The Potential of Predictive Procurement Orchestration
Welcome to the 2020’s, the same decade that George Jetson from the cartoon “The Jetsons” was born. While we are still far off from a future with flying cars and home robots, many of the technologies predicted in the show – think flat screen televisions, video calls, and drones – have become a reality.
One such prediction was that robotic automation would seep into the 21st century workplace, taking over everything for us. In some cases, it has, but today it is more behind the scenes learning for us. Like George Jetson, who still manually has to click a button at his job, there are still pains as we strive for automation. The procurement industry is no exception.
Has procurement really been digitally transformed?
It’s no secret that many companies miss the potential of digital technologies. According to Spend Matter’s whitepaper, “Procurement’s future is embedded platforms: introduction to predictive procurement orchestration,” while many organizations have adopted digital technology, the transformation occurs more on the visibility level (i.e. executives can see all procurement activities), but as a result the total workload for most procurement professionals has only grown.
“Self-service” procurement systems have moved us from the physical space (paper and fax) to a virtual space (spreadsheets and email), where procurement teams are still required to manually touch the procurement process. This is because these systems allow those outside of the procurement department to engage in low-intent purchasing behavior that is misaligned with corporate procurement intent.
Is low-intent purchasing behavior affecting your business? Spend Matters shares some indicators:
- Supplier Per Dollar: The number of suppliers goes up over time disproportionately to the amount of spend
- PO Per Supplier: The spend fragmentation (measured as the number of Purchase Orders per supplier) also goes up disproportionately
- Variance Per Item: The fidelity of spend taxonomy by transaction goes down, making for a noisier and less accurate real-time spend analysis
Long-tail spend, meet fat-tail spend
If your company is experiencing low-intent purchasing behavior, you are likely experiencing what is called a “fat-tail.” You’ve probably heard of “long-tail,” which is spend that is filled with one-off transactions, fragmented across a complex supplier base.
“Fat-tail” spend occurs further along the process and is linked to non-catalog Purchase Requisitions that increase over time. Unlike “long-tail” spend, it is neither high volume nor low value and usually occurs in transactions that are clustered together. This makes it difficult for procurement teams to act due to the sheer volume.
How can your procurement team manage spend without adding more steps or cycle times to the process? Enter Arkestro, who utilizes Predictive Procurement Orchestration.
What is Predictive Procurement Orchestration?
Predictive Procurement Orchestration (PPO) does what “self-service” and “best of breed” procurement systems can’t do. It constantly analyzes large amounts of historic datasets to identify the best purchases from the highest quality suppliers.
Procurement excellence already exists in your company, you just need PPO to see it. And the best part – users don’t have to manually trigger an action. Arkestro sets the optimal conditions across all your spend, by default.
Not just any procurement solution can claim to use PPO. To qualify the technology must meet the following criteria:
- No login, seamless user experience across multiple systems
- Pre-embedded and always-on analysis and data
- Alerts, notifications and delegated actions-by-default
The science behind Predictive Procurement Orchestration
The biggest components of PPO are data and behavioral science. PPO can address your internal data wherever it lives, from historical and real time transactions, it synchronizes across your different systems to overcome silos. Predictive Procurement Orchestration also considers external data like supplier risks and rankings, while also analyzing statistically normal and outlier transactions to make the most favorable recommendations, just like your best procurement team would.
For instance, let’s say you are a pencil manufacturer and are looking to purchase graphite. You’ve bought from three different vendors in the past and are looking for the best price. PPO can tell you which of the three vendors is the best supplier based on price. It can also recommend what savings-producing price the supplier is most likely to accept should you want to negotiate.
Recommenders are powerful information filtering tools used not only in PPO but by companies like Amazon, Netflix or YouTube to suggest what you should watch or purchase next! While procurement does accumulate a lot of data to make these recommendations, purchasing decisions are very much a human element in the PPO equation.
That’s why the other component of PPO is behavioral science and game theory. Once PPO proposes an outcome (best supplier and price) it automatically moves forward and sends a proposal to the suppliers.
There is no doubt that suppliers want your business. Going back to our previous example, when the graphite supplier learns that you are in purchasing negotiations with two other suppliers, that’s when FOMO or Fear of Missing Out comes into play.
Spend Matters shares that “the prisoner’s dilemma” could be one such concept suppliers face. “A key element is the fact that each participant does not know what the others will do although what they will do will impact each participant.” And just like that, behavioral science and PPO spark a cost-saving conversation for your business.
Welcome to the future
We think it is safe to assume that George Jetson would be proud of the future we are heading towards with Predictive Procurement Orchestration. It may not be flying cars or robots, but it certainly is the step in the right direction for overworked procurement professionals.
What can triggering a quote request without human intervention do for your business? Here are some high-intent procurement activities our customers have experienced:
- New incremental savings and results in less than 30 days
- Supplier and spend fragmentation decreases
- Price variance decreases by routing more spend to preferred suppliers
In addition to these value savings, PPO allows you to approach the market with speed and agility so you can buy and react faster. It focuses on being flexible and omitting redundancies to increase resilience in the event of supply chain disruptions.