The Effective Way To Address Complexity In Procurement

Procurement is an integral part of any organization, whether it is for products and services that keep the lights on, or for those that serve as input in the production of a product. When processes are standard and repetitive and the supplier base consistent and stable, many procure-to-pay solutions and automation platforms can serve to reduce cost and increase efficiencies in the organization.

The challenge becomes greater as complexity increases. An increasing number and variety of suppliers, an evolving diversity of requisition types, and a set of other factors could complicate the interaction between the buying enterprise and its vendors and require a greater level of flexibility and human intervention to ensure data accuracy, timely and accurate delivery and on-time payment.

Any large enterprise can face complex procurement, yet it is more characteristic of those which are capital intensive, and which have a complex supply chain. The complexity stems from the presence of processes that are based on agreements and blanket orders with inherent ordering rules and conditions around pricing, shipping, and deliveries, as well as those with mandated supply chain rules, special delivery scheduling and conditions. It also stems from the presence of orders with hundreds of line items, partial shipments per line and multiple receiving and invoices per line, processes that include intermediate warehouses and/or 3PL, QA, MRB, 4WM and returns, import via sea or air freight, and more.

In such environments, enterprises invest a significant amount of time and effort ensuring that suppliers comply with their business rules and policies, following up on order fulfillment, supply chain execution and on-time delivery, validating invoices, handling invoice reconciliation processes, validating payments, handling a significant number of errors and discrepancies, and preventing fraud. Additionally, complex environments often involve multiple geographies and the associated differing rules, regulations, and cultures, as well as the presence of multiple applications and ERP systems.

COMPLEX INDUSTRIES

There are multiple industries that deal with complex procurements every day. Some examples include Oil and Gas, Project-based Manufacturing, Life Sciences, and Consumer Goods.

Oil and gas companies, which need custom-designed infrastructure that can change based on sea depth, land topography, or the depth of the ores are just two examples of this type of company.

Project-based manufacturers, such as construction companies, power plant builders, commercial HVAC companies, industrial cranes, and specialty automobile manufacturers all have complex procurement needs to ensure that their projects are built to spec.

Life science companies, which operate laboratories and are involved in biology, physiology, botany, and other related sciences require parts that meet exacting specifications.

Consumer goods also have exact specifications for some of their parts.

All these types of companies are faced with difficult procurement issues, and unfortunately, most existing software fails to address their complex spends.

PROCUREMENT’S CHALLENGES IN COMPLEX ENVIRONMENTS

The chief procurement officer (CPO) needs a system that can handle varied types of interactions with suppliers. Using non-traditional vendors to source custom parts may involve processes that are outside standard business practices.

For example, the exchange of information around inventory, scheduling, planning, quality, technical specifications, and engineering concerns may require going beyond a standard sourcing RFP or issuing a purchase order.

These types of procurements require a significant investment of time and effort, to ensure that the supplier complies with the business’ rules and policies. As many of these suppliers tend to be smaller operations, they lack the expensive computer systems and B2B integrations that make procurement paperwork flow smoothly between the company and its supplier.

Because these engagements take place outside typical operations, it opens the door to quality issues such as errors in the final product and discrepancies between the volume that was ordered and the number of goods delivered. There is also the real possibility of fraud, kickbacks, and other illegal activities.

These challenges are further complicated due to the lack of communication channels between the suppliers and company, as well as differences in geography, culture, multiple ERP systems, different measurement and electrical systems, and different regulations applying to different locations.

CAPABILITIES THAT ENABLE COMPLEX PROCUREMENTS

Based on our experience working with complex procurements, we’ve found that there are essentially six different capabilities that smooth out the process and enable businesses to successfully collaborate with multiple vendors for complex procurements.

System Coverage

Procurement departments require a system that provides them with the ability to quickly implement and automate complex business processes. For example, they need forecasting tools that can anticipate their needs ahead of time, giving procurement enough time to source a supplier and place their order.

VMI capabilities provide suppliers with a clearer view of what’s needed, while vendor consignment processes enable parts to be delivered to the purchaser’s premises but remain on the books of the supplier until the vendor uses them.

Advanced shipment notice (ASN) and delivery scheduling capabilities also ensure that these goods can be delivered and provide visibility to the company about supplies they need. Other tools like S/N, import, 3PL, JIT, task management, and Q&A all work together to provide the company with the system coverage they need to manage their complex procurements.

Procurement systems with built-in processes and templates simplify the steps buyers need to take when placing orders. Additionally, process governance and compliance features allow for automated follow-ups and document reconciliations.

Process Governance

Businesses must have automated tools to govern their procure-to-pay processes, as well as have the ability to verify that both the supplier and the company are performing their required tasks while adhering to corporate policy.

Through effective governance, companies can manage and control supplier response, and ensure that both parties have shared the information required to successfully acquire the product. This includes specs, delivery times, and other details in the purchase, as well as step-by-step guidance to suppliers, walking them through every response type.

Any notifications, alerts, and escalation processes are part of governance. They need to be aligned with the buyer’s business rules and policies but customized to the specific role of the recipient, while automatically following up on open issues within the governed process.

Automation tools are required to involve the highest number of suppliers. This includes rapid supplier onboarding using automated, dynamic guidance based on specific process logic, required activities for each process, and step-by-step requirements that are aligned with the specific procure-to-pay process.

Process Compliance

Procurement teams need a system to verify that the supplier is adhering to the company’s business policies and requirements. Additionally, the system needs to ensure that the information shared between the company and the supplier is consistent across all documentation and that the information the company receives from the supplier is accurate.

This includes having the capability of automatically reconciling e-invoices, and validating transactions and documents such as PO confirmations, attachments, and shipping notifications, even when some of the data is missing or doesn’t entirely match data in previous documents.

Discrepancy Management

Discrepancy management is an important tool for procurement teams. It marks the ability to identify, in real-time, errors, discrepancies, missing data, documents, certifications, or other required paperwork to guide the supplier through correction procedures.

Automation tools embedded in this process should be able to identify and correct errors as well, based on predefined business rules and policies.

Finally, complex procurement tools must have the ability to automatically resolve discrepancies using machine-learning technology that can learn user behavior.

Supplier Relationship Management

Providing a supplier relationship management environment helps facilitate communication between the company and its suppliers, as well as provides accessible storage capabilities for supplier data, documents, and certifications.

This environment enables businesses to easily interact with their customers, sharing documents that need to be completed and tracking document expiration dates.

It also facilitates direct, free-text conversation between companies and their suppliers, with built-in corporate supplier hierarchies and categories, as well as automated responses and searchable FAQs.

Businesses can also use machine learning automation, with continuous improvement processes that can learn user behavior and receive feedback.

Integration with Multiple ERP Systems

For businesses working with multiple vendors, it’s important that their system integrates with the myriad of ERP systems that their customers are using. This enables suppliers to maintain their existing work environment and procure-to-pay processes, as well as turn manual activities into automated processes that eliminate errors and resolve disputes autonomously.

FINDING THE RIGHT TOOL FOR COMPLEX PROCUREMENTS

Most procurement tools fail when working with complex environments because they require suppliers to adapt to their customer’s systems. While this might seem ideal to the customer, suppliers work with hundreds of customers, and creating B2B integrations to make them compatible with every system is unrealistic.

Rather, businesses facing these challenges should look for a procurement solution that functions as an interface that connects disparate ERP systems. These solutions don’t place any demands on the suppliers and allow them to easily interact with their customer’s purchasing department.

This connectivity facilitates communication, introduces automation, and checks for errors in documentation that can delay processing and payment until its resolved.

Complex procurements are, by their very nature, complex. They push procurement teams outside their standard supply chain to source materials and parts that would otherwise be impossible to get. Simplifying the connection between vendors and suppliers goes a long way toward facilitating smooth processes once the suppliers are identified.

 

 

 

Originally published on Nipendo’s blog