Inflation, Attrition and Procurement
With an average inflation rate of 7.4% in 2022, the world is bracing for the heat of inflation . Inflation in the United States (US) peaked in June of 22 at 9.1%, the highest level in the previous 40 years. The Bureau of Labor Statistics’ monthly report on inflation noted that the CPI (Consumer Price Index) increased by 8.56% in the USA (UNITED STATES) from the previous year. About dealing with inflation, businesses are encountering numerous difficulties, particularly in sourcing and procurement. Gasoline prices have increased by a staggering 48% during this time, driving up energy costs by a startling 32%.  Direct and indirect material costs associated with industrial activities have increased as a result of inflation. In order to lower production costs, businesses have been hunting for new low-cost suppliers and renegotiating existing contracts. Covid-19 is the unidentified variable that is to blame for this, even though there may be other other causes at play in the world.
Fig. 1: Inflation Trend in the US
The following are some of the detrimental effects that inflation has on businesses.
- Rising costs for inventory, overhead, and raw materials
- Supply-chain reorganizations.
- Extended project costs and delayed project schedules.
- Increasing production and shipping expenses
- An increase in outstanding debts.
- Renegotiate supplier agreements or find new, less expensive suppliers
Another issue that has been affecting the supply chain system is attrition. Since Covid, there has been an imbalance between the supply and demand of labor, which has resulted in “Great Attrition” and wage growth. With growing competition for workers, the US is also dealing with a skills gap of epic proportions. The widening gap, known as the “Great Attrition,” already has an impact on the transportation and logistics industry and is only expected to become worse. The employment mismatch in the US up until December 2021 is shown in the graph below, where job openings have increased by 50% while the labor force participation rate has decreased by 1.8%. Also, there has been a change in how people work, with more people choosing flexible schedules and hybrid work arrangements.
Fig. 2: US Job Openings Vs. Labor Force Participation Rate
Despite pay increases, logistics operations continue to have trouble finding and keeping frontline employees. There is also a rise in absenteeism, which has an impact on the entire supply chain. Employers of third-party logistics services face a number of other difficult issues, such as a 30% increase in transit costs.  Compensation is under pressure from the labor market and increasing inflation, but many firms cannot afford to raise wages as quickly as workers desire or anticipate. Not all firms will be able to recruit and retain people based just on wages if inflation keeps increasing. Many direct and indirect repercussions on enterprises are being caused by these resource and inflation challenges.
Era of technology
As Covid hit the world in 2020, we realized that in order for their company to survive a rapid disruption, supply chains would need to be smart, flexible, and agile. A McKinsey survey found that successful companies were 2.5 times more likely to report having pre-existing advanced analytics capabilities than those that reported issues. For the supply chain of an organization to be resilient to unanticipated change and disruption, every area needs a reliable technological solution and data visibility. Increased need for procurement process automation and integration between e-procurement software and ERP solutions for crucial data flow between the two platforms are some of the factors contributing to the market’s growth. Businesses with an ERP system must update and the ones who didn’t need to put one in place, and vice versa. The purchasing process takes longer and has more room for error when using a typical procurement method. Contrarily, using procurement software enables a significant amount of the process to be automated, and the entire process is computerized.
- Using cloud-based systems: Among other things, using cloud-based technology for procurement enables effective management of the requisitioning, sourcing, purchasing, and handling of payments for services processes. You can create your own custom solution or adopt a standard procurement system much more affordably and quickly in the cloud. The benefit of using the cloud is that there is no added administrative burden associated with managing infrastructure or other IT requirements, which lowers overall cost.
- AI for saving opportunity identification: Category managers frequently rely on data from ERP systems to analyze spend patterns and find potential saving opportunities. The problem is that this data is typically insufficient and requires extensive data cleansing and classification before it can be understood. Usually, this is referred to as spend analysis. Artificial intelligence (AI) is currently being utilized to automate savings opportunities and continuously analyze the data to identify new chances or recommend any variation in the “spend trend” as compared to prior years spend.
- Increasing data expertise: Category managers need a lot of data to make decisions about what to buy, such as trends across many categories, market consolidation, current companies expanding their capacity, new entrants, etc. By automatically compiling data from many sources and presenting it on a category dashboard, procurement technology can provide data for category managers.
- Information for enhancing the effectiveness of bargaining tools: Category managers engage in a great deal of back and forth when running RFPs with stakeholders. The RFP process can be made more efficient for the sourcing teams and stakeholders by becoming digital. Imagine an e-sourcing solution that not only allows for side-by-side comparison of responses, but also for comparison of responses from several suppliers and the identification of crucial vendor differentiation.
- Better employee experience with guided UI: In today’s economy, when customers can book a ride with the press of a button, staff members likewise anticipate a comparable user experience from their company’s IT systems. Employees can get important information from digital procurement to streamline the purchasing process. Now that guided buying is an AI use case, your stakeholders will have a better experience. P2P systems of today are practically on par with e-commerce websites like Amazon, eBay, and others. On the other hand, because you are attempting to condense expenditures, you don’t want to provide consumers 20 distinct product selections as amazon.com offers. Less staff is required for helpdesk support if you have an easy-to-use solution supported by a straightforward procedure.
Choosing the appropriate source for the user may also involve interacting with desired partners to obtain bids and other information. Assume that the sourcing team is not involved at all by the system. I’m sure you can see the clear advantage of managing more expenditures with the same amount of resources.
By giving insights to the stakeholders, digital procurement can help increase the value of the procurement process. Consider systems that automatically collect supplier data, including not just performance data but also other crucial information like their financial outcomes, performance data, and geopolitical trends. This can help you identify any supply chain risks and offer a thorough supply chain report to your stakeholders. Presenting the purchase scorecard to your stakeholders has great value as well. The involvement will be better as they get more knowledgeable about procurement value-add.
Process streamlining and time savings: Consider how much easier approvals would be if the system knew that you always buy a certain product each month and that your manager always approves the purchase. If that’s the case, you don’t necessarily need a manager’s approval for every purchase.
Take on Maverick Spend: Despite the fact that your staff members want to adhere to the procurement policies and procedures that have been established, it is often the case that they are unable to locate the appropriate supplier in the system or that your preferred supplier is unable to deliver the product within the desired lead time. Consider how things might be different if the technological toolset could record the transactions and activities when the end user was unable to find what they were looking for. When a chosen vendor was available but not used by the business, machine learning automatically detects such trends in purchasing. Comparable to Google Analytics for your spending is this. Technology may now direct customers to their chosen providers, reducing the need for the workforce that would otherwise handle customer service inquiries. When this happens, your procurement team can concentrate on value-adding tasks like negotiating prices and creating improved catalogs for your customers.
Fig. 3: Gartner’s Magic Quadrant for Procure-to-Pay Suites November 2022 Report
Who are the participants? Many IT businesses are vying for market share in the E-Procurement sector nowadays, as can be seen by looking at the market. We can see that there are many additional rivals in this space by looking at the most recent Gartner’s Magic Quadrant for Procure-to-Pay Suites, which is dated November 2022. A dot plot for a solution’s completeness of vision vs. ability to execute is shown in the diagram. Here, the graph has been divided into four quadrants, labeled Challengers, Leaders, Niche Players, and Visionaries by Gartner. According to a Gartner analysis, those in the Leader quadrant have the greatest potential to shape the market’s future growth. They present a ground-breaking view of how P2P technology may support procurement professionals in achieving their corporate goals for managing compliance and reining in external spending. Through products and services, leaders may carry out that goal, and they have already shown financial success in the form of earnings and revenue. They excel in combining market knowledge, innovation, product features and functionalities, and general viability, all while maintaining a solid base of loyal long-term clients.
Successful implementations and the capacity to close new transactions are consistently displayed by leaders. Its clients span a wide range of organizational sizes and industrial sectors, and they are spread over the most geographical areas. Leaders are frequently the vendors other suppliers compare themselves to. They are also the suppliers in this Magic Quadrant who are most likely to still be in the P2P suite market in five years. Most businesses should consider leaders while looking for a P2P suite. They shouldn’t, however, be the only ones considered.
In this Magic Quadrant, SAP is a Leader, according to a Gartner assessment. The SAP Business Network and SAP Ariba, which are connected with SAP Fieldglass, are its procurement solutions that were assessed in this Magic Quadrant. As part of a larger S2P strategy that supports all spend categories, SAP focuses on offering P2P. Customers of SAP are spread out over the world, and SAP’s activities are geographically varied. Consumer packaged goods/retail, financial services, and manufacturing /automotive are its top three industries. The short-term investment strategy for SAP includes improvements to the business network, persona-based mobile shopping apps, advanced search/recommendations powered by AI/ML, and greater integration of Fieldglass SOW procurement into Ariba. Gartner lists some of the advantages SAP can take advantage of.
The following are the strengths that make SAP a leader in the E-Procurement space.
Fig. 4: Features of SAP Ariba
Ariba: Comprehensive P2P process solution For procurement solutions suitable for both mid-size and large enterprises, Ariba has been recognized as the market leader. For the seventh time in a row, Gartner has named SAP Ariba as a Magic Quadrant Leader for Ariba and SAP Fieldglass solutions. From source to pay, Ariba offers a total digital procurement solution. In order to reduce costs and improve business process effectiveness, Ariba offers “Spend Management solutions” that assist firms in analyzing and managing their corporate expenditures. Through Ariba Network, SAP offers businesses access to a digital marketplace with millions of registered buyers and suppliers who do trillions of transactions annually. The collaboration between the buyer and the supplier is improved through tools like spot purchasing and guided buying, which also contribute to a 10% cost reduction. Among the SAP Ariba’s primary characteristics are
- Integrating Ariba with any back-end system, such as ERP or ECC, is seamless thanks to Cloud Integration Gateway (CIG). The integration process doesn’t involve any pricy hardware or adapters. The collaboration between the buyer and the supplier is simple thanks to CIG, allowing them to communicate papers connected to transactions from procure to order. The SAP ERP solution, S/4HANA, and the Ariba procurement solution have continued to receive funding for deeper integration. For instance, it facilitates the automatic production of replenishment orders from the supply chain planning system or the synchronization of supplier master data.
- External workforce procurement: SAP’s Fieldglass solution for the hiring of temporary workers has a high level of industry adoption and feature functionality that enables integrated applications to support service spend at its best.
- SAP Business Network: With millions of suppliers on board, SAP offers a platform for collaboration and document sharing for transactions between the buyer and supplier. Due to the fact that only reliable suppliers are registered and onboarded, supplier risk is reduced. Purchasers may request items from their suppliers or they signed up to communicate with buyers. New suppliers can be found by buyers via Ariba discovery. Suppliers can give purchasing groups access to their catalog.
- Streamlined Source to Pay: Buying organizations may completely see and control their expenditure with Ariba. Internal consumers may be permitted by purchasing organizations to buy products and services solely from preferred or qualified vendors. Events like RFPs, RFIs, and auctions can be carried out smoothly with the help of sourcing solutions, with the goal of reducing costs.
- Global coverage: In key economies like India, Germany, France, and Saudi Arabia, SAP is actively striving to enable new legal frameworks, such as new tax models and the growing clearance model. SAP is a strong option for worldwide programs since it provides support for regional tax and invoice rules straight out of the box or via specialist partner products.
- Greater User Adoption: With the addition of features like Guided Buying in SAP Arib Buying and SAP Ariba Buying and Invoicing, purchasing has become simple for both casual and functional buyers. A similar user experience to shopping on any e-commerce site, such as Amazon or eBay, is offered via guided buying. By enabling greater self-service, procurement has increased efficiency and made officials available for activities of the highest priority.
Digital procurement is being touted as the solution to all procurement problems, which may be termed a new buzzword. From convoluted, difficult-to-use end-to-end procurement systems, procurement technology has advanced significantly. Using more modern digital procurement solutions will help you strengthen your SC procedures so they can adapt to changing conditions and improve the whole procurement process.
- Worldwide Inflation by Country 2022 (inflationdata.com)
- Covid-19 Related Inflation Surpasses 40 Year Record: How Long Will It Persist? (forbes.com)
- How COVID-19 is reshaping supply chains | McKinsey
Magic Quadrant for Procure-to-Pay Suites (gartner.com)
- 1- Monthly inflation rate U.S. 2023 | Statista
- 2– Reimagining supply-chain jobs to attract and retain workers | McKinsey
- 3- Magic Quadrant for Procure-to-Pay Suites (gartner.com)