Procurement Strategies for Digital Supply Chains: Concepts and Best Practices

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.

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.