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Procurement revolution will cut costs and working capital

The procurement function is undergoing radical change as the automation of systems and supplier management will shift the focus onto “developing the value chain and cooperating with strategic suppliers”. A report from European consultancy firm Roland Berger also describes procurement as “a seismograph for global change – an early indicator of the shocks, disturbances and innovations that today's highly complex international networks of companies are subject to.” It examines some of the trends affecting supply chains and the corporate procurement function. Procurement endgame suggests that procurement has entered 'the final stage of transformation' and highlights four of the main factors that will shape the procurement function of the future.

These four broad trends are:

  1. New technology will lead to the complete digitalisation of procurement and create end-to-end, real-time transparency over value chains, from the producers of raw materials to the end customers.
  2. At the same time, most tactical and strategic processes in procurement will be fully automated. Artificial intelligence (AI) and specialist 'bots' will make the majority of traditional operational procurement decisions. In many areas, human input will be entirely superfluous.
  3. Automation will inevitably lead to the commoditisation of many procurement processes and their subsequent outsourcing to specialist providers. Third parties can offer economies of scale, enormous computing power, robust data security and powerful AI-based applications. Amazon Business and the like indicate the shape of things to come.
  4. In parallel, the requirements placed on procurement in terms of support for corporate strategy will change significantly, both within industries and between different industries. The tasks of procurement are becoming more and more diverse, largely due to disruption in specific industries, dramatic changes in business models and the development of new products and services.

Working capital impact

But from the perspective of corporate treasury and financial departments, more automation of procurement functions will have an important impact on material costs, working capital and headcount. Roland Berger's graph, reproduced below, shows that, as automated purchase orders increase, other costs throughout the organisation will decline, including a reduction of working capital costs by 50 per cent and a drop of material costs from 5 to 40 per cent.


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Working Capital Management
Procure-to-Pay Cycle in WCM

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Comments

By Brian Shanahan on 24th Jul 2018:

It is interesting that our friends from Roland Berger think that working capital will reduce by 50% if their future end-game is achieved. So they really think that Days Payable will drop by 50%? That just shows that they don’t know what they are talking about when it comes to working capital. If anything the long term trend is that days payable would get longer through increased payment terms and increasingly long and complex supply chains. Automation won’t shorten these trends. If anything they will lengthen them. The rest of this paper is just a bit of blue sky thinking with no evidence that any of it will happen in the way the authors expect.

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