The future of Procurement Automation and the challenges of decision making

A house-maker can make an e-procurement decision to his own satisfaction, if the rules in his mind are clear what he is maximizing or minimizing; when a house maker clicks on the platform, he is one and only decision maker. This involves very little transaction cost, this is precisely the reason why on-line procurement is more efficient.

A large corporate entity would need complex structures to be able to replace this with roles and responsibilities and monitoring of KPIs of different functions, together with enforcement of values, principles and rules of engagement in Procurement.

Similarly what is offered by a platform in form of an efficient procurement would need layers of scrutiny if it is to be applied in a large firm, whether for a standard or a non-standard item. It would entail budgeting and accounting and strategies of all kind. Automation in Procurement cannot ignore some of these nuances that add value to procurement through checks and balances, but automation do provide room to delayer and tighten organizational engagement and reduce transaction costs thereby.

Amazon has more than 300 Million catalogues, the ease of buying these products (by putting them on a cart) can never be matched by any other way. When the item is not standard and is user-defined there is however the challenge of search, selection and transaction involving scheduling and eventually logistics and efficiency management of such items. All this makes procurement automation in large corporations challenging for user-defined products. Transaction costs are high for these as multiple agencies are involved both on the user-buyer side as well as on the seller side.

The easiest would be to convert as many user defined items into standard items, which is itself a task. But once that is done, creating a process for making catalogues for them which the user can click to buy and deliver would make the process simpler. This potentially would take care of may be 20% of the items.

But buying entails decision making at every step and most organizations create a matrix structure to be able to make optimum decisions. This needs also rules, principles and a governance mechanism. This would entail determination of how the selection of the vendor would be made, how the payments are to be made, how the information would flow and what would be the imponderables; the process of negotiation or auction itself would be governed by some rules.

Let me start with the basics of the procurement process:

Spend and search: Large organizations have typically thousands of items that are procured at defined or undefined intervals and at specified or unspecified quantities to facilitate certain production or service activities of the firm. From the maze of spend data, aggregation is the first step leading to some kind of forecasting of demand based on which certain supplier search can be initiated. This would then lead to RFQ floatation which in turn would lead to transmission of information on both sides for effective selection which must follow certain rules or principle of selection.

For standard items which can be catalogued, we can effectively squeeze all of this into a simple cataloguing effort, which would entail a backend job of ensuring that the item is sourced from the optimal source at the optimal cost after the principles of selection has been met. This would eliminate the entire process of user putting a requisition for buying this item to the raising of the purchase order as all of this can be eliminated by clicking on the catalogue, which has all the information required for buying and delivering that item.

A catalogue would need a rate contract with the vendor, which is then periodically reviewed for performance and the terms of engagement could be reviewed periodically as well.

A simple example would be let’s say a standard bearing is to be procured and the catalogue of this could be made available with photographs where multiple vendor selections could be done and some additional conditions could be put in form of a hierarchy table as well.

The user of this bearing could then make the selection and add it to his cart of purchase to be delivered to the MRO stores at the stipulated time.

The real work of firms cannot handle this event till a change management process is put in place, meaning that the MRP run, stocking policy, budget constraints, scheduling and logistics piece in the current form needs to cope with this new paradigm.

Most automation platforms struggle to do this as they have pre-determined solutions whereas the organizations have legacy systems of doing it in a particular way, which could be very efficient as well.

Contract negotiation and awarding: This is happening at the back end and this also has some challenges; for standard and non-standard items as well, to allow a transparent process of auction / reverse auction or any other form of negotiation would need a platform where this could be done on-line. There are some solutions provided by some service / systems providers, but integration is a challenge with the entire procurement process.

For example, while RFQs could be floated on line, conducting the negotiation online in the same system that will end up in awarding of a contract right up to the release of Purchase order is something which could be tedious.

Transactional process: The transactional piece is the next challenge, which would mean that scheduling of orders for processing right up to invoicing and receipt including logistics would mean that many interfaces in the organization would need to be touched on a virtual level through the platform.

While some parts of this is automated through the existing systems, not the entire piece is currently integrated.

The biggest show stopper for automation is the current process that has many checks and balances inbuilt that allows multiple agencies to be involved, instead of one, for making a procurement decision. It is typically a matrix structure of engagement, where rules are made for the different constituencies to compete with ideas so that a delegated and shared authority (with a hierarchy) can make the most efficient decision.

A house-maker can make a procurement decision to her own satisfaction, if the rules in her mind are clear what she is maximizing or minimizing.

A large corporate entity would need complex structures to be able to replace this with roles and responsibilities and monitoring of KPIs, together with enforcement of values and principles.

Procurement automation must be able to integrate all of this as well, otherwise it could make a very efficient decision by narrowing the boundary conditions or assumptions or a combination of standardization and differentiation could lead to an optimal outcome which need not be the best given certain objective functions to be maximized or minimized based on management priority.

Automation challenges are more in the business process area, change management better not be ignored.