Stop looking at the procurement process as a cost center and instead as a strategic partner to help fight inflation. There are opportunities for process improvements throughout all levels your organization – from procurement to accounts payable for example. Process mining provides real-time data and insights into how well or more tellingly - how poorly your processes are being executed. This article explores the relationship between procurement and process mining.
Process mining can combine with procurement strategies to mitigate the risks of today’s financial pressures (supply chain, inflation, labor shortages, etc.). As your business improves its procurement process execution, you also build resilience against those pressures now and in the future.
Using new technology solutions provide CFOs and other decision-makers with the real-time data they need to fine-tune procurement processes in sync with the business requirements as they are NOW – not as they were weeks or months ago. In this third article of our five-post series (Is Process Mining the Answer to CFO’s Inflation, Supply Chain, and Labor Shortage Fears and Close Your Accounts Receivables Execution Gap With Process Mining), I’ll explain how increasing efficiency for procure-to-pay processes delivers value by eliminating spend, productivity, and working capital draining execution gaps which exist in every business.
Process Mining Addresses Immediate and Ongoing Procurement Challenges
While the immediate focus today is to mitigate the effects of the pandemic, process mining combined with procurement delivers long-term benefits by delivering insights into operations that lead to sound business decisions based on data. For companies in industries experiencing price erosion, improving efficiency is essential for sustainable profit margins. Efficiency gains can be broadly bucketed into 5 major groups:
- Labor Productivity
- Supply Reliability
- Spend Reduction
- Working Capital Optimization
- Compliance & Sustainability
Within each of these areas, procurement professionals are continually attempting to adjust their processes relying on key metrics, which are usually computed using incomplete data.
In the immediate future, improving procurement processes uncovers opportunities to increase working capital and address supply chain issues and inflation pressures. In the long term, well-defined procurement processes boost resilience and the bottom line for everyone.
Proactively Address Inflation With Improved Procurement – Know Your Suppliers and Who Is Making Purchases
Insight into purchasing across the entire business prevents procurement confusion – procurement and supply chain teams each purchase the same materials using inconsistent rules, discounts, and vendors to ensure continued production. Suddenly, instead of strategic inventory, you’ve just paid for more than you need, can immediately use, or even safely store, leading to waste.
Given the constantly evolving prices of shipping, labor, and raw materials as supply chains are stretched by COVID, you’ll never get ahead of it by relying on outdated processes that require weeks or more to make decisions. Because sourcing strategically requires rapid planning today, waiting weeks or months just isn’t fast enough to keep up with fluctuating supply prices. In today’s market we’ve seen the price of lumber, steel, and sulfuric acid increase by double digits in less than a few months.
Of course you know who you have a formal contract or agreement with; however, do you also know how much “rogue buying” is taking place? Are departments or divisions of your organization procuring supplies with non-preferred suppliers? Does the purchase price align to inflationary price indexes? Is your procurement team even bothering to use/learn your price book and preferred vendors? Or are they taking the easy way out and just entering “free-text” orders? I’m guessing it happens more than you realize – or at least more than you want. For example - a $4B company having just a 5% improvement in contract usage results in over $1M in spend reduction.
Who wouldn’t hang their hat on that improvement?
While targeting additional suppliers for backup relationships is a strategically wise move, buying “one-off” supplies leaves you at the mercy of supplier price increases. Without a relationship, you’ll be the first to bear the brunt of price increases. This also means investing time to develop strong supplier relationships. While beyond the scope of this article, you can use process mining to identify your most reliable suppliers. Please comment and let me know if you’d like to have me dig into that deeper on a later post. Lean into those relationships so your organization remains a top priority for them to supply as they deal with disruptions and need to decide who receives available supplies and who will need to scramble to find an alternative source.
While the current pandemic can be expected to end … someday…, experts predict ongoing challenges to supply chains to continue. Disruptions from serious weather events and other geopolitical events – financial crises, terrorist attacks, cyberattacks, or another pandemic – will continue. While no one can precisely predict each future event, it’s certain there will be additional disruptions. Being as efficient and prepared as possible is your best defense.
Process Mining and Procurement Processes
Process mining is a key technology piece to gathering insight into your procurement process, rather than point-in-time snapshots of a step in the process. Lean Six Sigma teams are all over the corporate world performing time-consuming analyses, side-by-sides, and workshops to get to the “real process.” Unfortunately, these exercises usually result in views and recommendations of only part of the real process. Process mining provides CFOs and other decision-makers real-time insight into the performance of the procurement processes.
Here’s a high-level overview of how process mining works to remove execution gaps in procurement processes. With process mining, you can:
- Extract data from multiple data sources – from ERP to Excel spreadsheets to procure-to-pay software – to provide a real-time X-ray of your procurement processes from beginning to end. Your “X-ray” isn’t static. It continually evolves as the data changes.
- Benchmark regions, business units, buyers, and requisitioners against each other to identify process patterns, execution gaps, and best practices across your business.
- Monitor process performance against best-practice models to identify inefficiencies, the impact, and the root causes.
- Identify recommendations based on execution best practices to remove process inefficiencies.
- Automate improvement actions across systems while alerting and deploying the right people to remove execution gaps when manual intervention is required.
Let’s explore the costs of these execution gaps as well as the benefits of using process mining.
Inefficient Procurement Processes Equal Lost Opportunity
Celonis’ research identifies three procurement process execution benchmarks for average and top performing businesses:
- Spend under management. Top performers influence 75% of their total spend; average companies influence 47%.
- Supplier delivery reliability. Deliveries for average companies are on time 54% of the time; for top performers it’s 83%.
- Cost per purchase order. Average companies spend $15 to process each PO; for top performers, the cost per PO is $1.35.
Take a second and compute what those improvements would mean in your organization. The $$$’s get pretty big pretty fast even with a nominal realization rate of 10-20%
Process mining will identify the extent of the process gaps for these procurement processes
- Maverick buying. While different business units may have the incentive to “go rogue,” this is harmful in many ways. It increases risk, results in higher spending because it’s ad hoc purchasing (almost certainly at a higher price than those negotiated with regular suppliers), and can hurt productivity as these suppliers aren’t as incentivized to deliver on-time as regular suppliers. Process mining identifies instances of maverick buying and blocks access to the requisitioner or rejects maverick purchases based on business rules. By revealing vendors who regularly deliver maverick purchases, a company can also discover potential alternative suppliers or contact these vendors to explain the company policy on purchasing. And by pointing the process analysis internally, you can find out which units and personnel require additional training to follow the company line.
- Inaccurate and/or late delivery times. Late deliveries slow production, create pressure for inventory buffers, and create unhappy customers. Nobody wants that. Process mining can identify where master data parameters are incorrect leading to late customer deliveries. It can also identify delivery patterns to either automatically update planning parameters or to alert the planning team of a potential systemic issue.
- Free-text requisitions add costs to purchase orders by slowing down purchasing and wasting time of employees who manually create requisitions. Process mining allows the automatic conversion of a free-text purchase request to a PO from an existing approved catalog vendor to the requisitioner.
It’s not only Celonis that touts the benefits of improved procurement processes. McKinsey & Company research also shows a positive correlation between high-performing procurement processes and business performance, as indicated by the graphic below.
Procure-to-Pay Research Findings
Celonis commissioned research (Process Mining for Procure-to-Pay) that revealed a variety of execution gaps in processes and what those gaps looked like between top and average performers in procurement processes. For accounts payable, the research focused on the following three KPIs:
- Days payable outstanding. Top performers had a DPO of 74.5 days; average companies of just 48.4 days.
- Paid On Time Rate. The best companies paid suppliers on time 77% of the time; average companies only 50% of the time.
- Touchless invoice rate. Top performers had an 85% touchless invoice process rate; average companies 27%.
Once again, take a second and compute what those improvements would mean in your organization. Ready to make some changes yet?
What process gaps related to these KPIs can process mining identify?
- The primary cause of a low DPO rate is early payments. Companies often pay invoices too early, decreasing working capital. Process mining will check payment terms and apply them consistently, even sending automated notices to the supplier to inform them.
- Paying invoices on time accomplishes two things. First, you can take advantage of early payment bonuses. Secondly, suppliers like to be paid on time. Much like early payments, process mining can check for payment terms to ensure you take advantage of early payment perks. Price changes are also a culprit for late payment – including suppliers using outdated pricing when invoicing. Process mining can automatically check and apply contracted pricing while sending a notice to the supplier to alert them of the discrepancy. This saves manual effort to correct pricing as well.
- Incorrect invoices – missing fields such as currency, VAT, due date, etc. – are too common and increase costs by requiring manual intervention. By identifying discrepancies in invoice fields through comparisons to the PO and historical data, those fields can be automatically updated to eliminate manual intervention.
Only the Beginning
The process mining and procurement story encompasses more than the examples provided in this article. Just because I didn’t mention it doesn’t mean process mining can’t help – it just means I didn’t include it here today. What execution gaps and KPI’s are top of mind for you? Let me know in the comments.
Process mining can also help companies with extended supply chains understand who and where their suppliers are. By tracking purchases, a company can begin to unravel the connections between all suppliers (not just tier 1 suppliers) and begin to identify areas of supply chain vulnerability.
By pulling data from disparate, disconnected systems, process mining provides an X-ray into your procurement processes. What process improvement opportunities will your data reveal?
Next Steps - Your Own X-ray and Report Card
The sooner you begin, the sooner you'll close your procurement execution gaps. Doculabs can help you use process mining to delve into your data so you know where you need to improve now and where you can create value in the future.
We do this with a "CFO Report Card" approach. It's an X-ray of your current data created with Doculabs industry expertise combined with process mining from Celonis to:
- Diagnose how well core processes such as procurement are performing
- Provide an executive summary report that will include process improvement recommendations in order to budget for 2022
Ready to see what your grades are?