Procurement Strategies for Digital Supply Chains: Concepts and Best Practices

Procurement Strategies for Digital Supply Chains: Concepts and Best Practices

Varun Gupta (Pennsylvania State University – Erie, USA)
DOI: 10.4018/978-1-5225-7700-3.ch002

Abstract

The purpose of this chapter is to provide the basic concepts and the best practices for procurement in the context of digital supply chains. This chapter consists of three sections. In the first two sections, a review of digital supply chain procurement literature and theories is presented, followed by a detailed discussion of the best practices in procurement strategies comprising of the six-step framework for procurement strategies digitalization. Finally, the chapter concludes with future trends in procurement strategies. The chapter consists of case studies from different industries such as manufacturing (Apple, Beta products, IBM), fast food (Chipotle), and logistics/pharmaceutical (DHL). EVA (economic value added) model is discussed in the chapter, which is useful to evaluate the value of digitalization. This chapter is intended for all practitioners and academics who are interested in learning about the current best practices and the challenges associated with procurement for digital goods.
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Introduction

‘Procurement is the process of finding, agreeing on terms and acquiring goods, services or works from an external source, often via a tendering or competitive bidding process. The process is used to ensure the buyer receives goods, services or works at the best possible price, when aspects such as quality, quantity, time, and location are compared’ –Van Weele (2010). The purpose of this chapter is to provide a background, then introduce and describe the most important factors for the procurement strategies for digital supply chains. We do this by first reviewing the history and evolution of procurement processes, next we review the relevant literature on the digitalization of procurement processes. Subsequently, we develop a 6-step framework for procurement strategies in digitalized supply chains. We build the framework using specific case studies such as Nath et al. (2008), and Mabert and Schoenherr (2001, and literature such as Thompson et al. (2000), Neef (2001), Forbes (2012), Glas and Kleeman (2016), and Brich (2018). Thus, the chapter provides a practical framework and reference for procurement managers who are looking to get an in-depth understanding of the digital transformation for their procurement processes.

Procurement is a more comprehensive area than purchasing in the context of supply chain management (SCM), as purchasing focuses more on tactical aspects of acquiring the goods, services or work from an external source, whereas procurement encompasses development of business strategies that align with an organization’s mission and goals. Strategic procurement enables companies to develop and/or enhance their advantage over its competitors –both by cost advantage or differentiation advantage.

Emerging digital and advanced analytics tools promise new levels of procurement performance. To deliver that promise, CPOs must discover which of them are best suited to the needs of their company. – McKinsey & Co. (2017)

Digitalization of supply chains has helped companies with both cost reduction as well as creating a difference in values based on the digital transformation products used for procurement (cf. Farahani et al., 2017, Büyüközkan, G. and Göçer, 2018, and Ivanov et al., 2018). The first instance of a digital technology developed for procurement was the Replenishment Management System and Method (RMSS) by IBM in 2000. IBM used the technology to solve the complex procurement process for their laptop producing plant in Mexico (Guadalupe, 2011) and the plant production grew from USD 1.6 billion (annually) to USD 3.6 billion after three years of its implementation. This is arguably one of the first success stories of digitalization of the procurement process. Through digitalization, businesses are able to better adopt, design, and deliver new smart and connected products that change the way they compete in the markets (Porter and Heppelmann, 2014).

Modern-day procurement processes have become increasingly complex due to globalization, volatile and uncertain global tariffs, complex supply chain networks (“VUCA” world), digitalization including online shopping and e-commerce, changes in customer demands, shorter product life cycles, and a rapid increase in the number of SKUs (stock keeping units). This complexity is further aggravated by budgetary constraints on businesses and mass customization (hyper-personalization1) for customers, which requires businesses to use procurement processes as a key strategic tool to deliver profits at the least operational and sourcing costs. Consequently, it is increasingly important for procurement managers and supply chain managers to learn how to best use digitalized procurement strategies to remain relevant in the industry.

Key Terms in this Chapter

Procurement: Is the process of finding, agreeing on terms and acquiring goods, services or works from an external source, often via a tendering or competitive bidding process. It is used to ensure the buyer receives goods, services or works at the best possible price when aspects such as quality, quantity, time, and location are compared.

Machine Learning/AI: Is the statistical process that gives machines the ability to learn and act intelligently (take decisions using information) by using historical data.

3D Printing: Is the process of creating three-dimensional products using computer technology. This process is currently used by businesses for rapid prototyping and additive manufacturing.

Digitalization: Is the process of converting information into a digital (bits – 0,1) format (i.e., readable by computers). This allows any information to be stored, processed, and transmitted easily by using a network of computers.

Blockchain: Is a digital ledger that is decentralized, distributed and public. Blockchains are used to record transactions across many computers so that the records have the ability to be tracked and traced for any changes.

Sustainability: Is an approach or the process where the use of non-renewable resources, economic investments, and the orientation or goal of development of business, government, or technology are all in harmony with each other. This ensures that there are enough resources for current and future generations with minimal impact on the environment.

Big Data: Are large data sets that are so big and complex that conventional computers are unable to process the data at all or not in real time. Additionally, big data refers to the use of large volumes of data to make business decisions or to predict customer choices in real time using customer data.

E-procurement: Is the process of electronic or online (web-based) network for buying and selling goods in a B2B setting or a B2C setting. It is also used by government organizations for procurement. Processes such as RFQ, RFP, etc. are conducted online in an e-Procurement setting.

End-to-End Supply Chain: Refers to the philosophy of considering the entire supply chain starting from the customer to the end supplier, to eliminate any wasteful processes or middle steps, to optimize the entire supply chain.

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