Procurement & Logistics: How Far Can The Partnership Grow? 💸 🤝🚚
In the first of three articles on procurement, we look at the evolution of procurement over recent years and ask just how closely it can mesh itself into the supply chain.
“Technology is the easy part of the digital transformation of procurement. It is the people part which is difficult.”
This comment, from Maersk’s head of digital procurement Jacob Larsen, sums up the position in which procurement currently finds itself. In recent years it has witnessed an incredible spate of digital acceleration, and become a hub of innovation in the process. Now, though, the real questions begin.
Can procurement, with its new digital-first outlook, seize the opportunity to become a core component of supply chain management?
The direction of travel is certainly promising. Until recently, logistics and procurement were miles apart: the former was a relatively digitally mature industry with a string of mega IPOs to its name, beloved by innovators and venture capitalists, while procurement was written off as an innovation vacuum.
But now, the two sides are realizing how much they can offer one another. As procurement blossoms with the help of AI and attracts ever-increasing attention from VCs, supply chain leaders are discovering how much integrated procurement systems can improve their decision-making. At the same time, procurement leaders are becoming more holistic by taking on additional logistics capabilities.
Supply chain resilience concerns drive holistic supply chain management…
and this trend will only increase due to Covid, which has created widespread concerns about the strength of our chains (93% of business leaders surveyed by McKinsey are aiming to make theirs more robust).
In fact, many of the measures we are now using to beef up our supply chains have direct implications for procurement: the dual sourcing of raw materials, nearshoring and expanding the supplier base, regionalizing the supply chain and reducing the number of SKUs in product portfolios.
Now, as supply chain managers try to anticipate the next cause of disruption, procurement promises even greater benefits.
By integrating with the procurement further ‘up’ the chain, managers can avoid unpleasant surprises, such as dependency on a handful of suppliers for critical parts.
What’s more, the issue of sustainability is gaining greater traction at board level, with recent figures suggesting that 70% of supply chain leaders are planning on investing in the circular economy in the next 18 months. If companies want to push their sustainability agenda, they’ll need to tear down their siloes and gain knowledge of the full supply chain, so a strong relationship with procurement is essential.
In fact, we’re already seeing convergence at every turn 💫
In September 2019, we saw a major agreement between LevaData (applied AI used to transform strategic sourcing and procurement) and Resilinc (a provider of supply chain risk monitoring and mitigation solutions) to enable next-generation risk monitoring, detection and response.
Then, a few weeks ago, procurement software giant Coupa spent $1.5 billion to acquire Llamasoft, a tie-up which will combine the former’s execution capabilities with the latter’s specialism in supply chain design and analytics.
As the world emerges from Covid, we can expect to see more such deals come to fruition.
As Jacob Larsen says, “it has taken time to grow and develop many of the business networks that support procurement and SCM across a number of processes today. But as the networks are growing in both their reach and the scope of services they provide, the overlap between the offering provided to procurement and SCM respectively will increase, and the barrier between the functions will become lower as the networks make it feasible to look at things in an integrated way.”
But if procurement wants to make further progress and truly embed itself within the supply chain, it needs to look at how it governs itself 👀
To realize its own potential, procurement needs to move towards a new set of best-practice global standards.
Dr. Christian Heinrich, co-founder of AI-driven supplier discovery platform Scoutbee, says we need to reach “the standardization of operational procurement, including ‘maverick buying’ processes— the decentralized purchase of materials or services, without following the official purchasing.
“At the same time, we need to get towards genuine transparency. To make the right decision, clean master data is needed that can fuel software systems that need to be connected and harmonized. It should include spend transparency, supply chain transparency and sustainable impact transparency.”
Much of this progress will be driven by startups 👩🏽💻
The procurement startup space is already a hive of activity (which we will assess more closely in article 3 of this series). A whole host of companies have emerged in recent years, many of them carving global niches; for example C2FO, founded as recently as 2008, has emerged as a leading global provider for dynamic discounting with nearly $400 million of funding behind it.
At the same time, these younger companies are striving to solve the problems with existing procurement solutions, such as
- Inaccurate data
- Lack of trust
- Inadequate risk management
Jacob Larsen believes that “a lot of innovation will be driven by start-ups that have the agility as well as a fresh new perspective on how ‘old’ problems are addressed with truly ‘new’ solutions.
“Business networks that are successful in expanding the scope of services and value created from having a large part of companies connected will also have a good chance of becoming successful in the future. That also applies to networks that cut across both SCM and procurement.”
Established companies themselves will need to innovate from within 🆕
While startups promise to bring procurement and SCM even closer together, incumbent businesses are also waking up from hibernation. For example TradeLens, the supply chain platform anchored by blockchain, has started from the SCM space, but has the potential to go much further once all relevant players are connected on the network.
But to realise their true possibilities, mature procurement companies will need to uncouple themselves from outdated legacy systems. They will need to standardize core (ERP) systems and prepare them to connect and disconnect from various micro-systems and apps.
Even more importantly, they must prepare their people to move beyond their limited administrative roles and towards something more dynamic and imaginative.
Dr. Christian Heinrich says it’s crucial to “prepare your people to transform from operational tasks, which really won’t be needed anymore soon, towards tactical tasks such as supplier scouting, market analysis and long-term contract negotiations, and strategic tasks such as supply chain redesign, tech-scouting for core business, information requirement analysis and digital app integration.”
If we can get this right, the potential is huge 🚀
As marketplaces evolve, so procurement can move away from the role of middleman between end user and supplier. It can find a new role, one which facilitates collaboration between ecosystem partners and delivers advanced data insights.
Indeed, in the best-case scenario, procurement could become a competitive differentiator, anchoring the supply chain and driving collaboration with a wider ecosystem of partners.
According to Dr. Christian Heinrich, we may ultimately get to a state of full convergence between procurement and the supply chain. “Production is geared towards the target customer and previously individual disciplines are collaborating along the value chain in the sense of a ‘whole business.’”
When both domains are able to influence one another through feedback loops that are automated and scalable, the supply chain will be lifted to a new level of maturity.
As procurement news source Spend Matters puts it: “The power of optimization only starts to really come out when you continue to add additional datasets and constraints.”
Eventually, we believe procurement and logistics may become inseparable pillars of supply chain management.
However, it’s also possible that the opportunity passes us by 💨
The growing relationship between procurement and SCM may become bogged down in siloed thinking, and we may even reach the stage where procurement’s individual responsibilities are split across various other departments, with one team handling the automated aspects and another team, closely linked to new products, assumes the direct procurement function.
Ultimately, it depends on how far procurement is willing to go to utilize the new technologies at its disposal.
Jacob Larsen says: “The term Digital Darwinism can be used regarding procurement — the solutions are there, but the question is whether procurement as a function is ready to adapt to the new digital opportunities.”
If procurement can seize these opportunities — and if new ventures can factor in the evolution taking place within procurement when designing their products and sales strategy — the effect on our supply chain could be truly momentous.
In a series of forthcoming articles, we’ll aim to enhance our general understanding of the procurement market, and analyze the current state of VC activity — which will in turn highlight where the real innovation is happening.
We’d love to talk to you if this is your space
At Maersk Growth, we support founders that apply new business models and technologies to transform global supply chains. Please reach out if you’d like to discuss the future of procurement and logistics with us.
Get in touch today 💌 adrian.friederich1@maersk.com
