The state of procurement

From the May-Jun 2024 edition of Supply Chain Management Review.

May-Jun 2024

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When it comes to the state of procurement, perhaps Alexandre Gagnon says it best. “Procurement is fundamental.” It spans everything from “day-to-day purchases to measuring sustainability to future-proofing operations for long-term growth. It’s a wide spectrum of mission-critical responsibilities, spanning all business functions.”

Gagnon, by the way, is vice president of Amazon Business Worldwide. Not a bad perch to evaluate procurement in big picture mode.

Meanwhile, your in-the-trenches mode confirms everything he says. In fact, you have been living this for some time, and probably think: “Procurement is transforming at lightning speed.” As Amazon’s 2024 State of Procurement Report puts it. That’s a picture-in-picture mode if you ever saw one. And while all of this may seem a bit daunting (overwhelming on certain days?) Gagnon adds this: “Together, armed with the necessary insights and cutting-edge technologies, we can buy smarter, dream bigger, and thrive, in any economy.” That’s a great baseline for meeting the challenges of procurement in 2024.

Just so we’re all on the same page, procurement is a big deal that gets bigger and more complex every year. You know it. Gartner identifies 29 key sourcing and procurement activities. And they fall into the following seven key management activities.

• Strategy
• Technology
• Organization
• Performance
• Spend
• Suppliers
• Risk

All of these are in play at any given moment. That means they are always part of the current state of procurement, whatever the year.

“Cost, quality, and speed will always matter. So will economic forces like pesky inflation and good old-fashioned supply and demand.”

Cost, quality, and speed will always matter. So will economic forces like pesky inflation and good old-fashioned supply and demand. That said, three areas—the transformation process itself, technology (especially AI), and responsible purchasing including ESG and traceability—stand out in 2024. And with good reason. They are all relatively new and yet to be tamed. They are also complex and coming at procurement professionals at an alarming speed.

Let’s dig in.

Troubling transformations

Ryan Polk, senior director analyst at Gartner, calls this the great acceleration. He says we are at the intersection of accelerating change in risk management, ESG, and technology, to name three key areas.

The confluence of efficiency and complexity is the number one challenge today. That’s according to Amazon’s survey of more than 3,000 procurement decision-makers and executive leaders. Any objections to that insight? Probably not.

Or as Amazon says, “as responsibilities increase, procurement operations naturally grow more complex.”

But it takes a Nick Vyas to balance that out.

“Despite everything going on in procurement today, it hasn’t changed at its core. Procurement is still a corporate effort to find harmony between what you anticipate supply to be and what you anticipate demand to be.” Vyas is associate professor of clinical data sciences and operations at USC’s Marshall School of Business.

Ok, this isn’t a runaway train. Unless you let it become one. But if it was only that simple. Unfortunately, there are just an increasing number of layers and even distractions that make it so difficult to find that harmony—which brings us to a bit of deconstruction.

“Many CPOs report that achieving these transformation objectives is proving more challenging than anticipated.”

Consider this: Amazon’s survey identified top internal and external big picture challenges in procurement. Internal challenges include:

• complexity of systems/processes;
• access to a wider range of sellers and products; and
• compliance to spending policies.

External challenges include:

• rising costs of purchases;
• (tie): preparing for unexpected economic changes and corporate social responsibility (CSR) mandates; and
• working with suppliers unable to support digital procurement needs.

Sound familiar? In fact, the Amazon survey says that 95% of respondents foresee room for optimization in procurement. So, what are you going to do about it all?

A big part of the strategy of procurement leaders is to invest in analytics and insight tools, automation, and AI. That’s according to 98% of the leaders Amazon engaged.

And in a country with so many other divisions, those numbers (95% and 98%) are remarkable. This is something that you and others in procurement can rally ’round.

Transforming transformations

Everything you have read so far is worthy of attention when it comes to improving the state of procurement. And most articles like this would jump now to essential topics such as ESG, AI, and more. We will get there. Just not right now.

That’s because Polk, Vyas, and the respondents to the Amazon survey all have a concern for both the existing and building complexity in procurement. Just as important, they question people’s abilities to accommodate the changes needed for the coming new procurement complexities.

 “We need to get better at the process of change and transformation,” says Polk. “We need to learn how to manage cognitive overload.”

He starts with a simple line graph (see Figure 1) with change on the vertical axis and time horizontal, Polk shows that procurement’s aspiration for change far exceeds procurement’s reality for change.

Which, by the way, is much closer to a flat line than even the rate of change in other fields in the world. “Political, economic, social, and climatic conditions are evolving faster than procurement. That leaves the function in a reactive position and makes it harder for procurement to deliver value,” says Polk.

In other words, procurement is an underachiever when it comes to change. But why?

“People in procurement are being asked to do so much today that it’s hard to keep pace. The number of new tasks, task workarounds, and process changes procurement staff experience is increasing at incredible speed,” explains Polk.

To make matters worse, these workflow changes aren’t being adequately managed. According to a Gartner study of nearly 500 finance and shared service employees, only “big change” is adequately planned for. Unfortunately, “big change” only accounts for 4% of the change employees experience, leaving staff to navigate the other 96% of “small change” on their own. Over time, the cumulative effect of this pattern can drag employees’ mental energy down to critical levels.

Gartner research also shows that “leaders must capture greater value from transformation while reducing its difficulty. These twin conditions constitute transformation success.” Just as important, procurement leaders should feel a true sense of urgency here.

Gartner says that since 2018, “the average procurement team has undergone nearly five transformations in areas such as supplier management, category management and new technologies.”

“Polk puts the so-called watershed event in AI for procurement at January 2023. That’s when AI became ‘imperative’ to talk about because that’s when ChatGPT went mainstream.”

That was just the precursor to 2023. That’s when, Gartner says, the average procurement function juggled close to three active transformations simultaneously. Unsurprisingly, “many CPOs report that achieving these transformation objectives is proving more challenging than anticipated,” says a Gartner report.

Another Gartner survey of nearly 300 people gauged the difficulty of achieving any procurement transformation’s full objectives. Only 8% thought it was as difficult as expected and another 22% thought it was easier. Everyone else (70%) says transformations are more difficult than expected.

Here’s an especially interesting observation from this Gartner work. Traditionally, efficiency of change has been a driving force in transformations. Unfortunately, “a focus on efficiency has almost no impact on success,” reports Gartner. Key reasons why are as follows.

• It makes implementation the goal.
• It leaves workflows incomplete.
• It is over reliant on staff experience.
• One size doesn’t fit all.

Just as bad or worse yet (depending on your preference), the efficiency-based approach increases complexity.

So, Gartner took efficiency out of the equation in an attempt to develop a concept of design simplicity instead. Polk describes it as “a user-experience-based approach to business process management that seeks to reduce complexity by deliberately designing procedures, tools and stakeholder interactions to be easy to understand and/or execute by users.”

To break that down, here are Gartner’s drivers of design simplicity.

Workflow design

• No gaps or ambiguities in the workflow when it goes live.
• Job is easier to do with the workflow than without it.
• Workflow is easy to understand and follow.
• Workflow covers even rare scenarios.

Implementation planning

• Leaders, managers, and staff work as an integrated team.
• Leaders delegate but stay closely involved.
• Leaders take steps to minimize added difficulty.
• Learning and development are baked into actual work.
• Specific effort is made to recognize change adoption.

So, is that all worth it? Polk says Gartner’s research shows that leading organizations using designed simplicity enjoy a 42% increase in transformation success.

Not a bad start.

From where Vyas sits, the educational process leading up to the workplace, and even in it, also plays a strong role in transformational success in procurement. But let’s be upfront here. Vyas is talking the long game, not the next transformation. “The job skills needed today keep evolving and changing. It is critical to have a workforce that is able to adapt,” explains Vyas. “We need to rethink our entire educational system from the various degrees at university level to retraining throughout a person’s career,” he says. Vyas is also an advocate of practical training for at least a year at the undergraduate level.

“Forty-five percent of Amazon’s respondents are willing to incorporate AI into their procurement efforts immediately or within the next year."

“It all comes down to lifelong learning in smaller bites and more frequently,” says Vyas.

An example of such mid-career reskilling is the supply chain certificates offered by ASCM. The procurement certificate intends to “establish effective procurement policies, sourcing strategies and contract negotiation strategies that help match suppliers with an organization’s needs.” These self-paced programs facilitate remote learning. They also ensure the student has a secure grasp on the subject matter through an exam process.

AI: Road trip not roadmap

While most see AI as the elephant in the procurement transformation room, Vyas prefers to talk broader, about what he calls “the digital and/or technological evolution.”

Digital, he explains, has already been partially integrated into both the demand and supply sides. It marks a paradigm shift in the evolution of procurement practices. “Going digital is no longer an option; it is now essential for organizations to thrive. Digital transformation has the power to streamline processes, cut costs and boost efficiency. These tools can automate mundane tasks like data entry, contact analysis, and spend analysis, enabling procurement professionals to prioritize strategic goals.”

Which is exactly what Amazon says. Just ask Doug Gray, vice president of technology for Amazon Business.

 “By investing in tools that digitize, automate, and streamline core functions and processes, procurement leaders can empower their teams to focus less on function and more on strategy,” Gray says.

Amazon says there are five digital technologies currently in use for procurement. They are:

• procurement analytics or reporting tools (at 62% of survey respondents);
• automation of manual procurement processes (54%);
• digital or online invoice (51%);
• AI-driven optimization of purchasing decisions (47%); and
• voice technology (41%).

This is also where the conversation about technology inevitably narrows to AI and machine learning. That’s not bad. It’s just where we are in the state of procurement in mid-2024. And there are plenty of questions. More than enough, actually.

Amazon talked to the head of procurement at a multinational telecommunications company. This is what that person said. “Which digital tools do I implement and how? They’re coming very quickly—you’ve got everybody using automation, machine learning, and AI.
Do I buy a tool now. Do I wait? Do I outsource those services. These are all questions that are coming at the procurement department.”

Indeed, they are.

“Everyone is just experimenting right now to see where they can use AI,” explains Polk of Gartner. “There has just been a complete flip in client interest here from fascination to piloting and experimenting,” he adds.

Polk puts the so-called watershed event in AI for procurement at January 2023. That’s when AI became “imperative” to talk about because that’s when ChatGPT went mainstream.

If, however, you are looking for an AI roadmap, stop. There is none at this point. Instead of AI having a roadmap, AI is in itself a road trip without a schedule or known final destination. But rest assured, this is not a time for indecision. It is, indeed, time to update the ’64 Chevy.

Amazon’s survey shows that the three top mid-trip destinations are:

• quicker or deeper data analysis;
• time savings; and
• different systems to connect more seamlessly.

Forty-five percent of Amazon’s respondents are willing to incorporate AI into their procurement efforts immediately or within the next year. While 80% have a two-year time frame.

It’s important to note here that the survey was conducted in mid-2023. That would put us at the date of reckoning in the next year or so.

The Amazon report says, “even a year or two delay can open a window to even greater advancements in AI, meaning laggards only fall further behind competitors that more quickly adopt emerging procurement solutions.”

That said, Amazon says leading industries in adoption of AI in procurement are tech (52%), telecom (51%), and medical pharmaceuticals (49%). Healthcare services (38%) are least likely of all industries surveyed to adopt AI right now.

As you probably suspect, Gartner has developed its own set of expectations for AI adoption.

By the year 2026:

• Virtual assistants and chatbots will be used by 20% of companies for internal and vendor interactions.
• Advanced proficiency in data and technology competencies will be as important as social and creative competencies for procurement staff.

By the year 2027:

• Forty percent of sourcing events will be executed by non-procurement staff.
• Fifty percent of companies will use AI-enabled contract risk analysis and redlining tools.

By the year 2029:

• Eighty percent of human decisions will be augmented by GenAI with humans focused on tasks requiring ingenuity, creativity, and knowledge.
• Onward and upward.

ESG and responsible purchasing

As powerful a force as technology and AI are, they are not the only ones affecting the state of procurement in 2024. ESG still has a strong influence and will for the foreseeable future.

 “ESG goals have transformed into a vital KPI for organizations, surpassing their role in just mission and vison statements,” says Vyas. “A rising number of organizations are implementing eco-friendly practices and cultivating equitable supplier relationships, all while focusing on reducing carbon emissions throughout their supply chains.

 “I have long advocated for the transition from a single bottom line (profit) to a triple bottom line (planet, people, and profit). It’s a multi-dimensional mindset that encompasses agility, resiliency, sustainability, speed, and profitability,” adds Vyas. There are three key drivers behind this shift, says Vyas. Those are:

1. The debate on the reality of climate change is almost done;
2. corporations are realizing that consumers are becoming increasingly conscientious about products and their ESG heritage; and
3. the days of government laissez faire about ESG are fading quickly. 

Needless to say, net carbon emissions figure prominently here. And some are quite demanding.

 “From an environmental standpoint, we are working on a 50% reduction in our net carbon emissions by 2030. So, we require all of our suppliers to sign a code of conduct. We’re doing a lot more screening of suppliers to make sure they’re behaving like they should.” That’s what a vice president of global procurement at a German tech company told Amazon in its survey.

Vyas has been on the road lately and says ESG concerns in procurement are on agendas in many countries. In the past few months, he has visited India, Vietnam, and Singapore and says business leaders in all are ESG focused.

As big as it is, ESG is not a standalone procurement concern. In fact, it belongs in a bigger procurement bucket—responsible purchasing—says Amazon’s 2024 State of Procurement report.

When Amazon asked procurement professionals about top considerations for responsible purchasing, between 88% to 94% of them identified six key areas. Those are:

• the location where the products purchased originate (94%);
• the HR policies and standard of the organizations purchased from (92%);
• the type of transportation used to ship purchased products (90%);
• the ESG policies of the organizations purchased from (89%);
• the DEI policies of those organizations (89%); and
• the route and the stops that the products purchased make on their way to their final destination (88%).

There’s also the matter of traceability, which is big enough, like ESG, to deserve some extra attention in the sphere of responsible purchasing. In fact, traceability today is probably about as developed as ESG was several years ago. Talk to Vyas and he points out that it will be 2027 before the U.S. federal government imposes 300-plus regulations that will demand product traceability.The focus here is full supply chain traceability from point of origin to final disposal. “Enhanced accountability and/or authentication will be one of the priorities across the entire supply chain,” says Vyas.

And while the general media today focuses on items such as conflict minerals, traceability requirements will include common items, not the least of which is food. This is going to take some effort and will inevitably be technology heavy. “The potential of blockchain technology to ensure secure traceability cannot be overlooked. Integrating applications and leveraging cloud-based infrastructure will enable rapid changes to be executed, managed, and monitored with great ease,” says Vyas.

But don’t expect that establishment of traceability will be easy. It won’t be and needs some serious attention starting now.

Clearly, the state of procurement is a challenging one in 2024. But it will also only be part of an ongoing process. For the past 40 years or 50 years, says Vyas, it has been easy to focus on procurement’s effect on profit by managing cost and speed. But profit has now been joined by the effect of people and planet in what Vyas calls the new procurement triple bottom line. While procurement doesn’t have to fully embrace all three immediately, the shift is already underway. Don’t expect it to go away.

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