Why digital transformation is key to managing supplier relationships [Q&A]
Digital transformation doesn't just affect your own business, it has a major influence on your relationships with suppliers and partners too.
We talked to Dan Amzallag, COO at Ivalua, to discuss the impact of digital transformation on the supplier ecosystem and procurement processes.
BN: What challenges do companies currently face managing suppliers and evolving and innovating in the procurement process?
DA: Suppliers have become increasingly critical to companies. Whether controlling costs in the face of inflation, reducing their carbon footprint or keeping products flowing, suppliers are critical to success.
They are also a source of potential risk, exposing organizations to possible sanctions violations or unethical labor practices. As the lynchpin to an organization's suppliers, Procurement plays a pivotal role today.
Yet many procurement teams struggle to effectively assess, engage and monitor suppliers. Data is typically dispersed across many systems and of questionable quality. Growing data requirements, such as carbon emissions, exacerbate the challenge. Visibility into suppliers' supply chains, the sub-tier, is extremely limited. And sharing information and collaborating with suppliers is typically manual so limited to only the largest and most strategic suppliers, minimizing the impact. Furthermore, procurement staff's time is still mostly consumed by manual, tactical activities, making it difficult to find time for analysis and planning. As a result, leaders struggle to define and execute rapidly evolving supplier strategies.
This is a key driver behind the growing focus on digitizing procurement processes. The resulting automation frees capacity for more strategic activities. When done effectively, transparency is greatly improved.
By creating a single source of truth on supplier data, converging data from suppliers, third party data sources and internal systems, leaders can make more informed, timely decisions. According to a recent study from Forrester, 69 percent of business leaders said they plan on increasing supplier visibility, specifically into sub-tier suppliers.
Technology can also enable more efficient, effective collaboration with suppliers.
BN: How is the payments function evolving to meet today's economic challenges, and what's its role in maintaining supply chain continuity?
DA: In today's highly competitive business environment, it's essential for organizations to have a comprehensive payment solution to reduce costs, strengthen supplier relationships, prevent fraud, and gain better visibility into spend and the overall supply base.
More and more, organizations are switching to what’s called Source-to-Pay (S2P) solutions. The S2P process itself is quite broad but it spans the core aspects of procurement and accounts payable departments. S2P is the end-to-end process that encompasses all the activities between an organization and its suppliers. It starts with identifying the right suppliers for a need, sharing requirements and evaluating supplier proposals, selecting the optimal suppliers and contracting with them.
The last phase of the process, also known as Procure-to-Pay includes the ordering of goods/services based on those contracts, invoicing and payment to suppliers.
We're also seeing businesses taking advantage of virtual payment cards (V-cards) to manage their spending. V-cards are a next generation payment solution that allows businesses to complete payments with ease, while maintaining high levels of security and control. Virtual cards can be used to pay vendors. Instead of writing checks, businesses can use these cards to make payments, reducing the chance of fraud and human errors. At the same time, virtual cards can help businesses become more efficient. Rather than needing to re-enter your regular card number every time you check out, virtual cards allow you to auto-fill your payment information, saving you time.
BN: What are some of the top challenges weighing on procurement officers and CFOs in today's enterprise?
DA: The economic and geopolitical trends over the last few years have cast a long shadow over business conditions and continue to cloud the 2023 planning cycle. Concerns seem to have only increased around the risks posed by supply chain disruption, inflation and commodity price volatility, and the limitations from structural shortages of labor capacity and skills. This perfect storm of supply-side factors and pent-up demand is causing procurement organizations plenty of headaches.
We believe the top three challenges weighing on procurement officers and CFOs are:
- Managing supply chain risk to ensure supply continuity
- Reducing spend costs to mitigate the effects of inflation
- Ensuring compliance on the growing web of regulations spanning areas such as sanctions, ethical labor standards and sustainability
BN: How are new technologies, such as AI, transforming the procurement process?
DA: Procurement leaders are transitioning to digital and automated procurement workflows due to digitization efforts across the production value chain and industry 4.0. To help their digitization efforts, companies are harnessing the power of advanced technologies, such as artificial intelligence (AI), data analysis, and the cloud. Further, businesses and government organizations are moving towards sustainable and risk-resilient purchasing processes.
AI is rapidly developing as a particularly disruptive technology, with broad potential applications in the procurement process. In particular, AI is playing a key role in improving decision-making. AI-powered chatbots are now able to quickly answer questions and generate analyses spanning broad sets of data. AI is also starting to provide more predictive insights, moving from analysis of past activity to forecasting, warning of potential issues or recommending approved products for employee purchase based on company priorities and policies. AI is also being used to automate manual activities such as extracting data from scanned invoices or drafting contracts. Recent advances in generative AI are increasing the excitement and pace of innovation within procurement technology with the greatest benefits still to come.
BN: What role does procurement play in helping companies meet ESG goals? Are companies able to make progress in this effort as the economy grows more challenging?
DA: Procurement plays a pivotal role in helping companies meet ESG goals given the significant dependence on suppliers. Approximately 70 percent of most organization's carbon emissions and most ethical labor issues occur in the supply chain.
To create a truly ESG-driven supply chain, organizations must be able to share, gather, and validate supplier information so they can develop and execute sustainability strategies. They need to track suppliers’ environmental impact and work with suppliers to make products more sustainable.
Even after the important step of involving procurement teams, businesses will still face challenges. The accuracy and quality of 'foundational data' in the supply chain can be a big problem; companies may deal with inaccurate material master data -- that is all information related to materials that an enterprise procures, produces, and keeps in stock. This is vital information to ensure the resources needed to deliver a product responsibly and on time are present. The carbon impact of a product must be tracked down to the extraction of raw materials typically far down the supply chain. Additionally, inaccurate supplier information and master data, which includes information needed to do business as well as certifications, credentials, or financials, can wreak havoc on everything from processes to compliance.
By arming businesses with a better understanding of their supply chain and enabling setting and monitoring progress against joint improvement plans with suppliers, organizations can define more effective ESG strategies and drive meaningful progress against their objectives.