10 steps to procurement automation

Russian companies are thinking of increasing efficiency through procurement automation. Adopting this solution is commendable, and it is imperative to choose the right approach to avoid any spanners in the works that end up doing more harm than good instead of saving you money. To make sure this doesn’t happen, we’ve put together a handy checklist for those just starting out.

Taking the following ten steps will allow those just getting started with automation to find a suitable solution, save time and avoid extra costs.

1. Goal setting/Targeting. Let’s begin by understanding what challenges we intend to address using automation. Making a process more transparent? Reducing time? Increasing procurement efficiency from achieving bigger savings through intensified competition? Or, maybe, our goal is to enforce legal requirements, simplify workflow and implement regulatory procedures?

Primarily, we need to highlight the key issue to be solved by automation and make a list of the evaluation criteria for vendors’ solutions. We also need to determine purchasing categories to be covered by the tool – indirect only or both, direct and indirect.

2. Analysis of the Current Situation. It is not uncommon, for company management or those initiating the automation process not to have the faintest idea of how the “as is” process is arranged, so it’s difficult to develop a target model and approaches for its effective execution. In order to ascertain the parts of the operation mechanism to be replaced or improved, you need to study and describe the business process you wish to automate.

Let’s start by compiling a list of processes that require automation, and split them into two categories:

  1. Strategic sourcing. This includes tendering & contracting, contract management, supplier base management, spend analysis;
  2. Procure-to-pay process (including e-catalogues), the so-called P2P. This involves identifying requirements, creation and confirmation of order requests, placing orders with suppliers, recording of transactions in the database, invoicing, payment. This process is entirely covered by the e-procurement solution.

In addition to describing business processes, it’s worth creating an inventory of products that have already been implemented in the company. Perhaps, all the necessary tools have been acquired, but for some reason they are not ― or only partially ― in use.

3. Defining project scope. The next step is to spell out a “to-be” business process and to prepare a plan for implementation of the target-model. It is important during simulation to get all the stakeholders involved (the buyer, the initiator, the end user, etc.), so that a “to be” model – rather than being unrealistic ― is instead based on category specific knowledge and ”hands on” purchasing experience.

4. Choosing the right tool. Once we are happy with the “to be” process, we can choose the tools for its implementation.

The following options are used for strategic sourcing:

  1. Cloud-based solutions, employed successfully in global best practices. There’s a great variety of them, and I recommend getting acquainted with them by reading the latest Gartner report on this subject. It doesn’t make sense to introduce a complete list of them, since the solutions of many vendors have not yet been adapted for the Russian market. In fact, the only available ones on the Russian market are SAP Ariba and Scanmarket. Cloud-based solutions are developing rapidly in the US and Europe, but Russian business still lags behind, especially in terms of purchasing technologies.
  2. Russian e-trading platforms (ETP). There are currently more than a hundred in existence. The best-known are B2B-Center, Fabrikant and Sberbank AST. Among their clients are private commercial and major state-owned companies operating under Federal Laws 223 and 44 (regulating public procurement). Most often, state-owned companies use multiple ETPs which goes against the “one window” principle for all purchases. Suppliers have to pay to be able to register in those platforms.
  3. Custom platforms. Usually, the largest companies (market leaders or those with a monopoly in their field – Gazprom, Rosneft) create their own custom e-platforms for solving specific business problems. Custom platforms are expensive, requiring money to be constantly spent on their development. In addition, procurement automation solutions from independent software vendors lead the way in terms of ease-of-use and functionality, as vendors invest much more in development of platforms and work with a large number of companies.
  4. SAP SRM implementation. This product was popular about 10 years ago, but nowadays is irrelevant for most global companies due to the boom in cloud technology. The software vendor does not promote this product anymore, but some large companies in Russia still employ it, partly due to the readily available integration solutions for SRM with the ERP system. This solution, is particularly suited to the oil and gas sector, as it offers the necessary flexibility: ABAP Developers (Advanced Business Application Programming) are able to customise it to a specific workflow.

Each of the options presented have their pros and cons, but we recommend deploying global cloud solutions. Here are some of their advantages:

  • Usability, simplified workflow, many solutions have a user-, intuitive interface;
  • Modern, constantly-updated functionality;
  • “Single window” principle: a repository for all documents and data on purchases, “audit trail”;
  • Liability for data safety from the developer is usually provided by relevant agreements, and the risk of data leakage is often lower than with using your own independent systems. This is facilitated by company employees’ lack of access to hardware and software on which the system is deployed;
  • The solution comes with a “built-in” integrated and optimal business process ― meaning there’s no need to reinvent the wheel;
  • Speed of introduction – from 1 week to 3-5 months (depending on a particular solution);
  • Operating with SAAS model (software as a service). You won’t need to buy servers, install software, configure access systems, security, etc.;
  • Less total expenditure: there’s no need to spend money on maintenance and development, while the system implementation is cheaper;
  • If, for any reason, you are not satisfied with the solution, it’s fairly easy to opt out of it and move to another one.

5. RFP development. In the procurement automation specifications be sure to provide the most comprehensive info on how you see an eventual tool or process, and send it to potential vendors. Note: vendors should by no means develop specifications for you! You should devise them based on your needs, in your own words. If your company lacks expertise in this area, then it makes sense to turn to independent consultants, who will help make specs, taking into account the particular features of your activities and current trends in the market.

6. Introduction to solutions. Invite consultants or vendor representatives to your office for a tool demonstration. During discussion, test different (what-if) scenarios. Find out specifics: how an implementation will take place, how long it will take, and under what conditions? Get examples of successful implementation, preferably, Russian case studies. Seek references from a company that already uses this tool. Make sure that a vendor/consultant is well-versed not only in software, but also in business-process logic.

7. Testing. Try out the tools offered, carry out at least one project “in combat mode” from start to finish. With cloud services this isn’t difficult, as you can “test-drive” the product before implementing it. To understand how the tool is right for you, and size-up its advantages and disadvantages, it’s important that at least one representative from each group participating in the process – buyers, stakeholders, initiators, suppliers ― be involved in testing.

8. Evaluating vendors. The evaluation process can be as follows:

Make an assessment table according to the criteria established at the beginning of the project. Invite all stakeholders to evaluate the proposed products on a five-point scale, and then calculate final scores. For example, at the stage of goal setting/targeting we specified two criteria – functionality and user-friendliness, and decided on an order-of-priority rating for optimizing purposes of 40% and 60%, respectively. If, during an assessment, a solution got “5” for functionality and “2” for friendliness, its overall score is (0.4*5) + (0.6*2) = 3.2. Thus, having got the evaluation scores for each product we can compare the final scores and identify an optimal solution. Remember to evaluate the vendor itself: how long has the company been operating on the market, what is its financial stability, what do customers/suppliers, etc. say.

9. Calculating costs. By calculating the total price of each solution, it’s important to take into account all costs, including the non-obvious ones: licenses, acquisition of servers, consulting, training and support costs, upgrades, and integration costs. It is advisable to determine the costs horizon for the next 3-5 years. Familiarise yourself with the terms of the contract in advance and check whether penalties for early termination may apply, as well as any data transfer costs in the event you decide to switch to a competitor product. Consider the issues in respect of transition to another solution in the event of problems with the incumbent vendor, for example, with extracting data from the system.

10. Implementation and monitoring. Verify who manages the project from the execution side– does he have any experience with such implementations? During the implementation phase get all those who will be making purchases using the system involved: the procurement department, initiators, etc. Everyone should be trained simultaneously. It is desirable to outline the procurement procedure to employees across all levels of the company:

  1. all purchases above the threshold level must be carried out using the tool;
  2. each contract has an attached tender form with a number of the event (tender) in the system.

The threshold level is determined independently by each company, depending on the scale and the nature of its business. Companies numbering 200-300 employees normally set a threshold of 500-800 thousand roubles.

After the tool implementation, monitor and analyse stats regularly to ensure that users operate the system efficiently and that new opportunities for optimization are not overlooked. For instance, in e-sourcing systems monitor the total number of suppliers, how many of them participate in tenders, how many bids are held, how and why prices change, the savings amount, etc. For example, on the basis of such analysis, one of our clients pointed out that few suppliers were participating in tenders, and began to actively involve them by posting a special link on the company website for logging-in to the e-sourcing system.

In the next article, we will explore the most common mistakes when it comes to procurement automation. In the meantime, it would be great to hear about your own experience: what challenges in procurement automation has your company faced? What advice can you give to beginners?

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