market dynamics are forcing the majority of supply chain strategies to adapt or transform (93%)
- 62% of companies adopt new technology in order to manage risk
- 95% agree that better technology decisions made today will help long-term supply chain strategies
Although the essential job of procurement and supply chain management remain the same, Jabil’s respondents admitted that everything “under the hood” looks different.
To keep up in the digital era, it pays to examine modern market dynamics more closely.
Procurement in the Digital Age
If businesses fail to become digital-first, forward-thinking organizations, they will likely experience supply shortages, narrowing margins, delays, and other problems.
Preventing these issues requires a deep understanding of digital disruption, its impact, and how companies are adapting.
Let’s start this examination by looking at the effects of digital technology on procurement:
The Impact of Technology on Procurement Management
As mentioned, innovation and disruption are perhaps the driving causes behind digital transformation in the digital age.
For instance, a number of digital trends are contributing to what Jabil calls the “intelligent digital supply chain”:
- Changing generational expectations. Younger generations of consumers have different expectations than older generations. This customer pressure is pressuring brands to improve the end customer’s experience – and part of that process requires a supply chain that is faster and more flexible.
- Product complexity. From smartphones to cars, today’s products are becoming increasingly more complex, which, of course, increases the required complexity of the supply chain.
- Collapsing product life cycles. Competition is increasing across many industries, and when it comes to electronics and software, many organizations are responding by shrinking their product release cycles. This pressure compels entire markets to keep pace by speeding up their own product release cycles.
- Outsourced manufacturing. Though research suggests that outsourced manufacturing will become more common in the coming years, this adds more demands on supply chain management, which must turn to resource planning systems in order to keep up.
- Globalization. The globalizing economy increases the globalization of the supply chain. Organizations can, on the one hand, employ workers around the globe. At the same time, though, there are ever-increasing risks of supply chain interruptions from military incidents, natural disasters, and even virus outbreaks, as we saw with Covid-19.
- Supply chain savvy in the C-suite. Business executives are beginning to see the value in supply chain management as a strategic resource, rather than just a tactical one.
And since procurement, as mentioned, falls under the umbrella of supply chain management, these trends are also directly affecting procurement departments.
A number of technologies are impacting procurement and helping supply chains become more “digital” and “intelligent,” including:
- Data and analytics
- The Internet of Things (IoT)
- Artificial Intelligence (AI)
- Robotic Process Automation (RPA)
Trends such as these are revolutionizing the way that supply chains and procurement departments operate and deliver value.
However, as we will discover later, digital adoption and transformation themselves require effort, planning, and careful execution.
To fully realize the value of new software and build new processes on top of that technology, organizations must close the digital skills gap and ensure that employees are proficient, engaged, and productive.
Digital Disruption, Adoption, Transformation, and Maturity
To better understand how procurement and supply chain management are evolving, it pays to understand digital transformation concepts in detail:
- Digital innovation. Innovations in digital technology create new products and services that offer a significant advantage over existing options. For instance, the smartphone was an innovation that offered a wide range of unprecedented functionality.
- Digital disruption. When innovative technology offers a large enough advantage over existing solutions, then it can have a disruptive effect on the marketplace. A procurement platform that offers massive cost savings, for instance, can grant a competitive advantage to those who adopt it, pressuring all market players to adopt that new platform.
- Digital adoption. Digital adoption means adopting new technology and using it to its fullest extent and for its intended purpose. Unless organizations fully adopt and integrate technology into their business processes and workplace, they will not be able to realize the actual value of those tools.
- Digital transformation. Organizational change that revolves around digital-centric strategies – leveraging technology to enhance processes and products, for instance – is called digital transformation. For many organizations, digital transformation aims at becoming a digitally mature, digital-first organization.
- Digital maturity. Digital maturity is a scale that measures the digital capabilities of an organization. This definition includes not only the available technologies, but how effectively that technology is utilized. It depends on employee capabilities, IT infrastructure, business processes, organizational culture, and more.
In procurement, digital transformation leads to a digitally mature supply chain that is agile, lean, and “intelligent.”
Change Management and Digital Transformation
No procurement function can become digitally mature overnight.
A digital transformation effort requires careful planning and execution over a long period of time. It is not uncommon for transformation efforts to take several years.
When implementing any large-scale transformation effort, it is important to manage change efficiently and effectively.
Change management is the business discipline dedicated to managing such large-scale change efforts.
During any organizational change – such as digital transformation – change management can help:
- Assess and mitigate risk. Risk is inherent in any business endeavor, especially in large-scale organizational transformations. Since miscalculations can be so costly, risk assessment should be performed at the outset of organizational change efforts.
- Overcome other barriers to change. There are many obstacles that stand in the way of successful change. Lack of executive buy-in, employee resistance, budget constraints, and poor planning are just a few examples.
- Minimize employee frustration and resistance. One of the most common barriers to change is employee resistance. Effective communication, employee training, accountability systems, and incentives are common tactics for reducing that resistance.
- Improve change project efficiency and outcomes. Structured organizational change efforts deliver far better results than those that are informal and unstructured. By taking a data-driven, results-oriented approach, change managers dramatically improve the outcomes of organizational change initiatives, resulting in a net positive for the organization.
- Ensure that employees are well-trained, engaged, and productive. Employee productivity is directly linked to the outcomes of a change program. For that reason, change managers focus extensively on motivating employees and maximizing engagement.
- Maintain alignment across a number of business functions. Large enterprise change efforts involve multiple departments and levels. Unless these activities are coordinated effectively, they will likely operate in isolation, becoming more misaligned throughout the life of a project.
- Maximize the value of new technology and software. When it comes to digital transformation, organizations must exploit that new technology to its fullest extent. If they fail to do so, then their digital transformation efforts – and their business endeavors – will likely run into serious roadblocks.
Managing change effectively can mean the difference between success and failure in a change program. And, given the high stakes in digital transformation, organizations should do all they can to ensure that their digital change programs succeed.
Otherwise, they will fail to capture the full value of their technology, software, and process changes.
Adopting Procurement Software
Next, we will look at some of the most important software that is changing the way procurement departments operate.
- Track expenditures. Having a one-stop platform to track expenses can help procurement managers stay organized, save time, and reduce error rates.
- Speed up purchasing. By placing the purchasing process under a single hood, organizations can make the entire purchasing process faster and more efficient.
- Visualize the entire purchasing pipeline at once. A lack of insight into the purchase process – caused by an inefficient or overly complex purchasing process – can lead to errors, oversights, and extra expenses. These can be mitigated with the right analytics and visualization aids.
- Use analytics to gain real-time insights into organizational spending. Real-time data and reporting can help managers know exactly where the organization’s money is going, without waiting for data entry or expense reports. This real-time information offers more insight and, more importantly, more control over purchasing.
- Manage spend proactively with vendor management, end-to-end purchasing workflows, and more. The less unified the technology stack, the more difficult it is to work efficiently and manage the upstream supply chain effectively. Procurement platforms put all of the necessary features into a single dashboard, helping to streamline workflows and improve procurement performance.
However, as mentioned, purchasing is only one part of the procurement process.
For more comprehensive, in-depth functionality, it is necessary to implement procurement platforms, discussed below.
- Spend analysis
- Category management
- Savings tracking
- Contract management
- Supplier management
- Supply chain collaboration
Unified platforms are ideal for larger enterprises that need robust functionality that can digitally transform their entire procurement process.
Supply Chain Management Platforms
Supply chain management platforms are robust platforms that extend their functionality to include:
- Product life cycle management
- Supply chain planning
As with every other enterprise-grade tool on the market, these platforms vary in complexity and functionality.
Each covers a different aspect of the supply chain, such as the physical or informational side of the supply chain.
An informational supply chain platform, as the name suggests, focuses on improving information flow, collaboration, and coordination.
Physical supply chain management platforms, however, focus on physical assets, such as factories, sensors, and so forth.
Both types of platforms are crucial to “future-proofing” the supply chain and ensuring that supply chains can stay relevant in the coming years.
Digital Adoption Platforms (DAPs)
Digital adoption platforms (DAPs) are automated training platforms that are quickly gaining traction in a multitude of industries.
These training solutions have a significant, positive effect on:
- Employee proficiency and productivity
- Employee training efforts
- Digital transformation initiatives
- Software implementation, utilization, and ROI
They are built upon a set of features such as:
- Software walkthroughs. In-product walkthroughs take users one step at a time through key workflows. With these contextualized tutorials, users can learn to use a new application with zero human intervention – dramatically decreasing the need for technical support.
- Product tours. A product tour, unlike a walkthrough, introduces a series of features quickly and efficiently. In under a minute or two, users can become familiar with an entire platform and understand its value proposition – ideal for onboarding new users or customers.
- Software analytics. Software analytics track how users interact with a platform. This information can then be used to improve software tutorials, understand user needs, reduce errors, and more.
- Task automation. Automation bots can be assigned to perform certain tasks, such as repetitive data entry. This can be used to free up user time for more valuable activities or to help infrequent users complete workflows that they are not used to.
Ultimately, these platforms are designed to accelerate and enable digital transformation efforts.
In procurement, they can be used to boost user productivity, reduce confusion, and enhance digital maturity in the supply chain.
They have been built to tackle a major problem that is plaguing many industries when it comes to digital transformation: the promise offered by innovative digital solutions … versus the actual value that they deliver.
Digital Transformation in Procurement: The Promise vs. the Reality
Many organizations invest in new software with high expectations.
New platforms and software promise a great many benefits, with the ultimate aim of enhancing digital maturity and organizational performance.
Most companies dedicate significant time, human capital, and resources into new software and organizational change … only to see lackluster results and mediocre returns.
Why Digital Transformation Efforts Fail
There are several reasons why technology investments fail to pay off.
One of the biggest: a poor digital adoption strategy.
Without one, digital transformation efforts are likely to:
- Make the digital workplace more confusing and complex
- Overwhelm workers with new tools, skill requirements, and expectations
- Create a fragmented technology stack or work environment
Unfortunately, by simply “adding” a new technology into a work environment, organizations only frustrate employees and decrease productivity.
One aim of any digital transformation strategy, therefore, should be to create a simplified experience for employees.
After all, the outcomes and ROI of a digital transformation effort rest on their shoulders, so digital transformation managers and procurement managers should understand the critical role that employees play.
How to Overcome the Top Challenges to Transformation
Procurement has its own unique set of circumstances to deal with in the digital age.
They must protect shrinking profit margins, increase efficiency, keep up with the evolution of their supply chain, and so on.
However, procurement faces many of the same challenges as any other business function.
According to a study by Efficio, for instance, some of the top challenges to digital transformation faced by modern procurement organizations include:
- Digital readiness
- Lack of urgency
- Difficulty integrating new technology into a legacy environment
- Lack of internal expertise/talent
Overcoming these obstacles is certainly no easy feat.
However, the entire digital economy is transforming, which means that transformation is a necessity.
To keep up, digital adoption strategies should revolve around three core principles:
- Data. A data-centric approach keeps business processes centered on real-world information, instead of preconceived notions or opinions. In procurement, as well as digital transformation efforts, data is necessary for understanding performance metrics, measuring ROI, and making informed decisions.
- Worker-centricity. As we have seen, employee support is vital to the success of a digital transformation effort. If procurement professionals lack expertise, skills, or an understanding of new technology, for instance, they will be unable to drive change forward.
- Workplace simplicity. A complex workplace adds significantly to employees’ workloads, increases frustration, decreases productivity, and can reduce employee retention. Unless product adoption is handled with care, complexity can grow to the point where it interferes with employee duties and digital transformation programs.
By following these principles – and implementing a strategic change management program – organizations will see much better returns on their digital transformation efforts.
Why Change Management Is a Must
Change management focuses on change at the individual level.
This business discipline is devoted to organizing, coordinating, managing, and optimizing organizational change efforts – such as digital transformation.
Among other things, change management is tasked with:
- Building an awareness of and a desire for change
- Reducing employees’ resistance to change
- Training employees in order to improve proficiency, productivity, and performance
- Maximizing engagement and motivation in order to propel a change program forward
- Reinforcing and instituting change to ensure that it remains permanent
In the digital era, change management is becoming more important than ever.
Since organizations are changing rapidly – and continuously – change management has a profound impact on the outcomes and success rate of digital transformation efforts.