Interview: Future of procurement is digital: expert
"Procurement 4.0 has the goal of ensuring that the pricing of a product automatically follows the market," said Kerkhoff, adding that firms could eliminate the human factor and related risks in procurement.
Procurement 4.0, however, is a concept proposed by the Kerkhoff Group which provide systemic solutions that guargantee long-term best price certainty and transparent cost trends for commodities by disaggregating products into individual components and relying on networked indexes to chart market price developments in real-time as percentage changes.
The Kerkhoff Group is a German network of firms established in 1999, which has made a name for itself by offering specialized advice to firms on procurement, supply-chain-management and production processes.
According to Kerkhoff, there is no better way for managers to determine the fair price of intermediate goods than "detaching procurement from individual judgment" by using algorithms.
Building on the cost-engineering approach pioneered in the automation industry, companies need only to configure digital tools to reflect the proportional share of the different raw materials which comprise the desired product.
The consultant describes traditional procurement negotiations as an archaic process in which staff tended to tell management that they had achieved the best possible price or got a good deal without being able to provide any empirical evidence.
For business leaders, a key point was that they had no means to verify whether the latest price was actually a good value in the pre-digitalized epoch, said Kerkhoff.
However, with procurement 4.0, there is only a "one round of price negotiations" with the buyer and supplier agreeing on a long-term relationship in which the cost of intermediate goods simply follows the averaged fluctuations of digitally-indexed market prices.
"I don't have a problem with an increase of 20 percent in the cost of carbon if I know that it is justified," Kerkhoff said. In his opinion, China, in particular, stands to benefit from the digitalization of procurement as it is undergoing a gradual transformation from an export-led growth model to a consumption-driven one.
When Kerkhoff Group opened its first consulting office in Shanghai in the early 2000s, profit margins for Chinese exporters were so high that management staff did not feel "much of a need to further optimize internal procurement processes," said the business consultant.
The rapid growth of the gross domestic product since 1978 has seen China move to the center of the global economy. However, the success has created new challenges for local firms. Alongside rising wages, Beijing has become a leader on climate policy and strict environmental regulations. Kerkhoff said he believes that pressures associated with these necessary changes are forcing business leaders to re-assess their corporate strategies and make greater use of digital technologies like procurement 4.0 to bolster profit margins.
Kerkhoff emphasized that the benefits of automated sourcing are not purely commercial in nature but can also help alleviate compliance issues by introducing more transparency into procurement. International investors stand to profit from improved accountability as well as through greater control of their investments. Procurement is the area of business that is "most vulnerable to corruption," the industry veteran Kerkhoff said. Xinhua
Authored by Namibia Daily News
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