How to Get Your Supply Base Ready for Digitization
Companies should work on reducing differing degrees of digital readiness with their suppliers to avoid fragmentation and bottlenecking
Tobias Kosmol / Felix Reimann / Lutz Kaufmann - June 29, 2022
Digital procurement has become a hot topic for buying firms. But with varying degrees of readiness between these buyers and their suppliers, it is not guaranteed that the advanced digital procurement solutions implemented by those buying firms will lead to increased effectiveness. A new study from WHU – Otto Beisheim School of Management shows the mistakes made by some companies and how procurement managers can avoid similar pitfalls. It also reveals how a mutual level of trust and readiness is essential to successfully establishing a symbiotic, future-proofed workflow.
As with most areas of business today, the way companies—both buyers and suppliers—interact within supply chains is transforming. From the implementation of complex systems, such as artificial intelligence and big-data analytics, to the use of more accessible technology (e.g., cloud computing), the shift can be felt across the globe. Specifically, trends in digital procurement, i.e., the use of digitalsolutions for purchasing goods and services, have comfortably entered the discourse among procurement professionals. Many companies have already been able to employ these advanced technologies, saving themselves financial resources and improving their efficiency over time. But despite an overall shift toward digitization, many managers and division leaders are still unsure how to start their journey toward digital procurement: What are the organizational prerequisites that must be fulfilled ahead of time? A novel approach to this topic has made it possible to focus less on the various types of technologies—and more on the steps necessary to prepare the company and its supply base for the future.
Differing degrees of readiness constitute a main cause of fragmentation and bottlenecking
To understand how digital procurement is progressing in today’s corporate world, we adopted a “supply chain practice view” (SCPV) and examined how a company’s interorganizational practices affect the overall supply network. For our research, we define “digital procurement readiness” as the degree to which a company is able to incorporate new digital technology into its procurement flow. By comparing the results of the study to the most recent evidence on the subject, we have determined that the differing degrees of readiness constituted a main cause of fragmentation and bottlenecking within a supply chain.
What is needed to implement your digital procurement strategy
The results of a series of case studies have shown that companies in Europe are “ready” to varying degrees. Some have already embraced change, possess the necessary financial resources, and have taken steps both internally and externally to commit to a digital procurement strategy. Success could be seen in companies that, for example, hired a dedicated chief digital officer whose sole responsibility is to guide the transition. Other companies, by comparison, are struggling to implement their plans for digital procurement. Despite having medium-to-high degrees of organizational readiness and showing a commitment to digitalizing the workflow, these companies may still lack synchronization of their efforts with their suppliers and are consequently limited in their quest to make their ideas reality. Furthermore, buying firms have experienced tense business negotiations with certain suppliers in their respective supply base.
Where business was difficult, and ultimately unsuccessful, there was a relatively low degree of readiness on the part of the suppliers, further complicated by, e.g., general disinterest, confusion, or a lack of offered support. Even if the buying firm is already prepared, a lack of readiness on the supplier side will impede the implementation of digital procurement technology—and that can lead to severe bottlenecks in the chain.
What does a successful relationship between the buying firm and its suppliers look like?
It should be stated that managers of the buying firm are not necessarily responsible for the digital readiness of an external supplier. That being said, it would behoove one to be proactive and keep abreast of the situation. Those at the helm should consider implementing incentive programs or offer trainings or technical support to help improve the digital readiness of their key partners among their suppliers. By doing so, managers can ensure that both their own company and their supply network evolve at the same speed.
Similarly, the suppliers must also be willing to adapt when opportunity calls—or when problems arise. Otherwise, they could be compromising the integrity of a once collaborative relationship. For example, in an unfortunate turn of events, one supplier caused unnecessary congestion due to its somewhat antiquated IT infrastructure, which also made implementation of a more robust EDI inventory system an impossibility. By comparison, a successful case saw one supplier more willing to take a chance on improving both their relationship with the buyers and their infrastructure on their own premises.
In this cautionary tale, the companies analyzed offer today’s procurement managers an initial guide on how to scrutinize both their own and their supply base’s preparedness. And the moral of the story is clear: Both parties in a buyer-supplier relationship must be truly ready for change on all fronts to make efficient use of the technology selected. In the end, that deepened level of collaboration is beneficial to both parties, evincing that business can be made more secure when everyone is on the page.
Tips for practitioners
- Remember that it’s not only about your own company. Your suppliers must establish a similar degree of digital readiness to ensure a true coevolution.
- Think of ways to help your suppliers step into the future. Offer technical support, trainings, or incentive programs (e.g., preferred supplier status and positive supplier evaluations) to help bolster your shared professional relationship. Keep the channels of communication open and figure out how you can help your company by first helping your partners.
- Seek out, determine, and share best digitalization practices with your suppliers. In doing so, you’ll never walk alone.
Literature references and methodology
To provide empirical evidence on how inter-organizational practices affect the buyer-supplier interface, a series of case studies were performed. The research team analyzed the data of two Western European buying firms with key suppliers both at home in Europe and abroad in China. By analyzing interviews with all parties for patterns, the research team was able to uncover the factors that led to either a successful or an unsuccessful implementation of new technology in buying firms and their suppliers.
- Kosmol, T./Reimann, F./Kaufmann, L. (2019): You’ll never walk alone: Why we need a supply chain practice view on digital procurement, in: Journal of Purchasing & Supply Management, 25(4), 1–17. https://doi.org/10.1016/j.pursup.2019.100553
Tobias Kosmol drives strategic procurement at Infineon’s Procurement Center of Excellence. Before joining Infineon, he worked for five years at the procurement consultancy INVERTO – a BCG Company. In his role as Senior Project Manager, he supported industrial clients from the automotive and machine manufacturing sectors with a focus on digital procurement, risk management, and net-zero supply chains. Tobias graduated with a Master in Management from the University of Mannheim and received his Doctorate from WHU – Otto Beisheim School of Management.
Professor Felix Reimann
Felix Reimann is an expert on suppliers’ relations and B2B negotiations at WHU – Otto Beisheim School of Management. His main research fields are power and cooperation in business relations, and cooperation with suppliers in emerging markets. Reimann emphasizes the global orientation of the business school and has access to a far-reaching network of companies and institutions, especially in Asia.
Professor Lutz Kaufmann
Lutz Kaufmann is a Professor at WHU – Otto Beisheim School of Management and an expert in business negotiations. His work focuses on empirical research concerning B2B negotiations and procurement strategies. Since 2008, Lutz Kaufmann is the European Editor of the Journal of Supply Chain Management (JSCM). From 2010 – 2014, he was an Associate Fellow of Saïd Business School at the University of Oxford in the United Kingdom. He is the 2021 OSCM Distinguished Scholar at the Academy of Management.