The next BriefingsDirect intelligent procurement discussion explores the rationales and results when companies transform how they acquire goods and services.
By injecting intelligence, automation, and standardization into the source-to-pay process, organizations are supporting even larger digital business transformation efforts.
Stay with us now as we hear from two pioneers in how to bring agility, resilience, and managed risk to the end-to-end procurement process for significantly better overall business outcomes.
Listen to the podcast. Find it on iTunes. Read a full transcript or download a copy.
To show how organizations can embark on such a procurement and sourcing transformation journey, please welcome Victoria Folbigg, Vice President of Procurement at Zuellig Pharma Holdings, and Baber Farooq, Senior Vice President of Product Strategy for Procurement Solutions at SAP. The discussion is moderated by Dana Gardner, Principal Analyst at Interarbor Solutions.
Here are some excerpts:
Gardner: Baber, what are the top procurement trends and adoption patterns you’re seeing globally? Why is now such an important time to transform how you’re doing your sourcing and procurement?
Farooq: When we talk about trends in procurement, the macroeconomic factors governing the world -- particularly in this COVID-induced economy -- need to be kept in mind. Not only are we in a very dynamic situation, but the current scenario is impacting the function of the profession. This changing, evolving time presents an opportunity for procurement professionals to impact their businesses company-wide.
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Firstly, if you look at the world, some of these trends existed prior to COVID hitting -- but I think they have accelerated. For the past 10 years, we’ve had declining productivity growth across the world. You can slice this by industry or by geography, but in general -- despite the technological advances from cloud computing, mobile technologies, and et cetera -- organizations from a labor productivity perspective are not becoming more-and-more productive.
This trend has existed for 10 to 15 years, but we really started seeing flattening over the past two to three years, particularly in the G7 countries. Now, it’s interesting because that past 10 years or so also correlates with some of the greatest economic expansion that the world has experienced. When things are going well, you can kind of say, “Yeah, productivity may be not necessarily so important.” But now that we’re in this unfortunate recession of remarkable scale, efficiency is going to become more-and-more important.
The second trend is we know that the digital economy has been expanding in this new millennium. It’s been expanding rapidly, and by all indications that trend will further accelerate in this new COVID-normal that everyone is trying to come to grips with. We have seen this in terms of our daily lives being disrupted and how digital tools have helped us to remain functional. Sometimes circumstances in the world that change everything become fuel for transformation. And to a large extent, I think the expansion of the digital economy will end up continuing and accelerating and procurement will play a significant role in that.
Efficiency over productivity
The third trend I see is this concept that The Economist has dubbed slowbalisation, which is the idea that despite the past 30 years of increasing globalization -- even prior to COVID, we saw a slowdown in globalization due to trade wars and nationalistic tendencies.
Post-COVID, I think organizations will ask the question, “Hey, this complicated global supply chain that has existed puts me at risk like I never thought of before if there’s something disruptive in the market.”
So, expect more focus on nearshore manufacturing across many industries. It’s going to become more prevalent from a goods perspective when we talk about trade. On the flip-side, from a service’s perspective, digitization will actually allow for more cross-border services to be provided. That includes things we never thought we could do cross-border before.
It will be a very interesting shift to see how the world changes with these trends, and how it impacts procurement. Procurement is going to play a pivotal and central role.
It will be a very interesting shift to see how the world changes with these trends, and how that impacts procurement. It doesn’t take a lot of reflection to see where synergies exist. If organizations are going to operate manufacturing differently than they have before, if supply chains will be structured differently, and if we engage in services procurement differently -- in all of those conversations, procurement is going to play a pivotal and central role.
And how are you going to try to come out of this productivity glut? If the promise of the artificial intelligence (AI) is going to help us come out of this productivity glut, then procurement is going to play a central role in how we use suppliers as key co-innovation partners. It means a very different lens about how you manage a relationship with your supplier base than we’ve done traditionally.
So those are some of the key factors if you look at how procurement is going to evolve over the next five to 10 years. The macroeconomic factors are the driving forces. The more that procurement professionals focus on providing solutions to their organizations around these areas the more impactful they can be. These are very different than the traditional metrics that we’ve had around cost savings. Those are still important, of course, don’t get me wrong. But if I think about how the procurement profession is changing and those trends, I think it’s going to be around these areas.
Medicine thinks globally, supplies locally
Gardner: Victoria, at your organization, Zuellig Pharma, are you also seeing these trends? Tell us about your organization and what you’ve been doing with procurement transformation?
Folbigg: Zuellig Pharma is one of the largest healthcare services groups in Asia. And as a pharma services company we distribute medicine in Asia. We are present in at least 13 countries, or what we call markets, in Asia. We also have clinical trials distribution throughout the world.
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We realized pretty early on with all of the distribution capabilities and contact with healthcare professionals across Asia that we have a lot of data about drug purchasing preferences, which we are actively monetizing. We also have a significant role to play in ensuring the right medicines go to the market, which means preventing counterfeits and parallel trades.
Zuellig Pharma is not only enabling improved drug distribution, we also do vaccine distribution. In some of the bigger countries, for example, we take flu vaccines and distribute them to the various state hospitals and schools. It’s now very exciting for us to possibility be at the forefront of COVID-19 vaccines distribution. We are very busy figuring out how to make that possible across Asia.
Building on Baber’s points on globalization, which I found very relevant, there is a clear trend in supply of goods to move away from globalization. We have seen that even with the supply of personal protective equipment (PPE) from China due to people being concerned about buying from China as well as the many custom issues for going in and out. People are naturally now looking for supply sources closer to their countries. We are seeing that as well.
Baber also spoke about the globalization of services. This is fabulous and very exciting, and we are seeing that. For example, when I now negotiate contracts with consulting companies, I begin by telling them there is no need for travel. And so why don’t you put your best team on my project? I don’t even need your team to be in Asia.
And that makes them pull a breath and step back and say, “Oh my God. You know, we had these natural differences between regions and different companies in the servicing industry.” That is breaking down because customers are expecting the best people on the job anywhere. I completely see that in my daily work now.
Gardner: Baber also mentioned the impact of AI, with more data-driven decision-making. While we’re grappling with rapid changes in sourcing and the requirements of rapid vaccination distribution and logistics, for example, how are the latest technologies helping you transform your procurement?
AI for 100 percent reliability
Folbigg: It’s an interesting and complex subject. When I talk to my peers on the manufacturing side -- and again we’re not a manufacturing company – they oversee a lot of direct spend. I see them embracing data-driven, AI-driven procedures and analysis.
With services industries, and with indirect procurement, it is much more difficult, I believe. And hence we are not so much on the forefront of AI thinking. Also because we’re in Asia, I’m wondering whether there is enough databases and rules to be able to draw the right decisions.
Established technologies like RPA and chatbots are filling holes because people need support. The labor force is getting more expensive and so having a robot do a menial task can be more efficient.
For example, if I want to find a different source among suppliers very far away, I would rely normally on a database that would go through millions of sources for a supplier. If the supplier, though, were a local company, I might not find any relevant databases. So the challenges we have in Asia are about getting data that can be analyzed and then draw insights from it.
Other more established technologies like robotic process automation (RPA) and chatbots are filling holes because people need support. As Baber said, the labor force is getting more expensive even in Asia. So having a robot do a menial task can be much better and more efficient than hiring somebody to do it.
Gardner: Baber, how common are these challenges around data and analytics that Zuellig Pharma is grappling with?
Farooq: What Victoria said is so accurate with respect to the challenges that customers are facing in using these technologies. The challenge we have as technology provider is to make sure that we provide access to these technologies in the most beneficial fashion. AI is a very broad topic that means a lot of different things these days.
The ultimate goal of AI is to provide insights and eliminate tasks while effectively focusing on actual business outcomes, and not having so much repetition. When Victoria mentions the, “Hey, we can use a lot of this in the direct materials space,” a lot of those are predictable, repetitive tasks.
In the services space, and for indirect materials purchasing, it’s more difficult to grapple with it because it’s not as predictable and it’s not as rule-oriented as in other areas. That gets to the true heart of the problem with AI across any space, right? The last mile of AI is very hard. You can make it 90 percent effective, but who is going to trust their business with a robotic or computational process that’s 90 percent effective? Making it a 100 percent effective is the real challenge.
This is why we don’t have self-driving cars right now, right? They work great in laboratories. They work great on test tracks. They are driven around deserts. So much advancement and capabilities have happened, but that last mile is still yet to be achieved. And the amount of data needed to make that last mile work is an order of magnitude greater than it is for the first 90 percent of achieving the outcome.
The onus and the burden, frankly, is on companies like SAP to make sure that we can solve this problem for customers like Zuellig so that they can truly trust their business for insights and for the outcome-driven work that they would want the machines to do before they go ahead and say, “Okay, we’re happy with AI.” There were predictions six to seven years ago that dermatologists would not be diagnosing skin cancer anymore because an app would be doing it by taking a photo. That’s not true. It hasn’t happened yet, right? But the potential is still there.
The focus is on the outcomes that professionals are looking for. Let's see if we can use the data from across the world to drive these outcomes in a sustainable and predictable fashion. This work is research-oriented.
For us, the focus is on the outcomes that professionals are looking for. Let’s see if we can use the data from across the world to drive these outcomes in a sustainable and predictable fashion. This work is research-oriented. It requires focus from companies such as SAP to say that this is where we’re going to take the initiative and actually drive toward this outcome.
The reason why we feel that SAP is one of the companies that can do this is we actually have so many data. I mean, if you look at the SAP Business Network and the fact that just on spend and sourcing events we’re carrying $20 to $25 trillion worth of procurement over the past 10 years, we believe we have the data that can start making an impact.
We have to prove it, undoubtedly, especially when it comes to niche economies and emerging markets, like Victoria said. But we have a very strong starting point. And, of course, at the same time, we have to be considerate about privacy concerns and General Data Protection Regulation (GDPR) in all of these things. If you’re going to be mining data and then cross-applying the impacts across customer communities, you have to do it in a responsible manner.
So those are the things that we are grappling with. I clearly see there’s a trend here and you will see AI impacting procurement processes before you see AI driving cars on roads. There’s still a lot of work to be done, and there’s still a lot of data that needs to be mined in order to make sure that we’re building something that’s intelligence- and not just rule-based. You can use RPA, for sure, but that’s still rule-based. That’s not true intelligence, and no business is going to actually go ahead and say, “Hey, we’re happy with the insights that the machine is telling us or we’re happy with the machine doing the work of a human if it’s 90 to 95 percent accurate.” It really, really needs to be 99.9 percent accurate for that to happen.
Gardner: And whether we are doing this with AI or traditional data-driven analytics, what we need to deliver more of now are better agility, resilience, and managed risks.
Victoria, tell us about your journey at Zuellig Pharma and why you’re working toward those fundamental goals. How have you gone about revamping your source-to-pay procurement to attain that agility and resilience, and to managing risks?
Strategic procurement journey
Folbigg: Our real strategic sourcing journey started in 2016. And I like to call the company a 100-year-old startup because Zuellig Pharma is truly 100 years old. The company was, fair to say, in the early stages very decentralized. And then it moved to become more central-to-edge, with the need in Asia with emerging economies for general management to act much faster if there was a risk or opportunity. So these principles still apply.
But the chief executive saw the need for more strategic procurement, with transparency, visibility, and control of spend accountability. He sponsored the need to design and set up a lean procurement function within the Asia region. The first thing we decided to do was put a system in place to better anchor a new, all-encompassing, yet small procurement team. I have been getting this visibility, control, and data through our all-encompassing procurement system, SAP Ariba.
SAP Ariba has also been different because of its ecosystem and because they’re backed by SAP. And it has a support network and already-proven technology across Asia. Because of Asian tax rules, and the variety of Asian languages, we found when we looked at the market back in 2015-2016 that you needed a system that will grow with you. We needed something that’s anchored very strongly within Asia. From that, we gained control and visibility in stage one of our journey.
The next stage focused on process improvement. Our old key performance indicator (KPI) was about how long it takes to pay an invoice. And that you need to make it easier and user friendly but also have controls in place to ensure that you have no fund leakage. So, control and visibility are number one and two, and process improvement is number three. Next, we will be seeking agility and then insights.
But COVID-19 has shown the need for traditional procurement, too. For example, when it came time that we needed a PPE supplier -- everyone needed them. And it wasn’t a system that helped us, unfortunately. It’s more of people knowing people and finding out where there was capacity. That was not done via data-driven insights.
We had to go off system as well because sometimes we didn’t have time to get the supplies through the system. We also didn’t have time to pay the suppliers through the system because it was a supplier’s market: “You can have the shipment of your general masks. You take it or you leave it.”
The traditional kind of robust procurement systems were breaking down for us and exacerbated by the fact that we do not yet have the right kind of data to make these decisions. We still needed to be rather creative in how we found the best sources.
So very often we had to make this decision within an hour. And in some cases, I would come back to the supplier and say, “I’m ready to buy,” and they’re saying, “Sorry, somebody else offered me twice the price.” This was the reality of procurement last spring. It certainly brought us to the forefront because we needed to report to the CEO what we were doing to protect our business. We’re delivering the medicines to the hospitals. We probably needed this PPE for the drivers even more than the hospitals, and we needed to negotiate to buy that.
This is where the traditional kind of robust procurement systems were breaking down for us and exacerbated by the fact that we do not yet have the right amount of data on Asia translated into English to make these decisions as we would like to. That newer method may be strong and prevalent, of course, in the US and in Europe.
So that tested us quite a lot and it’s shown that we still needed to be rather creative in how we found the best sources. There are building blocks to what the systems allow you to do. And now we’re saying, “Okay, well, how can you give us insights? How can you give us this agility?” I think the systems need to evolve to be topical and to be able to address all of these use cases that came to the fore due to the COVID-19 pandemic.
Gardner: Listening to you reminds me of what Baber said about self-driving cars. You had to revert back to manual during the pandemic.
Folbigg: Bicycles even.
Pandemic forces procurement pivot
Farooq: It’s such a great point. One thing I’ve learned is that the technology and business processes we have constructed over the past 15 to 20 years kind of broke down. When you look at a pandemic of this magnitude -- it’s the greatest disruption in the world since World War II. The IMF just estimated how big. When the global financial crisis happened in 2008, the overall global GDP impact, because the emerging economies were not as affected, was a reduction of 0.1 to 0.2 percent in global GDP. This year we’re seeing a 5 percent GDP impact globally. It’s very, very significant.
The scale of the disruption is huge, and you are having these low-probability, high-impact events. Because they don’t happen for a long time, people presume they won’t happen, and they don’t plan for them.
What I’ve learned is, with technology and business processes, you need to keep in mind that one aspect that might have a 2 to 3 percent chance of happening. You can’t Pareto analysis that out of the way and not consider it. So it’s one thing to make sure that, of course, you’re not spending time focused on a problem that has a low chance of happening. But at the same time, you have to keep in mind that, “Hey, if there’s one of these events where if it happens, the results could be a complete breakdown.” You can’t ignore it, right? You need to make sure you have that factored into your technology.
So, emergency payment processes, emergency purchase order (PO) processes. These capabilities need to be built in. You can’t just presume that there’s going to be perfection that’s set up and available for all circumstances, and that’s the only thing you’re designing for, particularly when you talk about industries like life sciences.
Gardner: That’s the very character of agility and resiliency -- being able to have exception management for exceptions that you can’t anticipate. And certainly, we have seen that in the last seven months.
Now that we see how important procurement is for a larger organization during a very tumultuous time -- recognizing that we need to have the agility of working with the manual as well as the automatic -- what does the future portend? What will our systems need to now become in order to provide the new definition of agility and resiliency?
Agile systems preempt problems
Folbigg: We need agile systems, and we need to be able to solve specific use cases in order for these systems to become important, viable, and present within our procurement landscape and many ways of doing business.
It’s not good enough for us when everything reverts back to the system. When there is issue like a pandemic -- or for something that is not necessarily rule-based -- we then need to go off system, and that marginalizes the importance of the system. I honestly don’t know how you enable a search for suppliers that is largely relationship-based. But there are elements that come from the availability of data, data that is presented in a form that’s easily consumed, especially if the data has to be translated and normalized. That is something definitely that the system suppliers can play a role in.
When I look at the system now as the head of procurement, I am not looking at features and functions. I am looking at the problems that I need to solve through a system to enable us to drive the resiliency that the company needs. And if I look at the challenge that we have of enabling the potential like distribution across the world, what we are trying to do is not to be stuck in a situation that we had at the beginning of the year.
What we are looking proactively at is certain key suppliers to partner with to develop the system, to design the supply chain, and this is not transactional. This is a highly strategic activity based on human creativity, human network relationships, and trust between the leadership of different companies. It is a completely different design approach.
Now we are all thinking about preempting. How is the technology going to help me with what I am looking forward to? I need to be able to have the basic explanation at my fingertips fast in order for me and my team to concentrate on the strategic analysis.
Now we are all thinking about preempting. How is the technology going to help me with what I am looking forward to? I need to be able to have the basic explanation at my fingertips fast in order for me and my team to concentrate on the real strategic creative kinds of analysis.
Also, we need systems that can give us a lot of modeling and analysis. If you think about my problem now, I can buy freezers and cold storage for vaccines. But what am I going to do with them in five years’ time? You have supplies for the vaccine distribution. And then what?
I think the vaccine will become part-and-parcel of our cold chain and supply chain going forward because COVID-19 is not going to go away. The vaccines potentially are only going to last for a year or two, and you will have to be re-vaccinated. But, despite of all these high-cost, complex, energy-thirsty capital purchases, how do you do that? Now everything is done on the spur of the moment. A system that holistically can bring this all together for me would be a huge benefit.
Gardner: That point about being holistic, Baber, must be very important to you at SAP because you’ve been building out so many different systems, business capabilities, and data capabilities. It sounds like SAP might be actually in very good position to come to the rescue of somebody like Victoria, given that she has these pressing needs and wants to instantiate relationships into digital interactions. How SAP can help?
Supply chain for vaccine delivery
Farooq: It’s a privileged position because it’s a complicated problem. But it’s a problem that I believe SAP is one of the few companies that can support Zuellig. From our perspective, we want to get companies like Zuellig into a position where they can focus on those strategic elements and those creative elements that only humans can do. Creativity solving these problems is probably is one of the most complicated supply chain problems in recent history. The COVID vaccine distribution problem can only be solved through extensive creativity.
When SAP talks about the intelligent enterprise, that just means two very simple things. It means that I give an organization all of the insights and analytics capabilities at their fingertips so that they have the ability to quickly make decisions and pivot when they need to pivot, and that truly became evident during this pandemic. From our perspective, we have the ability.
If you look at all of the different processes that exist across manufacturing, distribution, sourcing, purchasing, procurement, payment -- all of these processes reside and are impacted by some element of SAP’s footprint. And our perspective is to make sure that all these elements can talk to each other. And by talking to each other, they can actively provide all of the data that’s required by organizations like Zuellig so that they can quickly make the decisions they need and focus on the strategic elements they need to focus on.
We don’t want people at Zuellig to be worried about how the POs are going to get raised and what are the different steps required for sourcing to take place. And that is very strictly the direction we want to take our products and we’re going to be taking our products so that we can go ahead and offer these solutions for companies like Zuellig.
The example that Victoria gave is just so close to my heart because I believe that when I was talking about the productivity decrease and growth that the world has experienced over the past 10 years, if we can make procurement more productive as a function, then procurement organizations can make the entire organization more productive. They can actually focus on supplier relationships and the co-innovation partnerships with suppliers that are critical suppliers. That has an impact on the entire business.
And no one is better suited to do doing that than procurement. We just have to get them out of the day-to-day processes of running reports, figuring out what the data says, and focusing on the transactional events and purchase orders and payments that take place. We need to get them out of those processes so they can leverage their skills in terms of finding the right suppliers, developing the right relationships that make an innovation impactful, and have an impact to the top line of organizations -- along with the bottom one.
And it is very clearly the direction that we are trying to take as rapidly as possible because we know that the next 12 months are critical in this space.
Gardner: Victoria, what advice could you give to others who are trying to transform their procurement organizations to take advantage of the agility and resilience that are now required? What advice can you offer for folks who might be not quite as far as long as you are in your transformation journey?
Educate around procurement
Folbigg: It’s complex because it depends very much on the specific company and how anchored procurement is. But it’s about making sure you find sponsors of the function who really understand the benefits of procurement. Give your team and yourself a job to show the benefit that strategic procurement can bring.
In this part of the world, we are just now seeing procurement on the university curriculum. Where I worked before, in Europe and the US, it was an established kind of skillset that we would learn in university. And there were courses on that in MBAs and social work. It’s just starting to anchor in universities in Asia. Go to your leadership and put procurement on the table and give a very factual and viable rationale of why the systems investment is very, very important.
As you are able to anchor your procurement with the system, it will put a lot of pressure on you to deliver the benefits that the system’s business cases provide. It gives you an opportunity to reach for wider buy-in of the system with you and your purchasers. Your training of people on what procurement can provide then becomes part of their evaluation. So, I think certainly this goes in hand-in-hand.
Gardner: Baber, anything more to offer?
Farooq: Victoria said something just a few moments ago. She said, “I really don’t care about the feature functionality. I only care about the outcomes.” That should be your North Star. It’s natural when you get into the deployment that you care about all the different little things, but one of the things that organizations often struggle with once the deployment begins is they stay in those sub-processes and functional elements.
I only care about outcomes. That should be your North Star. It's natural when you get into the deployment that you can care about all the little things, but one of the things that organizations struggle with is that they stay stuck in those sub-processes.
And a lot of the things that were the guiding reasons behind their transformation to begin with, those got lost, right? I say keep that front and center. That is the basis by which not only you will get internal buy-in, CEO buy-in, and CFO buy-in -- but it’s also something that you should constantly be reminding people of as well.
Of course you have to deliver to those outcomes and that’s where companies like SAP need to be held accountable and be a partner to make sure that those outcomes are delivered. But those business outcomes from a technology perspective is everything that we want to be focusing on and from a business perspective, and everything that the procurement organization should focus on.
And COVID-19 will force a recalibration on what those business outcomes should be. The traditional measures of the efficacy of procurement will change -- and should change -- because procurement can make a bigger, deeper impact for organizations.
Supply chain resilience is going to become a much more important factor. Procurement should embrace what they want to impact. Co-innovative partnerships that you deliver for the business should become a much more important factor. Procurement should embrace and show the impact. These are not measurements that were traditionally monitored, but they’re going to be increasing in terms of importance as we encounter the challenges of the next couple of years. This is something procurement organizations should embrace because it will elevate their standing in organizations.
Listen to the podcast. Find it on iTunes. Read a full transcript or download a copy. Sponsor: SAP Ariba.
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