How powering up your procurement process can help your business fight inflation
During periods of high inflation, the procurement department’s ability to reduce costs and protect margins are crucial for business success. Vaish Sashikanth explains how companies are optimizing procurement with Celonis.
Inflation. For the U.S.Federal Reserve and central banks, fighting this pernicious economic threat means raising interest rates. For businesses and consumers, the ultimate weapon against inflation is greater efficiency.
That efficiency takes many forms. Consumers are stretching every dollar, and businesses are adopting a continuous improvement mindset. I see C-suite executives looking for ways to optimize operations and increase productivity across their entire business. And they’re taking a fresh look at shared service processes like accounts payable, accounts receivable and procurement to accelerate cash conversion, improve working capital and reduce operating costs.
Traditionally thought of as a cost management function, procurement has become a strategic lever for managing working capital and avoiding supply chain disruptions. How do you ensure your procurement department is operating at its full potential? With the right mindset, as I mentioned earlier, and a technology that combines process mining and automation, called execution management.
Macroeconomics headwinds require businesses to chart a more efficient course
Making your procurement process more efficient can lessen the effect of supply disruptions, maximize your purchasing power and reduce costs. But before we talk about the “how” of that statement, it’s critical to understand the “why,” which means looking at the economic trends we’re seeing in the market.
Consumers are pessimistic and cutting back. In July, McKinsey & Company found that more consumers have a negative outlook about the economy than any time since March 2020, prior to the COVID-19 pandemic. And from March 2022 to July 2022, the number of pessimistic consumers doubled from 15% to 30%.
Given their feelings of economic uncertainty, it’s no wonder people are more efficient in their spending. Research firm MRI Simmons found that 42% of consumers are cutting back on non-essential items, 34% are shopping at dollar or discount stores and 30% are switching from name-brand products to store and generic brands.
Even as the consumers are looking to spend less, inventory and production costs are rising.
The producer price index (PPI), which measures wholesale inflation for goods and services in the U.S., was 8.7% for the 12 months ended in August 2022. This is more than 3.5X higher than the 2.3% monthly average for 2018 and 2019, prior to the COVID-19 pandemic.
Executives have been sounding the alarm during their earnings calls throughout 2022.
Colgate-Palmolive CEO Noel Wallace said the company is dealing with a difficult cost environment and expects “$1.3 billion in raw material and packaging inflation with higher logistics costs as well."
Johnson & Johnson CFO Joseph Wolk said the company is experiencing inflation across the company. Starbucks CFO Rachel Ruggeri said the company expects headwinds related to supply chain, commodity prices and inflation. McDonald’s CFO Kevin M. Ozan said the global restaurant chain expects roughly 12% to 14% inflation for the full year in the United States. Nokia CEO Pekka Lundmark said they are seeing inflation across the business and especially in semiconductor prices.
Businesses are caught between a rock and a hard place. They need to raise prices to maintain operating margins, but if they raise prices too high, they risk alienating buyers. That’s why companies are focused on controlling input costs and improving efficiency across their business processes.
That’s exactly what Carol Tome, United Parcel Service CEO and the global shipping giant said - they optimized trailer loads and are working to improve delivery density.
Procter & Gamble Co. CEO Jon Moeller said the company is “fully committed to cost and cash productivity in all facets of our business, up and down the income statement and across the balance sheet in each business and corporately.”
Arvind Krishna, IBM CEO, said much of the tech company’s consulting business is focused on back-office applications, critical applications and supply chain resilience for clients that are worried about cash conversion and optimizing their costs.
Procurement plays a crucial role in bottom-line optimization. By optimizing procurement, companies can mitigate supply disruptions, maximize purchasing power and reduce costs.
Is your procurement department operating at maximum efficiency?
Procurement teams are responsible for acquiring the raw materials and components used to make products, non-production goods used in day-to-day operations, goods held as inventory for resale and services. It sits within the broader source-to-pay (S2P) and procure-to-pay (P2P) processes.
To measure the operating effectiveness of procurement, businesses use a variety of key performance indicators (KPIs), including operational cost per purchase order (PO), supplier delivery reliability and spend under management. Within each of these metrics, Celonis found a huge performance gap between the average company and the top performers.
For example, the average company spends upwards of $15 to process a single PO, while best-in-class organizations spend just $1.35. Average companies have an on-time supplier delivery rate of only 54%, while top performers reach 83% on-time delivery. Average companies influence only 47% of their total spend, while the most efficient organizations achieve 75%.
To know how your company ranks for these metrics, you need objective data collected from your ERP (enterprise resource planning) systems, SCM (supply chain management) systems and across your entire application stack. But then what? Knowing where you have room for improvement is only half the battle. You also need the tools to close any process inefficiencies.
That’s where Celonis’ business performance Execution Management System (EMS) comes in. Our EMS both reveals and fixes hidden process inefficiencies, because the primary problem in businesses is not fixing the process problems that you know you have. It’s finding and fixing the hidden process problems that you don’t know you have.
The market leaders are powering up procurement with the EMS
What causes performance disparities in procurement? According to our State of Business Execution Benchmarks Report 2021, over 2,000 business leaders place two tech-related reasons at the top of the list:
- Fragmented data landscape
- Broken or inefficient processes
At Celonis, we’re seeing industry leading companies tackling both problems with EMS.
Optimizing procurement starts with using process mining to get a true picture, or an x-ray as we call it, of your procurement processes. This is an 100% objective view based on the data with your IT systems. And because EMS collects data in real time and can quantify the financial impact of the process gaps, you can take action immediately.
Once EMS spots incorrect prices or quantities, it uses process intelligence and automation to determine the correct values and make the necessary adjustments. Thus reducing manual rework due to out-of-date master data, data errors on POs, unexpected currency changes or missing vendor documents. Teams using EMS are better able to control material costs because the system can notify them when a price has increased and calculate its impact. Celonis can also help reduce maverick buying, increase use of electronic POs, improve vendor contract oversight and ensure on-time delivery.
For example, EMS and our Inflation Monitor show you how material prices and availability affect overall profitability. Procurement teams can identify the raw materials that have the greatest impact on gross margins and identify the top cost reduction opportunities, such as contract leakage. Having this information is good, but acting on it is better. EMS enables procurement to intelligently take action when they receive purchase requisitions without a referenced contract. If a contract exists for the material raised in the PR, Celonis will notify the team with a recommended contract to use, ensuring that POs don’t go out the door without using the available contracts.
The real-world results of companies using EMS for procurement are impressive.
Vodafone was looking for a tool to provide transparency into their purchase-to-pay processes and a tool that could provide actionable insights. Making their back-end business process faster and more flexible to meet customers’ needs is essential for the multinational telecommunications giant.
Vodafone worked with Celonis to analyze a year’s worth of data, which included more than 820,000 purchase orders, 2 million invoices and 40 billion payments. Using EMS, the company increased its ‘Perfect PO’ rate from 73% to 93% in a single year, reduced the cost of each PO by 11% and improved their time-to-market by 20%.
Stefan Delater, Global Process Owner P2P at Vodafone, put it best:
With process mining, Vodafone can stay in the race for being world class in terms of efficiency and effectiveness across all our internal processes.
Another compelling success story comes from TD SYNNEX (formerly Tech Data), the largest IT distributor in the world, with $60 billion in combined revenue and over 150,000 customers. Patrick Zammit, President EMEA and APJ at Tech Data, said:
From the outside, distribution looks like a very simple business. You buy and you resell to your customers. In reality, our role is clearly to simplify the complexity of the IT industry.
TD SYNNEX partnered with Celonis to optimize their procure-to-pay, order-to-cash and after-sales management processes. Within a year, the company reduced P2P cycle time by 57% and increased overall automation by 20%. And within just 6 months, they reduced the price change rate on POs by 27%.
As Zammit summed up the benefits of using Celonis perfectly:
In distribution, commercial excellence starts with operational excellence. That’s what Celonis helps us achieve for our vendors, our customers, and for Tech Data.
When I first saw process mining and EMS in action, the engineer in me realized the amazing potential for this technology to transform the processes that run our world, making businesses more efficient and in turn improving their top, bottom and green lines. And by doing that our product enables economic prosperity and makes our world a better place for everyone, one day at a time. At Celonis, we’re building a platform to help companies and the world to do just that.
If you want to learn more, I recommend heading over to our Celonis for Procurement page, download our Procurement Data Sheet and join us for one of our live weekly demos.