March 11, 2021
The desire to get the most from one’s collective trading partners, while simultaneously streamlining the time and effort spent on sourcing, is as old as the merchant class itself. From the earliest credit-issuing sellers of the Assyrian and Sumerian empires to the ancient Chinese nobles’ dealings with commodities brokers and the rise of merchant trade in Europe in the Middle Ages, those responsible for finding and procuring goods and services at scale have struggled with how to buy from the right people—and buy wisely.
The Industrial Revolution taxed the old ways of enterprise recordkeeping, making procurement a discipline all its own. And while relationships have always been key, the wide-scale proliferation of enterprise computing revolutionized sourcing in the mid-19th century—applying methodologies and metrics to procurement contracts and transactions.
Today, a variety of technological and societal advancements mean accelerated change within the sourcing function. Specifically, seven things came together in previous decades to get sourcing where it is today:
The 1990s brought the European Union, NAFTA and an unprecedented level of globalization. The millennium showed us the resilience and ubiquitousness of enterprise systems, even as panic over the “Y2K” issue made mainstream news. Soon companies were going beyond the enterprise, connecting trading partners across the supply chain for whole new levels of efficiency—though sourcing often remained an afterthought. Now, with the strain placed on supply chains around the world during this last year by COVID-19, optimizing supply chains are top of mind. These events, and others, are resulting in a mass evaluation of sourcing performance expectations. According to Resetting Supply Chains for the Next Normal, a 2020 report by McKinsey, 93 percent of procurement and supply-chain leaders said they planned to increase the resilience of their supply chains post-COVID. Sourcing will be a key part of this rebuilding and refinement effort.
But where do we go from here? What will change, exactly? To scratch the surface, these seven sourcing aspects will see change in a way that presents global opportunity for procurement optimization as the digital supply chain transforms sourcing as we know it.
1. Digitally Enabled Reduction of Sourcing Costs
The wide-scale business disruptions of 2020 actually mean greater expectation for productivity over the coming decade. For all the corporate carnage 2020 created, a McKinsey report from earlier this year called America 2021: Rebuilding lives and livelihoods after COVID-19 points out that 2020 also delivered the largest six-month productivity improvement since 1965. Specifically, the U.S. economy saw a 10.6 percent increase in the second quarter and 4.6 percent in the third. Corporate stakeholders in the coming decade will demand more progress, more quickly and with less spend. Not only will sourcing be a big part of delivering these new efficiencies, but refinement of the sourcing function itself is also underway.
Effective procurement burns through a tremendous amount of resources: performing due diligence on new vendors, maintaining benchmarks, project management, price negotiation and auctions, contract review, requests for information, reporting, etc. And over the next 10 years, a number of enterprises will be looking to cut the costs of these functions wherever they can. Conventional sourcing takes a lot of people and time, dragging down Sales, General and Administrative (SG&A) costs on the balance sheet and hindering capital performance. Up until now, ERPs have provided awareness and control within the enterprise, but many external transactions are still performed manually. But the widespread practice of digitizing, connecting and automating a number of sourcing transactions is going to completely transform sourcing efficiency around the world.
The next 10 years will see exponential adoption of digital supply chain practices that will increase procurement automation and creation for a never-before-seen level of strategic value. In fact, these new models are already proving out for Elemica customers, who save an average of 10 percent as a result of strategic sourcing best practices and experience a lower total cost of ownership because of these savings.
2. Global Acceleration of Procurement Transactions
In the coming years, many things involving procurement will take less time. Analog, back-and-forth sourcing and procurement tasks are a tremendous draw on resources—and corporate leaders are weary of paying for outdated inefficiencies. The next decade will see enterprises leveraging superior data, technology and processes to get more done, more quickly, through digitization. As a result, the mass adoption of systems that will enable current and potential trading partners to automate sourcing transactions to speed everything up will become prevalent. A 2017 Gartner Digital Procurement Benchmarking Survey reported that 47 percent of respondents said analytics and automation will combine to bring about more procurement execution speed. And a 2018 study by Logility and APICS revealed that 30 percent of supply chain leaders surveyed highlighted the need to respond to customer mandates for faster, more accurate and unique fulfillment as a top business priority moving forward. Procurement in 2030 will feature more digitization, more connectivity and more speed across the board.
3. The Reinvention of the Purchase Order
Inbound Logistics reports that by 2021 more than 40 percent of manufacturers will have enterprise-wide digital transformation initiatives in place. Much of the conventional paperwork of previous generations will soon dissolve into real-time, sharable digital data—morphing the global economy into a largely digital one. According to research firm Statista, digital transformation investment between 2020 and 2023 alone is projected to reach $6.8T USD. In fact, by 2022 the firm predicts that 65 percent of global GDP will be digitized. So purchase orders will continue their transformation from procurement documentation to a mere electronic demand signal.
4. More Effective Utilization
Increasing supply chain connectivity over the next 10 years will also see more effective utilization of data, demand (buying power) and technology between markets, trading partners and across internal organizations for better overall business efficiency. Enterprises will increasingly have access to aggregated data and opportunities for more organized collective purchasing power through digitally interconnected business networks. Existing technologies such as artificial intelligence, machine learning, Optical Character Recognition (OCR) digitization, modeling, cloud computing, robotics and the Internet of Things (IOT) will be applied for a more collectively intelligent and capable supply chain. Artificial intelligence alone has the potential to make a huge impact on sourcing transaction efficiencies. According to a 2020 MHI Industry Report, only 12 percent of supply chain professionals say their organizations are currently using artificial intelligence—but 60 percent expect to be using AI within the next five years. Businesses will look beyond their own industries for inspiration in creating aggregated efficiencies within their sourcing operations.
5. Tighter Risk Management
The COVID-19 pandemic clarified the state of risk-readiness for each organization’s supply chain with absolute clarity, for better or worse. Global professional services company Accenture reported that 75 percent of companies had negative or strongly negative impacts on their business. Many enterprises’ lack of supplier resilience was made evident by production disruptions and shortages. Most enterprises found their supply chains deficient in some aspects—with the pain lasting long enough that it’s unlikely to fade in the memory any time soon. As a result, the next 10 years will see a rise in risk management-related implementations to help not only tighten up supplier risk, but also other aspects of supply chain performance including formalized contingency sourcing, an insistence on increased supplier and materials visibility, actionable data analytics, scenario modelling and closer collaboration in general with those suppliers, facilities and carriers who make production possible.
6. More Value from Vendors
By 2030, more enterprises worldwide will profit from greater visibility into, and tighter collaboration with, trading partners across the supply chain. Much of this value will come from the continued maturation of two different efforts: 1. Tighter digital integration with suppliers and 2. More efficient development of suppliers as win-win partners.
When it comes to supplier integration, old school adversarial models of asymmetric information exchange will continue to fall by the wayside as the advantages of real-time insights, vendor-managed inventory, predictive analytics, automated transactions, electronic invoicing and more foster greater digital collaboration among enterprises. In terms of more effective management, procurement professionals will be able to more effectively collect and analyze supplier data to make more accurate assessments—and better decisions—regarding vendor models, pricing, incentives, risk and areas in which they might need additional support.
Observations earlier this year by global consulting firm Ernst & Young propose that organizations can save between 3 and 5 percent on medium-term initiatives such as implementing a more strategic approach toward supplier evaluation, and another 6 to 8 percent on longer-term supply chain initiatives such as implementing digital spend management and advanced analytics.
7. Increased Climate Change Impacts and Opportunities
Over the next 10 years, the intersection of supply chain management and climate change will mean a few different things for enterprises. Firstly, supply chain leaders will be expected to offer more solutions for stepping up efforts to fight climate change. This could manifest itself in countless ways, including climate-friendly sourcing practices, smarter planning to reduce carbon emissions, better technology, progressive carbon management strategies and more.
In addition to making efforts to reduce your supply chain’s carbon footprint, the next decade will also demand an increased awareness of the impact climate change could have on everyday execution. Though now overshadowed by COVID-19’s impact, it’s worth remembering that in 2017 alone the United States saw more than $228B in damages from hurricanes and winter storms. Nobody truly knows what kind of impacts climate change could have on tomorrow’s sourcing efforts, but there is plenty of speculation floating around academic and industrial circles—none particularly encouraging. So industry will need to step up and work together to overcome these challenges in ways that are practical, economical and effective.
So how can businesses capitalize on these trends to deliver the kind of supply chain efficiencies and economics stakeholders demand? The key to getting started, experts say, is to develop a clear and actionable roadmap for the digital transformation of key sourcing functions—one that provides a practical, actionable pathway to optimization. This essential strategic planning tool should encompass a clear snapshot of current sourcing processes, calculate a quantifiable assessment of current sourcing issues and provide specific and realistic potential solutions for the optimization of each function. Critically, this roadmap should take into account the entirety of your enterprise’s digital supply chain automation efforts for all business functions. This will ensure that your team is not implementing a solution that will provide short-term sourcing efficiencies at the expense of long-term limitations on the interoperability of your supply chain as a whole. Prioritize supply chain improvements by their potential positive financial impact and seek outside consultative guidance if needed. Sometimes an objective perspective with specialized expertise can make all of the difference.
No matter what the industry, the next decade will bring significant change to the discipline of supply chain management. How effectively, and with what velocity, an organization embraces and implements these advancements will make a demonstrable difference in how its performance exceeds that of its competitors in 2030.