Why Successful Digital Procurement Transformation Needs the Right Operating Model

WHY SUCCESSFULNEEDS THE RIGHTDIGITAL PROCUREMENTOPERATING MODELTRANSFORMATION WHY SUCCESSFULDIGITAL PROCUREMENT TRANSFORMATIONNEEDS THE RIGHT OPERATING MODELWHITE PAPER2If not effectively managed, supply chain disruptions can cost an organization between 6% and 10% of revenues.1 In addition, the disruptions impact reputation, increase operating costs and diminish customer loyalty.The financial impact is significant, as organizations experience a major supply chain disruption an average of once every three years. Consider the disruptions since 2020 — the Australian bush fire, Indonesian floods, blasts in Beirut, locust swarms in Africa, riots in several parts of the world, the Suez Canal crisis, the current shipping container shortage and, the largest of all, COVID-19-related disruptions — and now, the geopolitical instability due to the Russia-Ukraine war. The escalating level of uncertainty has made the CPO’s role in managing supply chains more critical. The world is headed toward an even more volatile environment where disruptions and black swan events are expected to occur at higher frequency, driven by factors such as climate change and geopolitical power shifts. The question for CPOs is how to build a resilient and agile supply chain that can respond and recover faster than the competition, as it is the ability to rebound quickly that distinguishes one organization from all the others in the marketplace. Digital transformation has been touted as the panacea that can transform organizations — the theory is that a mix of new tools such as robotic process automation (RPA), machine learning, artificial intelligence (AI) and natural language processing (NLP) combined with existing S2P suites is expected to make procurement deliver dizzying results, reduce costs by 55%2 and become a corporate rockstar. How true is the hypothesis? History often repeats itself; today’s new tools are distant cousins of e-sourcing platforms and S2P suites of the early 2000s. If your organization didn’t get the maximum out of these first-generation platforms, there is a good chance that investments in new tools will offer comparable results. Our previous paper from the Digital Procurement Series, How to Ensure Your Digital Procurement Transformation Program Delivers on the Promise, discussed the digital promise and what organizations must do to enjoy the full benefits — what must change, what must be adopted and what must be brought back. This paper will focus on the procurement operating model — what got you here and what will not get you there. WHY SUCCESSFULDIGITAL PROCUREMENT TRANSFORMATIONNEEDS THE RIGHT OPERATING MODELWHY SUCCESSFULDIGITAL PROCUREMENT TRANSFORMATIONNEEDS THE RIGHT OPERATING MODELWHITE PAPER3FIGURE 1WHY IS DIGITAL OPERATING MODEL CLARITY IMPORTANT?Adding 10 instruments to an orchestra with an absent or ineffective conductor only leads to more noise. The procurement operating model serves as the conductor, and organizations should pay more attention to it when building a new age procurement function. An operating model clearly defines responsibilities, key performance indicators and enablers for internal and external team members. A tunnelled view of merely investing in a new platform and expecting magical results, hoping that teams use it effectively, will only lead to expensive mistakes and heartburn for the organization and suppliers.So, which is the “right” procurement operating model, and how does one build it? The answer, as with most things, is it depends — there is no one-size-fits-all approach. The right operating model is an evolving entity based on current procurement maturity. It depends on factors such as current return on investment (ROI), platform utilization, availability of quality data, relationship with business/budget holders, needs of the business, experience and the motivation levels of procurement team members. Figure 2 shows the segments an organization can fall into based on maturity. For example, one that invests in a decent S2P module/suite and processes can be anywhere between a semi-digitized to digitalized-plus state.Source: GEPEmergingEnablersCorePr ocurementFunctionsBackboneArchitectureOrganization & Strate gyPr ocurement ROISavings, Risk, Agility, Quality,Innovation, Susta inability, Custo mer ExperiencePolicy, Pr ocess & Governance Exist ing data sources –ERP, S2C platform data, MDM,performance data fro m mach ines etc.New Data Sources (IOT/ Sensors, IOT, Bi g data)Busi nessPart neringCategoryManagementSource toContra ctProcure toInvoiceInvoice to Pay SupplierManagementAnalyti csArtifi cialIntelligenceBig DataRPABlock ChainCloud based Data LakeNLPMachineLearningIntelligentContentExtr action WHY SUCCESSFULDIGITAL PROCUREMENT TRANSFORMATIONNEEDS THE RIGHT OPERATING MODELWHITE PAPER4FIGURE 2Adding to this complexity, depending on how previous investments in a platform and nearshore/offshore team mix turn out, the organization may have a centralized or matrixed procu