New data reveals that manufacturers are critically unprepared for strategic sourcing and procurement, according to AI advisor for strategic sourcing, LevaData. The company recently released the results of its 2017 Cognitive Sourcing Survey on data-drive procurement capabilities by medium to large manufacturing firms, including those in high tech, consumer goods, industrial equipment, automotive, and life sciences industries.
The survey addressed the concerns of senior executives who oversee over $450 billion in annual direct material spending. At 97%, almost all respondents believe that a procurement process that is data-driven is vital to achieving long-term value, cost reductions, and efficiency gains. However, 49% expressed concern that their in-house talent is not ready to leverage the competitive benefits of a digital transformation.
Image courtesy: LevaData.
Supply chain executives identify a big gap between best in class performance and average performance on some key metrics:
- Cycle time for request to quote: Three days versus 40 days
- Sourcing event frequency: Ongoing, regularly discussions on a quarterly or more frequent basis versus once-a-year events
- Management tools for strategic sourcing: Best-in-class procurement organizations use integrated market intelligence systems that provide a consolidated view of the market versus siloed business intelligence tools or information from direct supplier relationships.
So the question remains. Why do so many manufacturers feel unprepared for the coming digital disruption for strategic sourcing and procurement? “Generally, investment in innovation for strategic sourcing and procurement professionals has fallen behind other core business functions and supply chain,” Rajesh Kalidindi, founder and CEO of LevaData, told EBN. “Partly, this is driven by resource constraints, but a big issue is the selection of priorities. While 69% of respondents believe employing AI to manage risk and improve negotiations are key to remaining competitive, only 7% currently list enabling software technology as a top priority for sourcing and procurement.” This will rapidly change as market leaders pull ahead of their competition and those left behind realize why, according to Kalidindi.
The initial industries affected the most are those that share a few key characteristics: complexity in terms of numbers of suppliers, parts, and product lines; shifting sources of volatility for part cost or raw material input costs based on market dynamics; global scope of sourcing from different geographies; and competitive pressures where product lifecycles are short or margins are thin. But what is it that makes a data-driven procurement process so attractive?
Although it has a number of advantages, Kalidindi said that most of all, it allows teams to act much more quickly – over 10 times faster than those that are not similarly equipped. Data-driven processes also allow teams to respond intelligently to supplier demands. They can counter supplier claims of cost increases with independent data, giving them more leverage in negotiations. “This results in significant costs savings, up to 30% incremental annual savings with some of our customers,” Kalidindi said.
Finally, and just as important as the points above, data-driven negotiation strategies can be shared broadly across multiple commodity groups, regions, and product divisions to scale performance. Some companies face the challenge of “islands of tribal knowledge,” with the most senior professionals relying on relationships, pattern recognition, and gut instinct, making it difficult to share or develop emerging talent on their teams, Kalindindi explained.
Fortunately, the sourcing and procurement teams of the future will be able to anticipate change in market prices, identify savings opportunities in advance, and avoid supply chain risks before they disrupt business operations. “Unlike the 52% of current organizations who interact with suppliers less than once a year, these teams are able to strategically manage their entire long tail of spend, to instantly and in real-time negotiate better terms for their companies,” said Kalidindi.