What Are the Biggest Problems in Procurement?
What are the biggest problems in procurement? There are no shortage of them when you speak with people in different business lines within the organization. Suppliers aren’t enamored with the process, so much as resigned to it. Even procurement staff see it as the “Devil we know.”
Here’s a list of some of the key issues companies encounter:
· High opportunity costs: Failed reverse auctions (RFPs with too few supplier proposals) lead to purchasing a second-best solution at an inflated price and living with it for potentially a long time
· High transactions costs: Using email and spreadsheets or overly bureaucratic incumbent systems soaks up time for anyone involved on the buyside of the procurement, as well as for the suppliers whose response buyers solicit
· Lengthy cycles: Procurement, in its efforts to comply with policy, can get bogged down in bureaucracy, delaying time to value even as this alienates suppliers from engaging
· Poor access to market intelligence: Particularly in categories the buyer purchases infrequently, it can be difficult to obtain relevant, contemporaneous information about suppliers, product offerings, and pricing
· Weak collaboration: Modern procurement, particularly large-scale acquisition, requires building consensus across a universe of internal stakeholders, something that is complicated
· Lack of structured data: For most organizations, data on the firm’s procurement activity is dark data, locked up in systems (or more likely spreadsheets) with no practical utilization, inhibiting automation and leaving valuable market intelligence untapped
· Decentralization: There is a constant entropy in enterprise buying in which business units want to purchase goods and services independent of procurement, risking potential compliance violations or at least making it more difficult to prove that they obtained value-for-money
· Complexity: Poor procurement has cascading consequences in the complex adaptive systems in which most organizations exist, consequences that can be exacerbated in times of shortage or price volatility (see Pandemic/War)
· Lack of visibility: Buyers do not understand who the suppliers to their suppliers are, missing vital information about risk in their supply chains
· High fixed costs business models for incumbent solutions: Most solutions in the marketplace require costly implementation and expensive running costs in the form of high subscription fees, charged per seat
We’ve written extensively about these issues. See the links.
Most buying organizations are complacent about these problems. For them, they are the cost of doing business. They accept them as part of life.
Ironically, smaller entities that lack an entrenched procurement apparatus have the opportunity to leapfrog ossified bureaucracies. Organizations that are willing to tackle these issues holistically can improve the ROI of procurement dramatically and quickly.
The ideal solution here would address these problems jointly:
· Simple, 21st century user experience: Drive supplier proposals by delivering a user experience that encourages suppliers to truly understand what buyers want and to bid on the business with responsive proposals
· Templates and standardized approaches: Standardizing and simplifying tasks such as vendor onboarding, collecting supplier proposals, and coordinating their evaluation across stakeholders lowers transactions costs and shortens cycles, in addition to enabling the buyer to cast a wider net than just soliciting suppliers they know already
· Private and public repositories of structured data: Buyers should be able to access data about their procurement history (including previous RFPs, responses, and contracts), in addition to accessing RFPs and contracts with pricing data from the public sector
· Social networking tools: Buyers should have a single area for collaboration internally and externally, connecting inside stakeholders to one another, even as individuals can connect to people with similar roles in other organizations for information sharing and brainstorming
· Supervised decentralization: Cognizant of the natural entropy and need for control, business units can take charge of their procurement processes using a platform with all the requisite tools and data, even as procurement professionals look over their shoulders unobtrusively, intervening only when necessary and expediting eventual approval requests
· Simplification and visibility: By encouraging all the vendors at every level of the supply chain for a particular project to join the platform, the original buyer can obtain perfect visibility into their project risk, even as they rely on the prime contractor to control it
· Variable cost pricing: Ideally, the platform should have no implementation costs, an intuitive experience, and freemium, variable cost pricing tied to actual usage for more sophisticated features
The ideal platform would look almost like Uber-for-procurement. There’s no sense in owning a full-blown procurement system. Buyers can pay for the service when they need it. It would enjoy the same sort of network effects, improving with the number of users and the amount of data on the system.
This is what we have built at EdgeworthBox. We have a different business model. There is no implementation necessary. It’s free for buyers and suppliers to join. We permit an unlimited number of seats per organization. EdgeworthBox should be the central locus for procurement discussions for our user organizations, helping to drive stakeholder consensus faster. We charge fees related to individual procurement events, as well as fees for supplier advertising and other services, all on a usage-pricing basis. Everyone on EdgeworthBox can use our messaging and profile services to connect with one another. Buyers can find other buyers for sharing market intelligence. Suppliers can develop business with other suppliers. Buyers and suppliers can get to know one another. Because the business model and the user experience is designed in this fashion, it’s super easy to get full visibility by inviting the full supply chain for a project onto EdgeworthBox. All of this reduces opportunity costs and cycle times. Come check us out. Check out this video. And give us a shout.