1: Digital Disruption – AI, Collaborative Platforms, and Cyber Security

The future of artificial intelligence in procurement

Conversations about artificial intelligence abound – and, indeed, AI adoption rates and its importance to operations in supply chain and manufacturing businesses worldwide are projected to increase. 

Figure 1 Artificial intelligence (AI) adoption rate in supply chain and manufacturing businesses worldwide in 2022 and 2025, % (Source: Statista)

In the short term, AI will automate routine, administrative tasks that have typically taken up much of a procurement team’s time, including document generation, data entry and analysis, initial vendor negotiations, and market trend monitoring.

In the long term, the use of AI in procurement will extend beyond simple automation. We expect advanced use cases for AI in procurement to include:

  • Dynamic negotiations: AI will support more complex, data-driven negotiations. This will include guiding contractual terms and intricate pricing structures and tailoring agreements to meet the needs of both parties
  • Strategic procurement through predictive analytics: AI-driven predictive analytics will leverage comprehensive data analysis to predict market trends and potential supply chain disruptions. It will use this to recommend proactive adjustments to procurement strategies
  • Holistic sustainability assessments: AI tools will help procurement teams to analyze datasets related to suppliers’ environmental impact, the ethics of their business practices, and social responsibility. This will allow for data-driven decisions that align procurement processes with business-wide CSR and environmental sustainability goals

Ultimately, however, a combination of human intelligence and technology are needed. Procurement should focus on using AI as a facilitator to better negotiations and supplier relationship management, with human emotional intelligence as the main driver.

Artificial intelligence: Getting started

Deploying AI in procurement offers significant opportunities, but it also introduces risks that businesses must proactively address. Thorough groundwork is essential before deploying AI tools. This includes:

  • Education: Providing comprehensive training and education to team members, making sure they understand the capabilities, risks, and limitations of AI tools. Emphasis should be placed on the need for human judgment to always validate AI outputs.
  • Data quality: Incomplete or low-quality data can result in performance and ethical risks, such as biased decision-making or inaccurate market trend analysis. Implement checks to guarantee the accuracy and appropriateness of data.
  • Governance: Make sure strong governance based on a clear understanding of use cases, risks, and protective measures is in place. Involve senior business leaders and stakeholders in the process, taking aspects such as legal, technology, and finance into consideration.

For a more comprehensive outlook, check out our viewpoint on AI in procurement.

Collaborative platforms (E-sourcing)


E-sourcing is gaining momentum as a means of gathering and comparing information about suppliers: this includes vetting new sources of supply, negotiating pricing, and mitigating cost increases for strategic spend categories.

The benefits for purchasers and suppliers are wide-ranging and include increased transparency through technology, improved trust between suppliers and strengthened relationships, efficient time usage for both parties, the unlocking of new business opportunities, reduced risk and cost, centralised communication, boosted productivity, emptied on-premises archives, and real-time market knowledge.

 

Figure 2 E-Procurement market forecast annual spend, € million[1] (Source: Gartner)

[1] USD/EUR= 0.9172 conversion rate as of 12/01/23, Bloomberg

CPOs are expected to continue increasing spend on E-Procurement platforms: Figure 2 illustrates that spending between 2021 and 2026 is expected to increase at a five-year compound annual growth rate (CAGR) of 14% (in constant currency terms). To date, E-Sourcing application spending has largely gone into standard sourcing and RFQ automation; advanced sourcing optimization and autonomous sourcing have yet to come into full play. 

As with all new technologies, the effective implementation of collaborative platforms requires a clear vision, a strong governance structure, and a supportive culture.

An AI and analytics disruptor: Digital twins

Digital twins are virtual models that simulate reality. In the context of supply chains, digital twins allow users to test out scenarios using real-world data, AI, and advanced analytics to identify dangers and optimize operations. This could look like:

  • Testing the benefits of supply base diversification from a risk mitigation, innovation, and cost efficiency perspective
  • Tracking and reporting supplier diversity metrics to ensure compliance with regulatory requirements
  • Optimizing resource utilization and waste reduction through the supply chain, contributing to sustainability efforts

Benefits include:

  • Improved decision making
  • Improved customer service, thanks to stronger product availability and timely delivery
  • Reduced cost, driven by streamlined processes and optimized resource allocation
  • A greater competitive advantage due to improved agility and responsiveness
  • Increased transparency across the supply chain, which allows for easier regulatory compliance and stronger accountability

But it’s not all good news … Are you on top of your cyber security?

There has been a notable increase in the number of cyber-attacks resulting from vulnerabilities within the supply chain.

These attacks can have devastating, expensive, and long-term ramifications for affected businesses, supply chains, and customers. Despite this, organisations often lose sight of their supply chain cyber security, with only one in ten businesses reviewing the risks posed by their immediate suppliers, according to the 2022 Security Breaches Survey by the UK Government. 

As organizations utilise E-Sourcing and E-Procurement applications, they must also treat cyber security as a matter of paramount importance to protect sensitive data and mitigate disruptions to their supply chains. Organizations must get on the front foot: dealing with cyber security after an incident occurs can be too late.

2: The war for talent

Shock events such as conflicts have upped pressures in the workplace, with many organizations facing an urgent need for specific expertise. This, combined with increased employee expectations around greater flexibility and remote working options, has made it an “employee” market for those with in-demand skills and experiences.

Procurement functions have been no exception. In fact, they have been hit particularly hard, with headcounts dropping significantly following the pandemic. When combined with the evolution of the procurement function – moving to a business-critical strategic role – the problems created by these gaps become far more pressing, especially when competition to fill such gaps not only comes from other organizations but also from other functions within the same organization.

Hiring, but more importantly, retaining

As pressures on procurement increase and become more complex, procurement leaders must take steps to attract, secure, and manage talent with the right skillset, more strategic thinking, and strong problem solving abilities. Without a clear plan, procurement will lose out to competition from internal functions seeking the same skills, as well as other organizations who have made this a priority sooner.

So, what would this look like in action?

Start by assessing current team capabilities. 

Conversations surrounding the war for talent tend to centre around hiring – and therefore overlook or underestimate the need for strong retention and skills development strategies. As the remit of procurement expands and reorients, procurement leaders must invest in high-quality training to help their teams develop the required soft and technical skills. In addition, outlining a clear path for career development shows teams that they have opportunities to progress within the company without having to jump ship. Investment in technology is another must for retention: minimize the burden of administrative and repetitive tasks through automation and shift the focus to value-adding tasks. Beyond readying teams for updated needs, these actions demonstrate to employees that they are valued.

But even in a well-oiled procurement machine, workloads and requirements will fluctuate and shift. In times of need, we see that successful procurement teams tactically utilize flexible external resources with the right skills and expertise to help meet specific needs.

And, looking at the bigger picture: to attract and retain the right people with the right skills, the role of Procurement fundamentally needs to be repositioned within organizations to reflect its strategic nature.

Looking for support in developing a high-performing team?

Find out how we can help upskill your team to make it future ready and get in touch via our Efficio Academy page

3: Sustainability

The intent and action mismatch

Organizations commonly use target setting to push for action and behaviour changes – and ESG is increasingly joining the list of C-suite priorities alongside more traditional measures of business success, such as revenue and profit. With voluntary ESG disclosures on the rise, companies across S&P 400, 500, and 600 have published CSR reports; these indicate high rates of target setting. Nonetheless, these activities generally remain in the lower stages of maturity, with businesses often disclosing their ESG-related figures rather than making stringent operational policy changes to achieve their targets.

Indeed, Efficio research shows that more than 70% of C-suite members state that ESG topics – including implementing net zero plans and delivering social impact – are important strategic priorities for their organizations. However, where these organizations spend their money paints a different story, with 47% planning to spend on environmental sustainability and 35% on DEI. 

While there is growing acknowledgement of the need for change among businesses, awareness and optimism alone cannot drive this. Organizations need a clearly defined means to achieving their ESG goals.

“ESG” is all-encompassing – so it’s unrealistic to rush to improve everything at once

Start by ironing out what your business’s ESG objectives and targets are and assess if you have accurate baselines and tracking abilities, and communicate clear targets both internally and externally. Engage your business’s ESG leads as subject matter experts and establish which agendas Procurement can drive forward. Implement sustainable procurement training and a sustainable procurement playbook to help fill any knowledge gaps and provide guidance and governance. For a more comprehensive blueprint, check out the CPO’s 10-Step Guide to Sustainable Procurement.

ESG will only continue to grow in strategic importance for businesses, and so getting on the front foot with clear action plans, roles, and reporting frameworks is crucial.

Unlock opportunity with supplier diversity

While environmental issues tend to take centre stage, another ESG topic that organizations are increasingly paying attention to is supplier diversity.

Supplier diversity programmes deliver social benefits and economic opportunities for disadvantaged communities – and we’re seeing companies ramping up their commitments to supplier diversity. Coca-Cola spends more than $800 million annually on diverse suppliers while UPS partners with multiple councils and third parties to run mentoring and training programs that support growth of diverse suppliers.

An inclusive procurement strategy also brings benefits beyond the ethical; it expands the supplier pool, thereby promoting healthy competition, which improves quality and brings down cost. However, an inclusive procurement strategy also comes with challenges, such as locating minority-owned vendors that comply with buyer requirements or making sure that investments in diversity programmes go to appropriate groups. These issues can be resolved by supporting suppliers with certification processes and training programmes to ensure standards are met and setting up auditing mechanisms to validate the authenticity of your diversity programmes.

Be clear on what supplier diversity means to your organisation

Based on our experience of working with various organisations, we find that conducting an assessment of your supplier base and then building a strategy sets a strong foundation for operational change. Develop tools to measure diversity-based performance parameters in readiness for competitive events. In the long term, it is imperative to have controls that monitor the diversity in your supply base.

A major challenge faced by “diverse” suppliers is being pigeonholed: buyers can have pre-conceived notions of the services they may provide. 

What does the journey to a fully developed sustainable procurement strategy look like?

Most organisations’ approach to sustainability and sustainable procurement is still at the early stages of maturity. Below is an overview of the phases we typically see businesses go through. Some key topics include target setting, the approach to supplier relationship management, performance tracking, and people training.

  • No sustainability baseline, strategy, or targets
  • Limited knowledge and awareness of sustainability
  • Sustainability is not built into roles and governance
  • Sustainability is not considered in planning, sourcing, or team structure
  • Sustainability is not included in policies or processes
  • Established a carbon emissions baseline
  • Initial sustainability targets are in place
  • Beginning to build sustainability awareness 
  • Beginning to assign responsibilities 
  • Considering sustainability in key sourcing initiatives 
  • Sustainability is included in the procurement policy
  • Supply chain objectives include sustainability goals
  • Responsibilities have been assigned within Procurement
  • Initial sustainability initiatives have been identified
  • Tools and templates are in development
  • Regular formal training is underway
  • Sustainability is included in procedures and contracts
  • Annual sustainable procurement objectives are set and action is incentivised 
  • Ongoing training and skills development plans are in place for Procurement
  • Sustainability initiatives have been implemented and are being tracked
  • Guidelines for sustainability-related risk management exist
  • Strategic approach to sustainability for key categories
  • Forums established to engage with suppliers
  • Sustainability is fully integrated into and influences purchasing decisions 
  • Sustainability targets for each category and activities are driven through category planning 
  • Board-level oversight of initiatives and performance
  • Automated dashboard to measure performance
  • Responsibility delegated at all levels with clear KPIs
  • Formal qualifications completed by key people
  • Supplier management is focused on sustainability  

Looking for support in driving sustainability improvements?

Find out how we can help your organization become a sustainable procurement leader and get in touch via our Sustainability and ESG service page.

4: Geopolitical

Agility in the face of disruptions

Disruption is the new normal

Geopolitical events can result in tariffs and restrictions, leading to raised sourcing costs, supplier shortages, production delays, and increased operational costs. The Russia-Ukraine War highlights the interconnectedness of economies and how such events can set off supply chain crises at a vast scale. Although there are fewer than 15,000 Tier 1 suppliers in Russia, organisations globally have 7.6 million Tier 2 supplier relationships with Russian entities, with more than 374,000 businesses relying on Russian suppliers, according to Dun & Bradstreet. From our work with our clients, we find that while procurement teams may have solid visibility over their Tier 1 suppliers, few have the equivalent over their Tier 2 suppliers.

Global demographics are changing dramatically. The world population is on track to exceed 9 billion by 2037 – and yet, with an aging population, the working-age population is shrinking. This calls for greater investment in automation and shifts in consumer preferences demand adaptability; e-commerce growth demands logistics adjustments.

Economic fluctuations, including inflation and exchange rate volatility, create challenges for businesses in maintaining stable pricing and accurate budget forecasts. Supply chain disruptions, such as capacity constraints and delayed orders, are further aggravating a challenging business landscape.

Amidst multi-pronged uncertainties and disruptions, building resilience, flexibility, and agility into the supply chain is imperative for navigating difficult times and maintaining a competitive edge.

Underestimate the importance of agility at your own peril

Supply chains today are more complex than ever: they can consist of hundreds of suppliers, service providers, and production and distribution centres spread globally, making them more vulnerable to shocks. Despite this, only 12% of leading global companies are sufficiently protected against future disruptions in supply chain and operations, according to the World Economic Forum, with the remaining 88% urgently requiring additional measures to build resilience.

The message is clear: CPOs must focus on supply chain resilience to survive and thrive in a fast-changing and disruption-filled world. Supply chain resilience – adjusting production levels, raw-material purchases, and transport capacity with greater ease – allows organizations to pivot in the face of potential disruptions. 

Agile supply chains call for new skills and resources. For instance, we see organizations maximizing the use of intelligent automation in both production and logistics settings and heavily leveraging digital technology in manufacturing. Collaborative robots and intelligent packaging machines are examples of technologies that can handle a considerably larger range of items and types of shipping and enable faster changeovers than the inflexible supply chain automation systems of the past.

Know where to narrow down activity and where to keep your options open

Working with clients on their procurement and supply chain challenges, we see that having a plan around supply chain mapping, conducting a thorough due diligence of suppliers, and running readiness reviews help organizations to navigate these uncertain times more smoothly. Activities may involve the following:

  1. Understand your profit drivers: Doubling down on what drives profitability becomes particularly important in uncertain times. Gaining a true understanding of profit drivers requires a complex cost-to-serve type analysis which encompasses all cost-producing factors, such as material prices, labour, transportation, servicing, and any overheads. Armed with this information, procurement and supply chain teams can help the wider business to understand where to reduce costs and assess the benefits of maintaining low-profit products.
     
  2. Strike the right inventory balance: An excessively lean inventory creates risk in times of disruption – but too much inventory also brings downsides such as higher storage costs and risk of damage or obsolescence.
     
  3. Manage risks from suppliers: Develop a clear understanding of your suppliers and their financial situation, which can help in addressing any issues sooner than later. Make sure this transparency stretches beyond Tier 1 suppliers and strengthen your supply chain against potential disruptions by ensuring diversity to your supply base.
     
  4. Adapt to changing situations: With unstable international markets and a greater scrutiny over the environmental impact of far shoring, companies should determine the viability of bringing operations such as manufacturing closer to home. 
     

Procurement of the future: start now to stay ahead

In our work with our clients, we see that some common attributes of success include vision-led and focussed leadership, an ability to balance short-term and long-term needs, a willingness to invest in change, and deployment of the right resources at the right time. 

Staying ahead of the curve will be no easy feat. However, tackling these challenges and opportunities head-on will be crucial to carrying organizations through future disruptions that will inevitably occur. The alternative is less rosy: fall behind and so lose out.
 

How we can help

Getting the right procurement framework in place to make sure your function is future-ready can present a significant challenge, and so partnering up with procurement and supply chain experts can help. Get in touch via our Procurement Excellence page to find out how our consultants can support you.

 

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