Direct material procurement, time to move to the front-of-the-line on digitalization

25 AUGUST 2020 | BLOGS

Situation unlike anything seen before… supply, demand and logistics breakdown on a global level

The set of challenges the global community experienced due to the pandemic in the first half of 2020 were unprecedented. Once organizations addressed the initial Covid-19 challenge of making sure employees, partners and suppliers were all safe, they turned their focus to the wide array of issues across the value chain. Supply was being interrupted on two dimensions – global suppliers shutdown in Asia and demand shifts that forced the food on farms to rot, unable to be harvested within the local economies. Large enterprise purchases by businesses dried up, while shelves for the same goods for direct consumption remained empty as demand patterns shifted. Lastly, when shipments were able to move, closed borders and limited availability of transportation options created logistical challenges.

The lack of visibility and capacity to respond quickly brought to light that there had been limited progress made by organizations on their digital value chain efforts. In the context of commodities and direct materials, the processes for trading, procurement, and supply chain execution were locked in a mix of manual steps, disconnected systems, and inaccessible spreadsheets. Central procurement teams were unable to assess the supply chain risks and company-wide impact they were facing. Finally, with workers being remote, communication and collaboration channels were limited across internal teams and extended out to core suppliers and partners.

It became very clear that the procurement organization needs to pursue an aggressive digitization agenda. Even more importantly, it must focus on the specific nuances of commodities and direct materials to be ready for the next round of disruptions. Procurement and financial leaders can no longer sit idle and make do with tools they are given that are inflexible and unable to meet the needs of this new environment.

Digitizing procure-to-pay, but with a direct material twist

Disruptions in the supply chain have been extensive. In a May survey by McKinsey, they found “73 percent encountered problems in their supplier base.  In the food and consumer-goods industries, 100 percent of respondents had experienced production and distribution problems, and 91 percent had problems with suppliers.“ What was most telling was the fact that:

“85 percent of respondents struggled with inefficient digital technologies in their supply chains.”

Source: McKinsey surveys of global Supply Chain leaders (May 15 – May 22, 2020)

With direct materials representing roughly 67% of revenues, why are procurement organizations across multiple industries including Agriculture, Food and Beverage and Chemicals still relying on legacy ERP systems to digitally transform their processes? Some organizations have looked to procure-to-pay (P2P) vendors for help, but they lack focus and have limited expertise on this category of spend. Gartner has even gone so far as to comment:

“Despite slow improvement, support for managing the P2P processes for direct materials spend continues to be underwhelming in suites offered by general P2P vendors. This use case had the lowest average score across the report”

Critical capabilities for P2P Suites”, Gartner, 9 September 2019

It is time for direct procurement teams to push to the front-of-the-line and press for digital change. But what are the core areas to focus on?

Procurement and IT teams will want to include additional elements:

  • The ability to support remote work, on an enterprise scale
  • A more modular approach then the ERPs of old allowing for faster implementations and time-to-value
  • Increased utilization of advanced technologies (Blockchain, AI/ML, Low code/no code automation) to accelerate decision making while helping to mitigate skills shortages across the various teams
  • Support open integration to bolster the ability to re-use existing systems where appropriate
  • Offer improved consumability/usability. Take advantage of the expertise of vendors/partners who understand the direct material procurement process

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