# OUR BLOG POSTS.

Discover the latest news and updates from the world of procurement.  

Everything you need to know about logistics, supply chain management, and tactical spend in one handy place.





## A Round-up of 2022
Long tail effects of covid compounded by an energy crisis: this year has certainly not been a breeze.

![crisis-proof supply chain.webp](https://media.graphassets.com/juLt3e3TB640a298eqVz)

Where consumer patterns and global demand are concerned, 2021 previously already marked a momentous shift with the emergence of the Covid-19 pandemic. Yet, even food and energy security issues have reached new heights this year.

With the war in Ukraine, tension has grown between Russia and the Western World resulting in numerous sanctions and economic counterattacks. The outcome: an energy crisis. As one of the largest exporters of gas, Russia's response to its sanctions, namely by turning off Nord Stream 2, has had far-reaching consequences for the entire world - not just Europe. 

## But what does this mean for procurement? 

Before Covid, rising productivity and lower costs ensured that supply chains functioned well despite the tendency for companies to opt for just-in-time strategies. 

However, last year’s disruptions have not only exposed supply-chain weak points but have all together exasperated them. Procurement departments have been forced to evolve. 

To find out what the greatest challenges have been in procurement this year, we sat down with Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply at The Chartered Institute of Procurement & Supply for the MENA Region.

Bringing with him more than 20 years of procurement expertise, he is well-equipped to answer the question “which events of 2022 have had the greatest impact on supply chains and procurement workflows?”. Here’s what he had to say:

> “While the war in Ukraine undoubtedly represented the single most impactful event in the calendar year, an event the previous year had the largest effect on supply chains in 2022. As the world was recovering from the pandemic, an unprecedented issue occurred when one of the largest container ships ever built blocked the Suez Canal, subsequently choking the most important supply route in the world. This exacerbated supply shortages, price spikes and business continuity and denied the global economy the swift bounce-back we had anticipated.”


## Key learnings & Predictions from the Supply Chain Crisis
Looking back on the past year is crucial in order to help us learn from previous mistakes and avoid their recurrence. 

> “We learned this year that organisations are more resilient and agile than initially thought, due to the skills and capability of their procurement and supply chain teams.” - Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply for the MENA Region.

We have divided our learnings and predictions into three procurement categories, 1) risk management, 2) data and automation, and 3) ESG criteria and sustainability.

### 1. Risk management 
**Learnings:**
As supply chain disruptions have continued to grow in terms of both frequency and magnitude during the course of 2022, risk management has proved itself to be a vital asset. In 2022, companies have been impacted by a broad range of risks ranging from data breaches and unethical sourcing practices to political instability, sanctions, and natural disasters. 

> “Procurement has become more agile and strategic as a function. Procedures are less static and risk management is more intrinsic in overall business planning.” - Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply for the MENA Region.

A key learning from the past year is that companies must continue regularly identifying, assessing, and mitigating risks to their supply chain. In order to facilitate this companies must have:

1. Ample time and resources to carry out risk management.
2. See risk management as an ongoing, rather than a static, process. 
3. Have the right tools to gain full transparency of their supply chain and ensure that risk management extends to all external stakeholders and suppliers.

**Predictions:**
Just in case (J.I.C.) strategies that favour and prioritise risk management will be more frequently opted for. Due to the constancy of supply chain disruptions, it is becoming increasingly essential to use this form of inventory management. Indeed, having more raw materials than is required at any given time ensures that companies have more leeway in times of crisis. 

> “Over-reliance on Just in Time concepts is a thing of the past and essential commodities are being stored in realistic quantities ‘just in case.’” - Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply for the MENA Region.

If you are interested in learning more about risk management and the steps for successful implementation, head to our [blog post] (https://www.lhotse.de/en/blog/risk-management-in-procurement-fail-to-plan-and-you-plan-to-fail).

### 3. Data and automation
**Learnings:**
> “Organisations who already had strategic supplier relationships, highly skilled procurement teams, effective technology implementations and good supply chain visibility in place were emerging from the effects of the pandemic much quicker than others.” - Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply for the MENA Region.

A realisation which began during the pandemic has resurfaced in 2022: many companies are simply too poorly equipped when it comes to their eProcurement systems. During the supply chain crisis, the need to collect data in a quick and error-free manner became tantamount to essential. Yet, companies heavily relied on outdated systems and manual processes in 2022. Indeed, a staggering 30% of companies still, to this day, mainly depend on manual procurement processes. By doing so, organisations miss out on the myriad of benefits afforded by digital alternatives, some of which can be ‘make or break’ in times of supply chain crisis. Examples of these include (but are not limited to), the advantages of real-time analysis and time efficiency. 

On a positive note, 2022 saw increasing awareness regarding the topic of digital innovation, with more and more companies valuing the part played by automation in optimising procurement processes and creating data insights. Though progress has certainly been made in the past year, there is still room for growth in terms of willingness to implement these new technologies. 

The benefits of procurement automation are numerous:

1. **Lower costs:** did you know that a 5% decrease in procurement costs can have up to a 3% decrease on the bottom line?
2. **Time savings:** automation allows employees to spend more time on strategy by reducing their number of manual, repetitive tasks.
3. **Creates insights:** automation gives your procurement team data insights in real-time to help them make better decisions.

**Predictions:**
In 2023, procurement departments will likely embrace automation more than in previous years and be less likely to settle for their existing manual and largely antiquated workflows. As a natural consequence of taking on board the aforementioned learning, third party add-on tools will gain in popularity as companies look to gain spending transparency and increase overall efficiency. 

> “Adoption and deployment of technology will increase to enable better visibility across all tiers of the supply chain and also to create more efficient operations.” - Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply for the MENA Region.

If you wish to find out more about how Lhotse can help you to optimise your indirect procurement processes, [speak to our experts] (https://www.lhotse.de/).

### 3. ESG-Criteria and Sustainability
**Learnings:**
It is undeniable that the issue of sustainability and ESG compliance has certainly become a greater priority for procurement departments. The increasing momentum behind this has likely been caused by two factors. Firstly, a societal shift has occurred causing these topics to gain in relevancy. But perhaps even more critically, it has also become compulsory to take these issues more seriously due to legislative action. 

With the recent changes in ESG regulations, for example through the Supply Chain Act in Germany, sustainability is deservedly reserving the right to a place on corporate agenda. 

**Predictions:**
Whilst this year the main focus, in terms of sustainability, has been on measuring and evaluating ESG ratings, companies will have to divert greater attention to becoming more sustainable. In essence, ESG initiatives will turn into more of a ‘must’ rather than a ‘nice to have’ next year. 

> “ESG will become fundamental to procurement planning as organisations deploy methods to monitor and measure carbon emissions while also seeking sustainable options throughout the procurement cycle.” - Sam Achampong, Regional Head & General Manager of The Chartered Institute of Procurement & Supply for the MENA Region.

## Summary 
So what do these learnings mean, practically speaking, and how can they be used going forward in order to build a more resilient supply chain?

Procurement teams should use the crisis as an opportunity to improve their processes. In terms of digitisation and data management, this could include reevaluating existing eProcurement systems, reconsidering data policy, and implementing new software solutions (such as Lhotse!).

With regard to ESG and sustainability, procurement teams need to establish a clear plan in order to comply with internal company policy as well as external legislative changes. As companies face increasing scrutiny, regarding their willingness to support ESG initiatives, businesses must go above and beyond in the efforts.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Learnings in Procurement and Predictions for 2023

The November edition of the Digital Procurement Club focused on the pressing topic of “new currencies” in procurement. Our moderators Gundula Ullah (Head of Purchasing at Funke Mediengruppe), Sebastian Lücke (Head of Supply Chain Innovation & IT Landscape at E.ON), and Henning Hatje (Co-Founder and Managing Director at Lhotse) discussed the topic of "New Currencies” in procurement together with their guest Susanne Reichhuber (Director Special Finance Corporates at HypoVereinsbank). 

## Supply chains are changing 

The world is changing rapidly and so are supply chains. First-hand, we are observing that the frequency and impact of global disruptions is increasing. The greatest priority for supply chain optimization has historically been cost efficiency, but now it is resilience. Indeed, factors such as ESG compliance and risk management are becoming increasingly more important in procurement. It is for this reason, that we refer to these factors as the “new currencies” in procurement. These new dimensions of value or “procurement currencies” no longer constitute mere monetary value, cost reduction, or even net savings. Indeed, procurement leaders and investors are now also looking at ESG-compliance as an indicator of a healthy supply chain. 

# ESG criteria and their importance in the banking sector 

Susanne Reichhuber began by giving some insights into banks' perspective on ESG in corporate banking.

The topics of ESG and sustainability have generally gained momentum in the last years. This has been caused by regulations, but has often also been required by stakeholders. In addition to 'Net Zero' targets, aspects such as biodiversity and the circular economy are increasingly coming into focus, as of course are 'social' aspects.

At HypoVereinsbank, sustainability is firmly rooted in the culture of the entire business. The bank views itself as 'part of the solution' in that it helps its customers to make sustainable decisions through corresponding advisory services and financial products, such as promotional loans. Yet, this also holds true for ESG or Sustainability-linked loans, as well as green loans. In this sense, Banks can actively contribute to the economy's green transformation by monetarily incentivising those who borrow money from them to act sustainably. 

> "There is no 'one strategy which fits all'."

This takes into account that a medium-sized clients have differing needs to larger corporations. Therefore, how they are consulted and offered products must be adapted accordingly.

## Data is a challenge

In the discussion round, it soon emerged that a universal challenge exists: The market has not yet found uniform solutions and quantifiable measures to compare and evaluate companies’ activities. Similarly, no source of standardised data exist, nor has the problem of data determination been solved in the first place. Indeed, data collection must occur on a scale that has not yet occurred, which poses a great challenge, particularly for procurement. It’s clear: the more it becomes compulsory to report information, the more available data will become. Yet, merely creating the database poses a myriad of issues. 

## But why is this relevant to procurement?

It is inevitable that the topic of sustainability in supply chains will land on buyers’ tables. But, in concrete terms, what does this mean and how can buyers prepare?

In the future, buyers will be seen as a source of information, creating transparency and knowledge.

Purchasing will be central to enabling ESG compliance, especially when it comes to data collection, aggregation, and analysis. Soon the questions of how sustainable suppliers are and how sustainable they will be in the future will be frequently posed. 

Everyone is looking at procurement and asking how emissions can be reduced. The topic of CO2 and supply chain management will certainly end up falling to buyers, if it hasn’t already. However, in the discussion round, the procurement leaders expressed an unanimous fear of tighter bureaucracy. 

Buyers are now very much responsible for creating a uniform database which presents the challenges of selecting and accepting a tool for data collection and processing. Because currently, coverage only exists for a a small percentage of possible supplier data. The question of which platform will ultimately prevail is still open.

## Warning: Incoming Analysis Paralysis

One thing to avoid in this world which is inherently complex and uncertain is falling into the "analysis paralysis" trap. Over-analyzing the situation and waiting for the perfect solution, which may delay or even prevent a decision, is entirely counterintuitive. What is essential is that companies and their procurement teams take the first steps, gain experience and learn to develop along the way. But of upmost importance is that the projects are begun. 

It cannot be forgotten: buyers are impulse generators. They will be pioneers in this topic and have to stay courageous because this company-wide topic will be built on the foundations they have created.

## Summary

This topic of “new currencies” in procurement is gaining momentum and all stakeholders, regardless of what company they are from and what angle they perceive it, are working together on this and are excited to see how policies, guidelines, and data will evolve. 

After this exciting discussion, the decision was unanimous: A future edition of the Digital Procurement Club will certainly revisit this pressing topic! 

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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“New Currencies” in Procurement: Supply Chains and the Emerging Importance of ESG-Criteria

In the next part of our ‘understanding the product’ series, we focus on Lhotse Search - our procurement solution which helps you automatically find suppliers through a user-friendly interface. We take the time and hassle out of sieving through your existing database to find the most competitive and compliant supplier fit! Sounds good? Read on to find out more…

## What is Lhotse Search? 

We see first-hand how complex tools such as SAP have a wealth of information that is often not being used. Lhotse helps you to make sense of your data in a simple and powerful way. 

Lhotse Search processes existing data points by clustering (i.e. grouping) related suppliers and creating a contextual understanding of each supplier. Data points from Lhotse's own database are then added. For any new request, Lhotse identifies the best supplier with a semantic search across the entire cloud of possible suppliers.

In this way, Lhotse transforms your supplier database into a fully searchable source of knowledge! Our Google-like, user-friendly interface combines your existing supplier data and enriches it with Lhotse’s database so that you can always find the right supplier based on the specific requirements that you have - be it lower price, faster shipping, or sustainable or regional suppliers.

Gone are the days of manual static processes! Lhotse is fully automated and constantly updating, thus freeing up your procurement team and business users’ time to focus on what matters most.

## Lhotse Search: Benefits 

Lhotse’s one-click quote feature ensures you get the most competitive quotes ***every*** time, no matter how large the scale. We reduce the required engagement on the part of suppliers whilst simultaneously ensuring compliance. The result? Streamlined and fully transparent procurement processes!

Here are some of the results our clients see immediately:

### 1. Increased visibility 
 
Our search function allows you to remain in complete control of your supplier knowledge by ensuring 100% transparency. This visibility extends to all your historical purchases, credit scores, ESG compliance, and regional suppliers. Yet it is not only procurement teams who benefit from this added visibility, but also a variety of other stakeholders along the process, ranging from business users to approvers and suppliers.

### 2. More offers 

Lhotse enables you to identify the right suppliers and obtain quotes automatically so that you receive up to 3x more offers at more competitive prices! Lhotse ensures more offers every time due to our extensive supplier database which combines Lhotse’s database with your pre-existing supplier knowledge. 

Just ask Peter Hagenow, Head of Strategic Group Procurement at KWS, who shared his first-hand experience with Lhotse in [our latest interview] (https://www.lhotse.de/blog/procurement-in-agriculture-kws-and-lhotse-combine-powers-to-drive-success).

### 3. Time savings 

Automation saves time! Indeed, our customers have found that they spend up to 30% less time onboarding new suppliers and a staggering 70% less time dealing with the request to offer process. In fact, our customer [FUNKE] (https://www.lhotse.de/blog/patnering-up-with-lhotse-funkes-secret-weapon) saw time savings of up to 76%, using Lhotse. These time savings free up capacity in your procurement teams so that they can focus on strategic activities and add further value to the business.

### 4. Compliance 

Lhotse ensures 100% compliance throughout the entire Source-to-Settle (S2S) process. This guarantees that your procurement activities stay aligned with internal policies during both supplier selection as well as bid solicitation.

## Sounds good, but how does it work? Let’s get a bit technical… 

We have explored *what* Lhotse Search does and *why* these features have so many advantages, but what’s the technology behind this product feature? *How* was Lhotse Search built and *how* does it work?

### 1. Connecting your data to the Lhotse supplier database 

Our database includes information on **hundreds of thousands of suppliers** and in order to make the most out of this data, we use an algorithm to **group supplier branches under parent suppliers**. If you’re curious about how this is done, exactly, head to our [blog post] (https://www.lhotse.de/blog/supplier-mapping-how-your-company-can-use-AI-to-find-the-best-suppliers)! This way we can share the information accumulated under one supplier branch with other supplier branches.

The large supplier database can also be connected to our customers’ supplier data. By doing so, customers are able to make use of both Lhotse’s supplier data and their own (through the aggregation of their own supplier information). 

### 2. The importance of requisition data 

Grouping suppliers and building connections between them, in the aforementioned way, critically also allows for the aggregation of requisition data. 

Therefore, requisition data which is spread across several supplier branches (of the same supplier) is able to be aggregated **under a single parent supplier**. This is important for Lhotse Search. In order for a supplier search to deliver optimal results it must have **as many data points** (i.e. requisitions) for each supplier **as is possible**.

The **historical knowledge** of a supplier delivering different iPhones, iMacs, and Apple accessories **allows us to make predictions**. Namely, that the same supplier also sells the latest MacBook. In contrast, if a supplier were only to sell one iPhone charger and no other data points were available to us, we would not be able to come to such a conclusion easily.

### 3. How does Lhotse Search suggest suppliers based on past requisitions? 

In section two an assumption was made that if a supplier has sold similar products, it is likely that they would also sell the product looked for through Lhotse Search. But how can we find past requisitions which feature similar products?

**Context Search versus Lexical Search…**

A conventional approach would be to match for lexically similar words. But what does this mean exactly?

Through **lexical search**, if you were to type in “car” words such as “cat”, “can”, or “rat” would be produced. You would be right if you were thinking this doesn’t sound adequate. 

Therefore, in Lhotse Search, we look for similar requisitions based on **context** (otherwise known as **‘semantic search’**). Searching based on context might produce the following results for the search “car”: “automobile”, “tire”, or “Volkswagen”. 

Sounds better, right?

We make use of an advanced AI model that has learned how words and sentences relate to one another based on billions of text samples. For a given requisition text, all contextually related requisitions are returned alongside a **similarity score**. These scores give us a clear indication of how relevant RfQs are to the given search query and whether we can be **confident** that the associated supplier is relevant. 

**Ranking based on similarity scores…**

The suppliers associated with these requisitions are then ranked based on the following criteria:

1. How many relevant requisitions the supplier has
2. Relevancy of the ‘most relevant’ requisitions 

A combination of these two is necessary because we prioritise suppliers who have **once delivered the same product** over a supplier who has **delivered a product ten times which is merely similar**. 

Not to worry though: we will always show you all available suppliers who have delivered a similar product and rank them by confidence of delivering ability. That way, it will be that much easier for you to choose the best one based on your specific criteria! 

Let’s be honest: you needed those laptops yesterday, so we know that speed is of the essence. 

### 4. How do we ensure GDPR Compliance? 

We know how important compliant and safe data storage and data processing is. This is why our clients’ data is secured with 256-bit AES encryption at rest and SSL/TLS encryption in-transit. We provide GDPR-compliant cloud hosting via AWS-Cloud-Services. Customers’ data is stored exclusively in the European Union. 

## Summary

Lhotse Search is a powerful tool which enables your company to easily find the most suitable suppliers from the hundreds of thousands in our database. Our user-friendly interface ensures every procurement purchase is made in an efficient and compliant manner. 

The beauty of it all? Behind-the-scenes complex processes such as supplier grouping and context mapping take care of all of the hard work and you are left with a simple, yet powerful supplier search engine: Lhotse Search.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Lhotse Search: Your Supplier Data at Your Fingertips

Procurement software has historically been over-complicated delivering an un-intuitive user interface. Creating a purchase request (PR) should be a simple and automatic process but currently thousands of business users have to go through endless back-and-forth communication just to get a simple order out. Complex software necessitating expertise and specialist procurement knowledge: it doesn’t paint a pretty picture. 

What this has resulted in is a total disconnect between businesses and their procurement departments. All too often employees in charge of indirect procurement are left dealing with complicated purchase requisitions from which details are difficult to decipher. Or else, the worrisome threats posed by uncontrolled [Maverick Buying] (https://www.lhotse.de/en/blog/5-types-of-maverick-spend) and an exploding supplier base fall to them. Surely PR creation could be made simpler?

Enter: Lhotse Forms!

## What are Lhotse Forms? 

Lhotse Forms are intuitive intake channels which support and guide users through the purchase request creation process from start to finish. Any business user regardless of specialist procurement expertise can use our software.

We take the hassle out of PR creation by ensuring that every request is made compliantly and in line with your company’s internal procurement policies and guidelines. Lhotse Forms also guarantees zero system breaks and vastly reduces Maverick Buying. 

Our software supports full integration with your company’s existing ERP system and eProcurement solution. Answers, for example relating to suppliers, cost centres, or material groups, can be pre-filled out in Lhotse Forms by your ERP MasterData. After the form is completed, it is automatically transported back into your ERP system in the form of a PR ready for approval and further processing. 

## How do Lhotse Forms work? 

Lhotse Forms are fully customisable and achieve autonomous PR and PO creation. During the onboarding process with our customers, we define the organisation’s preferred property mapping to ensure seamless implementation. 

See Lhotse Form’s user-friendly interface below: 

Due to our **no-code drag-and-drop functionality**, all forms creating tools are lightning-fast and easy to use. However, our team can either create these forms for you so that the templates are ready to use or guide you through the process. 

## Lhotse Forms: the Benefits 

### Intuitive Interface 

Our Forms allow you to collaborate with as many business users during the request definition process as you deem fit via an internal chat. The forms themselves are also entirely customisable with user-defined mandatory and optional fields.

Our customers also appreciate Lhotse Forms’ intuitive interface which has resulted in our Net Promoter Score (NPS) exceeding 90. 

### Faster PR Creation 

Because Lhotse Forms guarantee that all requests are standardised, PR and PO creation becomes a much quicker process. Business users spend up to 40% less time in eProcurement systems and up to 70% less time in the request-to-offer process. Purchase requests are also structured to ensure quick purchasing confirmation. 

### Secure and Compliant 

Lhotse Forms ensures full compliance with approval flows adhering completely to internal procurement guidelines and policies. Due to the increased accuracy of Lhotse Forms our business users achieve 90% fewer errors despite little to no procurement team involvement.

All data is also stored securely and compliantly on servers in Germany (AWS) and is encrypted in transit and at rest. 

## Summary 

Lhotse Forms is your solution to creating purchase requests (PRs) quickly and compliantly. Automating this process through the use of our user-friendly interface ensures every business user can create a PR at the click of a button. To put it simply: no more email ping pong between departments!

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Lhotse Forms: Request Products and Services Quickly and Intuitively

Whilst most companies divert much of their procurement efforts and budget to direct spend, their attention to indirect spend often falls short. An often costly mistake because indirect spend is essential to cost effective operations and has a larger impact on the bottom line than many business leaders might think. So where does the difference between the way these two functions operate lie and **why is it a mistake to neglect indirect procurement?**

## What is indirect procurement? 

Indirect procurement can be defined as the sourcing of goods or services which are not related to manufacturing, yet are still necessary for a company to operate successfully. These goods or services are often purchased to be used by internal employees and stakeholders rather than for the eventual sale to customers. Indirect procurement spans a wide range of categories, with anything from IT-related products (e.g. laptops) and office equipment (e.g. furniture, lighting) or even hiring an agency falling under the umbrella term.

Whilst indirect procurement might be deemed ‘non-essential’ to the production of consumer products, inefficient management of indirect spending can still have far-reaching impacts on operations as a whole. Effective indirect procurement can have a significant role in a company’s success. This is namely because, without the necessary equipment, employees cannot succeed in their role, which subsequently leads to time wastage. Likewise, **indirect procurement still makes up over 20% of spending!**

It’s clear: efficient indirect procurement processes can help keep costs low whilst ensuring high-quality goods from suppliers, ultimately leading to strengthened organisational operations. Yet, this potential is often neglected by corporations of all sizes and industries.

## How does indirect procurement differ from direct procurement? 

Alternatively, direct procurement, also referred to as ‘direct spend management’ or ‘direct sourcing’, refers to securing ‘core supplies’ which are required for the production of the product sold by the company to consumers. This is an end-to-end process that, taking manufacturing as an example, begins with the process of the new product introduction (NPI) and follows through right until the product’s end-of-life. In the vast majority of cases, direct procurement is also deemed strategic in nature and the term is often used synonymously.

Direct procurement involves many internal and external departments, including but not limited to engineering, logistics, suppliers, and procurement teams.

The greatest distinguishing feature between indirect and direct procurement lies in the functions each addresses. Because they operate in different ways and thus, necessitate their own dedicated approaches. After all, the procurement of service-based purchases is already an entirely different process from purchasing manufacturing material. 

See the table below for an overview of the differences between direct and indirect procurement…

## What are the Challenges of Indirect Procurement?

Indirect procurement is multi-faceted and incorporates many challenges. A study undertaken by NelsonHall concluded that the **large majority of senior executives consider indirect procurement processes to be underperforming**. In fact, this figure amounted to as high as 80%, with 55% stating that the function was inefficient in driving business performance in their company (Strafford, 2012). What are the biggest contributing factors, then, to so many procurement professionals being dissatisfied with their indirect procurement processes?

The main challenges can be broken down into the 4 following categories:

### 1. Decentralisation
 
The sheer scale of indirect procurement positions decentralisation as a major challenge. Indirect procurement encompasses hundreds of spending categories and deals with countless contracts and suppliers. Equally, the nature of indirect procurement, as a set of processes that caters to the daily functions of many internal stakeholders, means that it is often decentralised to different departments. It is precisely when this occurs that cost-saving opportunities are overlooked and time is wasted.

### 2. Poor transparency 
 
Poor visibility of data, specifically in terms of supplier availability and performance, or past purchase requisitions, often occurs on account of decentralisation and is one of the major pain points for procurement professionals. This lack of visibility can lead to [Maverick buying] (https://www.lhotse.de/en/blog/5-types-of-maverick-spend) which is, in essence, a purchase that occurs in an organisation without the involvement of the procurement department. Not collating information or excluding approvers from procurement processes has negative repercussions. Doing so can lead to inconsistent supplier management, as well as bottlenecks and time delays.

### 3. Untapped potential for cost savings 
 
The sheer complexity of indirect spend, coupled with the lacking spend transparency can lead to substantial cost savings remaining untapped. For this reason, it can be difficult to see the bigger picture. To minimise this risk, processes must be streamlined and spend adequately controlled. Yet, it is only after [cost savings] (https://www.lhotse.de/en/blog/a-recession-is-coming-save-costs-through-procurement) opportunities have been identified and recognised that this can occur. 

Research done in 2018 found that **54% of global procurement leaders consider cost savings as a top focus area** (Dedhia, 2018). Because direct procurement deals with transactions that are high in monetary value, procurement teams tend to hold strong supplier relationships enabling the negotiation of higher discounts and cost savings. Yet, indirect procurement often does not meet up to the same standards due to the large number of transactions involving many different stakeholders.

### 4. Lacking expertise 

Skilled employees with experience in procurement can offer expertise when it comes to strategic activities such as data analytics as well as contract and supplier relationship management. However, most businesses are lacking in trained professionals whose main role is to manage indirect procurement processes.

Yet, with easy-to-use AI software that takes the hard work out of procurement, this becomes less of a challenge. With the help of software specifically tailored to your company’s indirect procurement needs, your organisation can realise benefits, establish, and maintain better contracts with suppliers. Ultimately, the aim is to empower everyone in the organisation to procure like experts.

## Ways to Optimise Indirect Procurement 
 
Since the average organisation spends anywhere between 20% or more of its total turnover on indirect procurement, optimising the associated processes should be a top priority of any business. After all: **savings in indirect procurement are not just short-term quick fixes, they hold longevity.**

But what exactly does a successful indirect procurement approach entail, and how can ineffective purchasing be prevented?

### 1. Use AI software to increase spending visibility 
 
A large cause of inefficiency stems from the fact that purchasing processes are often still manual and fragmented. Equally, they often occur without approval from the organisation. By taking advantage of digital tools, you can streamline procurement processes and enable better compliance and less time wastage. 

With Lhotse, your company can become empowered to become more strategic in your purchasing, through added visibility and more accurate spend analytics. For example, by using Lhotse [FUNKE] (https://www.lhotse.de/en/blog/a-recession-is-coming-save-costs-through-procurement) was able to do all this whilst simultaneously bringing in **3x more supplier offers at 20% lower prices. **

Ultimately: eProcurement solutions increase productivity and give your company more control of its spending. 

### 2. Rework your supplier base and contracts 

Managing indirect spend is not a static process and necessitates ongoing attention, specifically regarding supplier contracts. [Re-negotiating] (https://www.lhotse.de/blog/negotiations-in-times-of-crisis-insights-from-the-experts) existing contracts and collaborating with suppliers to realise savings is a great way to overcome one of the greatest indirect procurement challenges. 

Reworking your supplier base is also an excellent opportunity to ensure that your contracts with suppliers mirror and align with your company values. In so doing, your company can be certain that they are spending money in a cost efficient manner that is also ethical and sustainable. 

### 3. Educate your employees about indirect procurement 

The distinction between indirect and direct procurement is one not all employees are aware of. Since it is precisely the business users who are involved in the purchasing processes, adequate education regarding new policies can be instrumental. Ensuring these policies and processes are easy to understand can also help speed up and improve results. 

Often eProcurement solutions provide guidance not only through their onboarding procedures but also in the form of resources that train employees. In the procurement sector, this is known as ‘change management’.

Alternatively, other software solutions pride themselves on their user-friendly interface. Take Lhotse, for example, our platform is easy to use without any previous procurement expertise! 

### 4. Collaborate 

Collaboration can take many forms and can be crucial in improving the efficiency of procurement processes. Due to the nature of the procurement function, procurement teams must already work closely with other departments. 

Let’s take for example the finance department. Concentrating more effort on collaborations and working in concert with your finance colleagues can bring many advantages. This specific collaboration can help your team to analyse spending performance through financial data which can improve future strategic pursuits. After all, the finance and procurement departments in a company have a variety of responsibilities in common so collaboration is always mutually beneficial. 

## Summary 

Studies show that a mere 5% reduction in indirect spend can approximately translate to a 2% reduction on the bottom line (Erdner, 2022). The high number of stakeholders and suppliers causes indirect spend to be highly complex and yet, despite this, commonly overlooked.

However, optimising indirect spend requires a specific skill set. Whilst supplier management and negotiations are crucial, in the modern age the ability to harness technological innovation is a must. AI-software solutions, such as Lhotse, offer a user-friendly method of streamlining manual processes and enabling spending. 

Developing these skills, as well as following the four outlined steps in this blog, ensures the optimisation of indirect spend so that neither money nor time is wasted! 

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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## Bibliography 

Erdner, P. (2022, June 16). Increase Your Bottom Line by Managing Indirect Spend. Apexanalytix - Ultimate Supplier Management. https://www.apexanalytix.com/resources/reports/increase-your-bottom-line-by-managing-indirect-spend/

Dedhia, A (2018). Pulse of Procurement 2018. Zycus. https://res.cloudinary.com/zycus-com/image/upload/v1531134099/Files/PDF/Zycus_POP_2018_Part_1.pdf

Patowarya, J. (2022, September 20). You Didn’t Know these 7 Steps of an Effective Procurement Process. Zycus Procurement Blog. https://www.zycus.com/blog/procurement-technology/you-didnt-know-these-7-steps-of-an-effective-procurement-process.html

Strafford, G. (2012). https://cdn2.hubspot.net/hub/28326/file-330611712-pdf/docs/Proxima-current-perceptions-part-1-whitepaper-final.pdf. Proxima.

Debunking Procurement Terminology: Indirect Procurement and its Importance to Your Organisation

Rising inflation, unstable economic conditions, layoffs, disruptions in supply… The list goes on and on! If you are working in procurement or you have been simply following the news, you know the current situation is far from rosy, and predictions for the upcoming months don't paint an optimistic picture either. So, we wondered: is it all gloom and doom or is there something that procurement leaders can do to prepare for negotiations in a time of crisis?

To find out, we invited some of the biggest procurement leaders and negotiation experts, namely Philipp Michel, Simon Wasserroth, Christopher Miadzel, and moderator Alejandro Basterrechea. Individually, their expertise and skill set are a huge advantage but combined, they are unstoppable! So, on a cozy Thursday evening, we sat down in the Lhotse office and discussed some of the most pressing questions about negotiations during difficult and uncertain times.

## What are some of the biggest challenges you see in procurement today? 

**Christopher Miadzel** is the Global Head of Procurement for the Patient Care Business Unit of Ottobock and has more than 10 years of procurement experience across different industries and categories. He answered first: 

> “The biggest challenge is ongoing and begun during Covid: **uncertainty**. Prices are hard to predict and it is difficult to know when a product will be available or to know exact delivery times. Because of increasing costs, businesses need to drive up their revenue to stay competitive. It is very hard to predict when this will ease up, which makes planning very challenging.”
>
> “Currently, we see that country organisations are not able to give accurate information about what is going to happen in their local markets in the next year, which is crucial when it comes to financial planning negotiations in my role. Whereas normally, they can give at least approximations (e.g. our sales prices will go up by a few percentage points), now there is a lot of uncertainty about the jump in prices and even more importantly how long these increases will last.”
> 
> “Therefore, backwards calculations of the goals for the procurement department and the margin predictions become extremely complex. Various departments are waiting on input from procurement, but providing them with more clarity is challenging right now.”

**Simon Wasserroth**, Principal at TWS Partners who supports German as well as international corporations in strategic projects, agrees:Wasserroth_Simon_tie_round

> "There is uncertainty on so many levels - you hear many stories about capacity constraints, inflation, and price instability. Suddenly, suppliers are calling you every day telling you that prices are going up, but they are also under a lot of pressure themselves. It feels as if no one knows what is going to happen next year and everyone is trying to solve two complex problems - one is firefighting in the moment when you need to react quickly, but another one is making strategic decisions for procurement for the next 2, 3 or even 5 years, depending on what type of long term contacts you have.”
> 
> “This is why the uncertainty we currently see in procurement requires new approaches and new methods. For many years, it was all about global sourcing, bundling, and creating synergies. Now, localization, multi-sourcing, and allocating risk are all of paramount importance.”

**Alejandro Basterrechea**, Head of Procurement Excellence and Corporate Services at Zalando, adds:

> “Every challenge is an opportunity - you need to take this challenge and make the best out of it. This is why now is the time to position the procurement team within the company and gain equity in the organisation. For many companies, procurement was simply part of the finance department, whereas now procurement is leading the budget discussions. **Crisis time is procurement time!**”

## How can the right balance be struck in negotiations so that both partnerships are built and price requirements met without burning bridges?

**Philipp Michel**, who brings with him sales, commercial, and negotiation perspectives as well as experience of more than 20 years, answers this question:

> "The power no longer lies in favour of suppliers. Therefore, companies need to think about their strategy and find the right balance between short- and long-term planning. For example, do you use negotiations to force through a price decrease today or do you look at the bigger picture to ensure both you and the supplier have a seat at the same table again?”
> 
> “The first thing you need to understand when it comes to negotiations is how important the relationship is. You can classify your suppliers based on your relationship with them - for some suppliers, you are considerably dependent on them and you need to ensure a long-term relationship because your company can’t function without them. In other cases, you might have a wider choice of suppliers that you can easily exchange.”
> 
> “A big mistake many companies make in negotiations is that they are not agile or quick enough to react because their setup and negotiation processes are too complex. It is not clear who makes decisions, how and when, what agreements can be made nor when they need to walk away.”
> 
> “Even though a lot has changed in the setup, the key principles of how you negotiate are always the same - you simply need to adjust your behaviour based on the situation. Too many business leaders don’t understand the principles of negotiations, but whilst the environment might change, those principles stay the same. This was true 10 years ago, it was also true 100 years ago. The difference right now is the huge, critical impact that suddenly some of those negotiations are having on the success of the business. Procurement organisations need to adapt and move quickly because the bigger and more complex your organisation gets, the more challenging everything becomes.”

**Simon** adds: 

> “Everyone now has the added pressure of prices and inflation going up and are, therefore, re-negotiating their contracts. However, I have seen companies deal with this pressure by committing to very long-term contracts because in many situations this is their biggest negotiations lever. However, companies need to be careful that they don’t fall into the trap of endangering the long-term success of their organization, in an attempt to secure prices for the next year.”

**Christopher** shares:

> “It could be that offering a long-term contract is a good decision or a bad one, but there’s no way of knowing for certain today. For the first time ever, we are seeing suppliers coming to the organisation to justify their prices, instead of procurement knocking on doors and reaching out. For the first time in a long time, suppliers are receiving communication asking them to justify their prices for the next year, so the ball is now in their court to explain why their costs are going up and what they are doing to mitigate.”

## With the Supply Chain Act coming up soon, are you implementing ESG-criteria into your negotiations with suppliers?

**Simon** is quick to respond: 

> “ESG is a very complex and multi-faceted topic. The first question is always one around the subject of implementation - why is it that you want to integrate ESG topics? First, you need to follow regulatory requirements. Then it depends on which business sector your organization is in - for some business sectors ESG topics (especially carbon reduction) are very commercial topics due to emissions trading. Reducing carbon (your own but also in your supply chain) becomes not a soft ESG topic but a true cost. Carbon equals costs in an emission trading system because if you don’t reduce it, you need to buy certificates. **Suddenly, you are not negotiating costs, delivery times or quality with your suppliers, but you have another variable in the equation: carbon reduction.**”

**Christopher** also shares his perspective: 

> “We are proactively asking suppliers what they are doing to be compliant with the Supply Chain Act. For a lot of them, this is only a side topic, so they are getting worried because companies are in the process of implementing a supplier scorecard system where ESG compliance will play a role. It is definitely giving companies additional leverage during negotiations with suppliers.”

**Alejandro** clarifies: 

> “ESG can mean many things. For certain suppliers, for example in logistics, CO2 reduction is key. For businesses where energy is key, green or renewable energy becomes more important. For commodities or categories that are labour-intensive, human rights play a bigger role. So, some companies divide their supplier base into those core elements and apply a data-driven process to score them, look at the risk and take action. However, the right infrastructure and set up in the company is instrumental in order to meet this end.”

## How do you ensure success in negotiations?

**Philipp** takes the lead on this question: 

> “To be successful in negotiations in procurement (and overall), you need to combine the following elements:
> 
> 1. Have the right **mindset** and **skills** to negotiate
> 2. Have the right **data** at the right time for the negotiator
> 3. Have enough and the right **governance** 
> 
> Negotiations are a very complex process and you need to provide the right training to your negotiators, have your data under control so that you can make quick decisions, and have the authority to set commitments and consequences. When you have a center of negotiation excellence that controls all three elements, you can move quickly and remove a lot of unnecessary silos. The goal here is to moderate and steer negotiations, have the bigger picture in mind, and set the framework for how to negotiate - only in this way can a company have the speed to implement successful strategies and decisions.”
> 
> **“Mindset, right data, and governance. Only if you manage all three, you can be agile and successful in negotiations.”**

**Simon** sums up: 

> “Governance needs to be anchored in the organisation. And most importantly, you need commitment. As a purchasing organisation, if you have the mandate and there is commitment from the organisation to the deal you are negotiating, you have essentially removed the biggest blocker. Giving the procurement team the mandate means that you are no longer just a service provider with internal customers, but you are now the driver. **Therefore, commitment is essential - it is a big paradigm shift**.”

## Summary 

Here are some of the key takeaways we want to leave you with from the discussion on "Negotiations in a time of crisis":

1. Currently, the largest challenges in procurement are uncertainty and unpredictability. Above all, this relates to capacity on account of rising inflation and price instability.
2. The issue of creating transparency and clarity is becoming increasingly more complex for procurement departments. 
3. Companies must rethink their strategies in order to find the right balance between short and long-term planning. Simultaneously, procurement departments must be both adaptable and quick in their response.
4. In order to be successful in negotiations, the following elements need to be combined: the right mindset, enough and the right type of data, and governance and commitment from the organisation, so that quick decision-making is enabled.

It's clear: now is the time to better position procurement teams as an integral part of any organisation. Procurement is bound to play an ever greater role in the overall success of companies and further ways to optimise its processes can always be found through technological innovation.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Negotiations in Times of Crisis: Insights from the Experts

In our current climate, it’s undeniable that social issues strongly influence whether businesses grow and succeed or are left behind. A staggering 64% of millennials say that they will not work for a company whose corporate social responsibility is low (Prilepok et al, 2022). In general, environmental, social, and corporate governance (ESG) is becoming a competitive advantage and a business imperative. For example, between 2016 and 2018, 33% of assets under management totalling $30+ trillion were invested in an ESG conscious capacity (Prilepok et al, 2022). 

But what exactly is meant by supplier diversity and how is it related to ESG?

### What is ‘supplier diversity’? 

A diverse supplier is any business that is at least 51% owned or operated by people who are part of an underrepresented group (Barrington et al, 2020). Among other underrepresented groups, these include minority-owned enterprises (MBEs) and woman-owned enterprises (WBEs). Collectively, these groups are known as (MWBEs). Over time, however, this definition has also expanded to include businesses run by other minority groups, such as members of the LGBTQ+ community or people with disabilities.

### Not to be confused with ‘supplier diversification’… 

Supplier diversity should not be confused with the semantically similar term ‘supplier diversification’. ‘Supplier diversification’ is related to companies’ efforts to source from suppliers who offer “various unique traits, as a way to protect their company from the threat of risks by making supply chains more resilient. In other words, ‘supplier diversification’ is a sourcing strategy that relies on selecting suppliers based on factors such as size, cost, flexibility, and location, among others. 

## Why is supplier diversity important?

Supplier diversity efforts are indicative of a company’s desire to maintain high moral and ethical standards. Indeed, evidence of a company’s investment in these programs can often improve its reputation as they represent a desire to join the fight against racial discrimination and create economic opportunities for disadvantaged communities. A recent survey by McKinsey also showed that MWBEs were 67% more likely to hire minority talent than the average for US companies, evidencing the positive feedback loop effect that supplier diversity programs have (Prilepok et al, 2022). 

If you don’t find the ethical arguments for creating supplier diversity programs to be compelling, perhaps the commercial ones will prove more convincing… 

An inclusive procurement strategy has the following positive ramifications: 

1. It widens the pool of potential suppliers
2. It promotes competition among suppliers 

Both of these effects can help cost-saving efforts and improve product quality. Indeed, by providing more sourcing options, inclusive procurement can also make supply chains more resilient even during times of crisis and uncertainty. 

Supplier diversity can even positively influence hiring processes with 52% of surveyed employees stating they wished to work for a company that prioritises supplier diversity and inclusion (Barrington et al, 2020). More widely, though, MWBEs are also known to have a positive effect on the economy as a whole. It has even been proven that **they offer their corporate partners a staggering 8.5% annual procurement cost savings** (Prilepok, 2020). This economic advantage of supplier diversity is one often overlooked by procurement departments, often to their own detriment. 

We sat down with Andrea Fimian, CEO at fips Consulting who brings with her more than 15 years of procurement expertise having worked in roles such as Supply Chain Management Consultant and Supplier Diversity Program Lead at IBM. Here’s what she had to say:

> “Many companies invest money in diversity, equity, and inclusion (DE&I) efforts in the workforce, but not in procurement, where most of a company’s spending occurs. That doesn’t make sense to me, because the impact on DE&I activities is the same in the supply chain as it is in the workforce.” 

## Global Trends in Supplier Diversity

Whilst there are a number of socially conscious companies who have paved the way in addressing racial injustice through their supplier diversity programs, some companies have neglected this practice, or have implemented them merely as a token gesture or a PR stunt. 

However, according to Supplier.io’s ‘Supplier Diversity Report’, 2022 has marked a “momentous shift” in the supplier diversity community. Critically, the report shows that companies are embracing supplier diversity for the ‘right’ reasons, rather than treating it as a mere compliance check-box exercise. In this report, it was found that:

1. 45% of those surveyed had formally established supplier diversity programs
2. 19% tracked diverse suppliers without a formal program
3. 12% were in the early stages of establishing one 

**It seems clear: there’s an upwards trajectory in corporate commitment to supplier diversity and this change is here to stay!**

### The Current Situation in Germany

In Europe, the legislative frameworks set out by the European Union are generally conducive to supplier diversity. With over 15.3 million people who declare immigrant origin in Germany, it seems this topic is of utmost relevance to its procurement. 

Recently, the EU drafted a guide titled “Buying Social: A Guide to Taking Account of Social Considerations in Public Procurement”. This guide includes case studies from Germany and details socially responsible public procurement (SRPP) activity that is possible within EU law, including making supply chains accessible to small and medium enterprises.

Whilst the concept of supplier diversity in procurement is still a relatively recent concept in Germany, the country itself as well as the overall DACH region are seeing progress, and the topic is on the radar for most procurement leaders, despite the many challenges along the way. 

> “A major challenge is the implementation of SD&I, including new policies, strategies, and training. Another challenge is changing the mindset and commitment of the entire organisation in supporting SD&I efforts.” - Andrea Fimian, CEO at fips Consulting 

## How to make suppliers more diverse 

### 1. Identify diverse suppliers 

The first step in ensuring the diversity of your suppliers is to seek them out. In order to find them, you can elicit the help of advocacy organisation websites and directories. For example, in Germany this includes the newly established European Supplier Diversity Project (ESDP) by MSDUK. It is also important to search through your existing network, as this may uncover new unexpected leads. 

With a fully visible supplier base, the number of businesses in your network expands exponentially, and with it the opportunities for inclusive sourcing. MWBEs should also be sought out in emerging areas of growth, such as sustainable products and renewable technologies, as this is where partnering opportunities could deliver the greatest returns. 

### 2. Build relationships

In order for partnerships with MWBEs to be successful, procurement teams need to commit to long-term relationships whereby both parties can learn from each other and foster mutually beneficial relationships. 

This can encompass making team members available for kick-off and start-up meetings for those contracts that have been established. However, it is also beneficial to suppliers to implement debrief processes for bids that have been unsuccessful. 

### 3. Develop an action plan 

Developing a comprehensive action plan ensures your company has a strategy that facilitates partnerships with MWBEs and welcomes companies run by socioeconomically under-represented groups. A step to ensuring this is to implement diversity metrics directly into your procurement processes. Likewise, the implementation of a specific supplier diversity managerial role can aid in fostering the aforementioned relationships and promoting inclusive supply chain management. 

> “Supplier diversity takes time, and there is no quick fix - get top management support, budget for external support, staffing, and memberships, and promote your SD&I objectives internally and externally.” - Andrea Fimian, CEO at fips Consulting 

### 4. Support diverse suppliers

First-time applicants often need more help with the onboarding process. In order to simplify this task for them, you should review internal processes which may act as barriers to MWBEs and stop them from being able to compete with larger suppliers. More often than not, these onboarding processes include stringent security requirements which can be costly and time-consuming. Therefore, procurement teams should ensure that diverse suppliers are given enough support, and crucially, early on in the process. Equally, technical assistance should be provided when it comes to their requests for proposals (RFPs) and the certification process. 

Another way in which companies can show their support for supplier diversity programs is by advocating for them and joining international councils such as MSDUK or WeConnect International.

### 5. Harness technology 

Automating your procurement processes creates both internal and external accountability. Digitising contracts and certifications also leads to substantial time savings when it comes to supplier identification and classification. In this way, apps such as Lhotse optimise procurement and aid in making your workflows all the more transparent. It can even help your company to discern exactly how effective your action plan and further measures are.

## Summary

All in all, choosing diverse suppliers has significant advantages:

1. It encourages competition between suppliers
2. It creates innovation
3. It ensures equal opportunities for people who are often discriminated against

It is crucial that, when implementing supplier diversity programs, procurement leaders ensure they are placed in a position to be successful in the future, as well as today. Creating a comprehensive action plan and supporting businesses through the processes of certification, security requirements, and RFPs is crucial to a program’s success. Whilst implementing digital technology is always key to procurement process optimisation, it is particularly valuable in the process of diverse supplier identification, classification, and analysis.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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## Bibliography 

Barrington, A., Bateman, A., & Date, K. (2020, August 18). Why You Need a Supplier-Diversity Program. Harvard Business Review. https://hbr.org/2020/08/why-you-need-a-supplier-diversity-program

Prilepok, M., Stewart, S., III, Yearwood, K., & Zegeye, A. (2022, July 14). Expand diversity among your suppliers—and add value to your organization. McKinsey & Company. https://www.mckinsey.com/capabilities/operations/our-insights/expand-diversity-among-your-suppliers-and-add-value-to-your-organization

Supplier.io. State of Supplier Diversity Report. (2022). https://www.supplier.io/2022-state-of-supplier-diversity?hsCtaTracking=00146ee2-2b7d-4802-94d1-7febd169274a|95987b12-4def-4b71-b65a-079e88de7c4c

Innovate Your Supply Chain and Increase Resilience Through Supplier Diversity

Supply chains are changing; procurement is no longer just a cost-cutting process but rather is evolving, partially on account of the global pandemic. Covid-19 brought with it many supply chain disruptions cementing the urgent need for sufficient risk management and mitigation. But what does this entail exactly and how can it be effectively implemented?

## What is Risk Management?

Risks are internal or external events that are uncertain both in terms of occurrence and impact. These events may even include ‘delayed consequences’ which are those that have historically occurred but are yet to be played out. In simple words: risk management is the process of avoiding or minimizing the impact of events that could affect the way your company operates. 

## But how does this apply to procurement?

Risk management in procurement is the process of identifying, understanding, and grading these risks in order to mitigate possible supply-chain disruptions. These risks can manifest themselves in anything from late deliveries to quality issues. But whilst the most effective type of risk management involves circumnavigating and eliminating possible threats, there is no such thing as an entirely risk-free business.

## The Importance of Risk Management in Procurement

Risk management is critical due to its far-reaching effects on many aspects of the sourcing process. Implementing suitable risk management and mitigation strategies not only ensures a smoother and more successful running of supplier operations but also helps to bring down costs.

We sat down with Stefan Wiemers, Digital Supply Chain Risk Management Expert at targetP!, to discuss the topic of Risk Management in Procurement further. Our most burning question for Stefan was: “Why is risk management crucial in procurement?”. Here’s what he had to say:

> “The #1 priority for a supply chain risk management strategy is to prevent risks and professionally mitigate risks. Protecting financials and assets while creating a competitive advantage must be at the top of every CPO's agenda.”

Among other reasons, effective risk management has the following positive knock-on effects on a business:

- Ensures resources are being used responsibly
- Improves supplier relationships and customer service
- Encourages an innovative culture
- Reduces business liability
- Aids in regulatory compliance

The financial consequences of poor risk management can be vast. For example, in a single year alone, Ford, General Motors, Nissan, and FCA US, could reportedly have generated a combined profit of $2 billion if they had selected better suppliers (Barrios, 2022). 

> “Losing revenue changes the mindset of senior management and opens access to more budget for professional supply chain risk management. The last few years have significantly contributed to a new perception of Procurement in companies. As a value driver and crisis manager.” - Stefan Wiemers, Digital Supply Chain Risk Management Expert at targetP!

## The Dangers Posed to Your Supply Chain…

It is clear that mitigating risk is a high priority for procurement professionals but in order to do so well, understanding the risks is crucial. Companies must identify all possible risks if they wish to begin the task of aptly safeguarding their organisation. 

These risks can fall under four possible categories: 

1. Social, Ethical, and Environmental
2. Financial
3. Operational
4. Strategic 

Potential social, ethical, and environmental compliance risks have profound implications. These include issues surrounding sustainability, which is quickly becoming a high priority for businesses, yet, also ranges to issues of human rights violations. 

Financial risks can include a variety of external factors such as unfavorable exchange rates or the cost of supplier instability and bankruptcy. Internally, though, supply chain risks can also manifest themselves when budgets are exceeded or are limited. All of the aforementioned factors can have an extensive impact on trade and procurement processes. 

Stefan Wiemers, Digital Supply Chain Risk Management Expert at targetP! notes, regarding the external risks faced by procurement organizations…

> “The most significant [...] are the global uncertainty of geopolitics and economics and the amendment of national laws especially “German Supply Chain Act’ [...] We have had to learn to deal with common disasters and crises like the tsunami in New Zealand, earthquakes in Japan, Brexit, Covid-19, semiconductor shortages, the Ukraine war, and many more.” 

It is clear then: factors which could negatively impact supply chains are constantly arising, highlighting effective risk management strategies as crucial in procurement. 

## Risk Management in Procurement: Steps for a successful execution

It is crucial that risk management is seen not as a static process but, rather, a continuous set of processes. In essence, risk management consists of identification, analysis, mitigation, planning, and continuous monitoring. Companies should conduct regular risk assessments in order to avert risks to their supply chains and ensure they are adequately prepared in the event of a crisis.

> “Think big, start agile, be fast and effective from day 1. Risk mitigation is a journey and it will not be implemented overnight. Create awareness within your organization for supply chain risks and develop it stepwise” - Stefan Wiemers, Digital Supply Chain Risk Management Expert at targetP!

### 1. Analysis of your business needs

Firstly, a full needs analysis should be done to ensure your procurement department has a clear understanding of what goods or services are required, who needs them, when, and why. This analysis should be fully documented and include a good understanding of the customer, client, and supplier needs.

During the needs assessment process it is critical that needs are neither overstated nor understated and that realistic timelines are proposed. Similarly, requirements must be clearly defined and an accurate budget proposed. An incorrect needs analysis and forecasting can create a host of issues down the line. For example, a supplier may be selected who is too expensive or a quantity of product might be ordered in excess. Therefore, we suggest following Stefan’s advice:

> “Conduct a risk maturity assessment to analyze your status quo regarding risk culture, understanding, governance, processes, and internal collaboration. Derive your project roadmap to a comprehensive and proactive Supply Chain Risk Management (SCRM).” - Stefan Wiemers, Digital Supply Chain Risk Management Expert at targetP!

### 2. Select the right suppliers

Choosing the right supplies is one of the most crucial decisions a procurement department can make in terms of risk management. It is only once suppliers have been thoroughly researched that their performance can be assured. In order to do so, it is important to implement a supplier evaluation method that is both easy to read and readily accessible. 

Failing to do so puts companies at reputational risk. For example, recently UK retailer Boohoo was forced to cut down its suppliers from 500 to 100 after it came to light that factory workers were being paid as little as £3.50 an hour (Sillars, 2021). This in turn sparked a £1bn hit to the companies’ share price. Likewise, Uniqlo and ASOS have both faced serious backlash on account of poor supplier selection. In 2016, it was discovered that their Turkish factories were employing 7-year-old children to work 60-hour weeks (Hutchison, 2016), which severely impacted their reputation and led to substantial financial losses.

Choosing suppliers incorrectly has detrimental effects in procurement when it comes to delays and cost implications. But did you know it can also have serious ESG ramifications? 

To avoid non-compliance, a company should look for ways to embed ESG criteria throughout the entire organisation, not just in procurement. However, to do so, a careful analysis of suppliers and a thorough review of how ESG affects procurement processes are necessary.

At Lhotse, we are committed to simplifying the process of finding sustainable suppliers. Whilst manual processes leave procurement teams with a lack of comparable data, Lhotse enables transparency as well as easy selection of sustainable or regional suppliers. To find out more about ESG compliance and how procurement leaders can drive sustainability in their supply chains, head to [our article] (https://www.lhotse.de/blog/sustainability-in-procurement-esg-compliance-for-a-more-resillient-supply-chain).

### 3. Effective contract and supplier relationship management

When the process of contract management is neglected, contracts can be left both unexecuted or uninvestigated, leading to inefficiencies in time and costs. In order to ensure efficient contract management, procurement leaders should regularly audit the process for failures and ensure effective management and communication. 

Organised supplier relationship management is of equal importance. External processes, contrary to internal ones, can be much more difficult to manage. Delays, which frequently occur in supply chains, can be reduced by properly keeping track of suppliers’ past and current records as well as ensuring favorable contract terms and maintaining a constant relationship, especially in times of crisis.

### 4. Continuous analysis of possible supply chain disruptions

The term “risk” often denotes the sense that supply chain vulnerabilities are entirely unexpected. In reality, disruptions are inevitable and can often be adequately planned for. Treating risk management as an ongoing, continuous process ensures quick response times in times of crisis, which currently occur all too frequently.

In order to continuously monitor risk management processes their effectiveness must also be evaluated. Indeed, even the most well-thought-out plans can have flaws. Therefore, it is important to hold regular evaluations to find areas for improvement. Digitizing procurement enables a simpler evaluation process through transparency and also ensures that the ongoing process of risk management is easy to maintain. 

## Questions to consider:

Does your company have a robust risk management strategy and adequate protocols? Find out by answering the questions below…  

Do you have full visibility when it comes to your supply chain process and the suppliers you use?
Do you treat risk management as an ongoing process, rather than a static one, by regularly monitoring the performance of your suppliers?
Are you aware of how legislation, such as the new ESG regulations published in the [Supply Chain Act] (https://www.lhotse.de/blog/supply-chain-act-do-not-neglect-the-non-strategic-suppliers), affect your company?
Are you confident that you can respond quickly and efficiently to disruptions in your supply chain without ramifications to the rest of your business?

If the answer to any of the former is no, your supply chain may be at risk. So, here’s a tool that can help: Artificial Intelligence.

AI solutions create transparency in your procurement workflows and help you to gain a better understanding when it comes to the reliability of your suppliers. [AI software] (https://www.lhotse.de/blog/supplier-mapping-how-your-company-can-use-AI-to-find-the-best-suppliers) enables your company to see anything from whether your supplier holds a conflict of interest or whether their ethics align with those of your company.

> “Connecting the “digital and the non-digital world” is the most effective way to operate a value-creating SCRM, and it is the only way to drive resilience! Technology-driven risk management increases agility to mitigate, identify, evaluate, and prevent risks faster.” Stefan Wiemers, Digital Supply Chain Risk Management. Expert at targetP!

## Summary

In the case of procurement, ‘ignorance’ is certainly not ‘bliss’. Belief in this saying is not only dangerous to procurement teams but also to a business' ability to deliver on promises to their consumers.

Whilst factors influencing supply chains such as the global pandemic are difficult to forecast, the chances of other risks affecting your business (such as fraud, lacking compliance, and ethical sourcing) can all be reduced through effective risk mitigation strategies. It is only by seeing risk management as a high priority that corporations can prepare to react to issues such as poor supplier performance or price instability.  

With the help of AI-software solutions, such as Lhotse, companies remove manual labor from risk management processes, thus enabling efficiency. Data-driven risk management also has the advantage of improving supplier selection and making compliance, for example, to ESG regulations more transparent.

## Bibliography

Barrios, K. (n.d.). Play Nice: What is the Cost of Poor Supplier Relationships? Retrieved October 31, 2022, from https://www.xeneta.com/blog/what-is-the-cost-of-poor-supplier-relationships

Hutchison, C. (2016, October 20). Uniqlo criticised for supply chain failures that left vulnerable staff out of work. Evening Standard. https://www.standard.co.uk/business/uniqlo-criticised-for-supply-chain-failures-that-left-vulnerable-staff-out-of-work-a3374441.html

Sillars, J. (2021, March 25). Boohoo cuts hundreds of suppliers to fashion new future after factory scandal. Sky News. https://news.sky.com/story/boohoo-cuts-hundreds-of-suppliers-to-fashion-new-future-after-factory-scandal-12256064

Risk management in procurement: fail to plan, and you plan to fail

Some might have doubted Clive Humby’s statement **“data is the new oil”** back in 2006, but today nothing rings more true. With the release of Google Search and Amazon’s Alexa, or newer innovations such as the image generator DALL-E 2, it appears data has become the new universal currency. But how does the importance of data relate to the world of procurement? Read on to find out!

### The importance of supplier data in procurement

In procurement, the central problem revolves around matching the best supplier to a given requisition under specific criteria. As a solution to this problem, Lhotse’s AI helps companies find the best suppliers faster and more accurately. 

If a customer makes a request for a ‘Macbook Pro 13’, how can we actually identify the numerous electronic retailers who sell them? Simple: the answer is all in the data. At Lhotse, we have collected a vast quantity of data spanning from catalogs and keywords to certificates and product categories. All this information makes up a database of hundreds of thousands of suppliers! Additionally, we also enrich this data for each customer by combining it with data from all their past requisitions. Knowing that a customer has previously bought iPhones and Windows laptops from a specific supplier enables us to predict in the future that the supplier also sells Macbooks.

However, sometimes problems can arise if the supplier purchase history is not detailed enough. So, what happens then? Well, in many cases, several supplier branches exist that offer roughly the same products but are considered separate suppliers. Merging this information which is provided by the requisitions made by business users is crucial. This is because it helps the Lhotse App to make more confident decisions!

*Figure 1: Comparison of available information with vs. without grouping of supplier branches*

## Challenges

### Grouping suppliers is harder than it looks

While the advantages of grouping suppliers are straightforward, the process is anything but. In simple cases, the difference between two suppliers can merely lie in the name of the city - in others it can vary greatly.

Suppliers may belong together despite their names differing in terms of:

1. Acronyms (ABC GmbH vs. Anna Bauer Computers GmbH)
2. Abbreviations (ABC Technology GmbH vs. ABC Tech GmbH)
3. Business description (ABC Technology GmbH vs. ABC GmbH)

In other cases, though, two suppliers might sound very similar but should not be grouped together because their stock could be entirely different. They vary mostly in terms of:

4. Description of the business unit (ABC GmbH Human Resources vs. ABC GmbH Logistics)

It’s clear then: basic computational heuristics simply do not suffice in the pursuit of accurately determining whether two suppliers belong together. 

Instead, we could apply some comparisons, check online data for the two branches and then come to a confident conclusion. Seems quick and painless, right?

### But there’s a catch:

 Lhotse’s supplier base consists of hundreds of thousands of suppliers. Therefore, a supplier branch holds the risk of matching with every other supplier branch. Technically speaking, the number of potential matches grows quadratically with the number of suppliers. So, how quickly would a result be produced, if a comparison were only to take a second? You would be waiting a while because the answer is more than 10,000 years! It goes without saying that this is simply not a feasible option.

The implications are, therefore, two-fold: firstly, we must ensure comparisons are fast but simultaneously accurate, and secondly, we must reduce the number of comparisons that occur as much as possible.

*Figure 2: The increase of computational complexity with a larger supplier base*
 
## Lhotse’s solution

### ‘Blocking’ and relevance scores

The first step is to eliminate as many irrelevant potential matches as quickly as possible! This process is named ‘blocking’ and in order to implement it, we construct an extremely fast yet accurate algorithm which can eliminate all pairs that are clearly not a match. 

Take these three suppliers as an example:

1. ‘Jupiter Berlin GmbH’,
2. ‘Jupiter GmbH Branch Cologne’,
3. ‘Hürth Car Repair KG’,

Here, only ‘Jupiter Berlin GmbH’ and ‘Jupiter GmbH Branch Cologne’ would pass the blocking process as they are the most likely to belong to the same supplier. Simultaneously, the algorithm can decipher that ‘Hürth Car Repair KG’ is too different from the other two suppliers to potentially match them, so these supplier pairs are not further considered.

In this way, we can reduce 99.93% of the billions of potential pairs within mere seconds.

*Figure 3: Blocking irrelevant combinations*

### What’s next? 

Now that only the relevant potential pairs remain, we must make a final decision as to whether the two suppliers belong together. Having, fortunately, eliminated many potential pairs during the blocking process, we can now divert our attention to more elaborate methods. These may take longer to compute but are more successful in taking into account all the tiny, yet, extremely relevant details of each supplier.

For this, we trained a Machine Learning model on thousands of samples. By providing it with different scores on the similarity of two suppliers, it can learn what makes two suppliers more or less likely to match. As a result, it can predict the likelihood of any previously unseen pair of suppliers belonging together.

*Figure 4: Estimating the probability of two suppliers matching*

For this reason, we know which pairs of suppliers are likely to match. But in order to make the most of our data, we need to also create groups of suppliers, rather than just pairs.

To do so, we connect suppliers through a graph where two suppliers are connected if their probability of matching is above a certain threshold. All suppliers that are connected within one component of the graph are grouped together.

*Figure 5: Using graphs to group suppliers*

Using this set of techniques, the assignment of a supplier branch to a particular group is correct in 98% of all cases!

## Summary

For Lhotse to correctly match suppliers to a given requisition, it is essential to collate and combine the past data of several supplier branches. Simple heuristics coupled with state-of-the-art AI solutions enable Lhotse to automate the entire process of grouping supplier branches. This also all occurs with very high accuracy and little to no computational effort. It’s all in the data!

Fully leveraging supplier data is paramount to the success of any procurement team. This is because making the most of data aids in the understanding and general performance of supplier capabilities allowing companies to make better decisions regarding their suppliers. In short: it reduces costs and improves transparency!

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Supplier Mapping: How Your Company Can use AI to Find the Best Suppliers

As part of our series of expert interviews with procurement leaders, we sat down with Peter Hagenow, Head of Strategic Group Procurement at KWS Saat. Peter brings with him 17 years of international experience in procurement and strategic sourcing from multiple industries - from automotive to real estate to now agriculture. So, it’s safe to say: Peter is the expert and we couldn’t wait to hear more about his procurement insights and learnings.

Peter’s professional journey led him to KWS Saat, a German-based company focused on plant breeding, with activities in 70 countries worldwide. His favourite part about working at KWS? The fact that a company with 6,000 employees and more than 1.3Bn EUR revenue can feel so much like a family! This is no surprise, as the company, which was founded in 1856, is still family-owned. This family business approach brings a lot of stability for their employees, who feel enabled to focus on the long-term goals and not just short-term quarterly planning.

## Agricultural procurement: digitalisation as a competitive advantage

There are many examples of procurement in agriculture being years ahead compared to other industries, but nothing stands out as much as digitalisation. 

**Digitalisation and agriculture go hand in hand.** Peter illustrates this with one simple example: when a farmer is operating a tractor in the field, this tractor serves as a computer that is actively generating and collecting important data for analysis and planning purposes. Another example is using technology to measure the CO2 footprint of their supply chain.

Digitalisation has also been implemented when it comes to **indirect purchasing**. Whereas previously ordering indirect materials was done via the phone or using catalogs (practices still common in many companies today), KWS has now centralized and digitized its indirect procurement. Peter backs this up with data: a few years back, only 50% of indirect purchases were processed via a central system, a number which has increased significantly today leading to more control over not only how much is being spent, but also where, why, and how.

**Sourcing indirect materials is now a strategic topic for the company so that the process is simple, fast, and streamlined.**

## Building a resilient supply chain during challenging times

With [inflation rising] (https://www.lhotse.de/blog/a-recession-is-coming-save-costs-through-procurement) and disturbances in the supply chain operations becoming almost a daily occurrence, many companies are preparing for the upcoming difficult times. Nevertheless, procurement in agriculture is facing challenges that are unique to the industry. For example, agriculture is heavily dependent on commodity markets - recent fluctuations in wheat prices are hugely impacting the stability of agricultural supply chains.

Peter’s experience in building a successful procurement function from the ground up means that he is well-equipped to share advice on building a resilient supply chain. His main takeaway is two-fold:

1. Build the right team - having experienced procurement experts beside you is a clear-cut way to have the knowledge and skillset needed to adapt quickly to market fluctuations. 
2. Involve procurement early on - [Maverick buying] (https://www.lhotse.de/en/blog/5-types-of-maverick-spend) (i.e. purchasing without going through the proper procurement channels) can be a huge drain on resources. By involving procurement experts at the beginning of the purchasing process, you can collect more competitive supplier offers, diversify your supplier base and avoid leaving cost savings on the table. 

## KWS x Lhotse: solving procurement challenges together

Working together with Lhotse has enabled KWS to successfully address some of its existing procurement challenges. Peter highlights three crucial topics:

1. **Additional offers** - getting multiple supplier offers can now be done with a few clicks on the Lhotse app.
2. **More visibility** - in many cases, the procurement team is not aware that their existing suppliers can fulfil specific orders, which leads to a lot of one-time purchases and hours spend onboarding new suppliers. With Lhotse, Peter and his team are able to discover matching suppliers or already existing catalog items, which streamlines their whole procurement workflow.
3. **More competitive offers** - gathering offers from new suppliers brings more competition and cost savings without the need for increased team capacity.

In addition, Peter’s main learning from working with Lhotse is that they **don’t need to limit themselves to what the traditional Enterprise Resource Planning (ERP) providers offer**. The Lhotse app sits on top of their existing ERP system, fulfilling gaps in indirect procurement and optimising their workflow. Peter also notes that integrating Lhotse has been a quick and low-effort process, while the payback and results have been immediate.

## Future of procurement: from technology to sustainability

Peter is optimistic about the future of procurement - he expects a lot more up-and-coming technological advancements which will drive progress. This is already in motion in KWS, where software tools will free up capacity, so that procurement experts can focus on more strategic topics instead of manual work or admin.

**Technology in procurement** will also allow for instant price findings - for example, by collecting data on how a product is built, from what materials, and via what production process, you should be able to immediately determine the price. This will not only add value, but it will remove many repetitive tasks.

Moving into 2023, the number 1 priority on top of Peter’s agenda remains **securing and diversifying the company's supply chain**, thus making it more resilient to sudden market fluctuations. 

Last but not least is the topic of **sustainability in procurement**. Improving ESG (environmental, social, and governance) footprint is crucial - KWS is already in the process of partnering up with suppliers and implementing measures to consider all costs (not just price, but also environmental and societal costs) in their procurement workflow.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Procurement in Agriculture: KWS and Lhotse Combine Powers to Drive Success

Feeling overwhelmed by keeping up with the continuous changes, updates, and new regulations in sustainable procurement? You are not alone!

The topic of environmental, social, and governance issues (also known as ESG) is increasing in popularity in the procurement field. The reason for this is clear: **two-thirds of a company’s ESG footprint sits with suppliers** (McKinsey, 2021). In addition, **up to 90% of emissions from a company come from the supply chain**, which is 11 times more than the company’s direct emissions (CDP, 2022).

> “A company’s sustainability performance can only be as good as those along the entire supply chain.” - Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”

How should procurement leaders approach the topic, and are there any ways to ensure a fully integrated sustainable procurement strategy? Read on to find out more…

## Sustainability in procurement: pressure from all sides

Even though some might think that sustainable procurement only affects environmental criteria (the E in ESG), it actually has an impact on all ESG dimensions. Its focus is not only on carbon emissions and climate change, but also on how a company uses energy and resources, and how this affects the environment. 

Therefore, sustainability in procurement is interconnected across all ESG dimensions and it can no longer be seen in isolation. Moreover, it is no longer considered a “nice-to-have”, but it’s now a basic requirement for most companies. 

The procurement department has a crucial role to play in shaping the organization’s ESG footprint through purchase decisions and working with sustainable suppliers. The pressure often comes from all sides - be it consumers, investors, regulators, or employees.

### Consumers

For one, **consumer** sustainability expectations are rising. Consumers today are voting with their wallets - they are willing to pay higher prices for more sustainable products from companies with sustainable practices. This trend applies across generations, with numbers steadily increasing year over year. For example, in 2022 Forbes reported that ~90% of Gen X consumers are willing to spend an additional 10% or more for sustainable products, compared to just over 34% two years ago.

### Regulators

**Regulators** are another important stakeholder, as many upcoming regulations (e.g. the [Supply Chain Act] (https://www.lhotse.de/blog/the-supply-chain-act-will-push-your-companys-esg-standards) in Germany, which comes into effect on 1. Jan 2023) increase the urgency to become compliant and more transparent. Companies are facing increasing pressure not only to meet regulatory criteria in their own operations but also to ensure they are working with suppliers or contractors across their entire supply chain who also meet those ESG requirements. Otherwise, they can face fines of up to 2% of the company’s annual revenue!

Regulations remain a complex topic but ultimately aim to give guidance to companies so that they can meet the needs of their markets and stakeholders. Nevertheless, keeping up with the latest requirements and laws could be challenging for organizations that don’t have a dedicated sustainability team, and the consequences of non-compliance could dramatically change the course of the company’s growth ambitions.

### Investors
Last but not least, a lot of the rising pressure to act in a climate-positive way comes from **investors**. Product quality or financial performance are no longer enough to convince investors - showcasing tangible progress towards meeting or exceeding ESG objectives is essential.

In their Sustainability Report (2022), Deloitte found out that 71% of business leaders feel pressure from investors to act on climate change. Working with sustainable suppliers signals to investors that the company is environmentally conscious, future-forward, and therefore a stable investment. It also makes financial sense: analysis from McKinsey (2022) shows that top ESG performing companies have faster growth and higher valuations by a margin of 10-20%. 

## Common pitfalls of sustainability in procurement

One of the biggest challenges of driving sustainability in procurement is **undefined ownership**. This means that a company wants to be proactive, but doesn’t have the capacity or skillset to do so. This often leads to a lack of focus, unclear roles and responsibilities, and low engagement.

Another common pitfall is **not committing to sustainability** until a company has everything right. In reality, sustainability is a new topic to many organisations and it’s more important to make a start than to be perfect at it. Sustainability knowledge in procurement is still very fragmented and it will take a lot of research and working together with suppliers to make a lasting difference.

Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy, shared this advice with Lhotse:

> “Think of sustainable procurement as an iterative process that needs to be continuously implemented based on risk and impact prioritisation, and that will gradually become more refined.” 

A prerequisite for sustainability to be prioritised is **support from leadership**. This means that the management board and the C-Suite take it upon themselves to drive sustainability in all areas and don’t treat sustainability as just another hype (or even worse: a PR stunt!). The German Supply Chain Act also requires senior management to issue a policy statement on the company’s human rights and environmental issues strategy, thus making top-down advocacy on those issues essential.

Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”, shared his views on the topic with Lhotse:

> “Procurement organisations have the ability and responsibility to turn ambition into action: sustainability is a new playing field for procurement to deliver value by aligning the supply chain on higher environmental, social and economic impact.”

Finally, sustainable procurement is a process and **seeing results takes time**. This is why long-term commitment is necessary to meet (or even exceed) targets. Setting realistic expectations when implementing sustainable practices in procurement is the only way to guarantee long-lasting success.

## How can procurement leaders drive sustainability: tips from experts

Sustainability is still a topic that many business leaders find difficult to prioritise. After all, there are so many other topics that also need to be pushed further, such as inflation, cybersecurity, unstable market conditions, changing workforce, etc. **So how can you as a procurement leader drive sustainability in your organisation?** Here's what the experts have to say...

### Be strategic

One tip is to **be strategic** with the sustainability initiatives you are advocating for. Think about what projects have the highest impact in your industry and should therefore be prioritised. In that way, your organisation will see the value in sustainability as not just something that is done to tick a box, but something that positively affects procurement and the overall business.

> “Start small. Define tangible targets (for all three ESG dimensions), develop a strategy and roadmap, and run first pilots. With this approach, you will build the case for change and for scaling up sustainability in your organisation. Throughout this journey, search for allies within the company and in the wider ecosystem of suppliers to work jointly on solutions.” - Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”

### Collaborate with other departments

Any organisation that is serious about sustainable procurement needs to encourage and enable **close collaboration between departments**. For example, targets are often set by Corporate Affairs who might be pushed to agree to conditions that the business is not ready to meet. However, if procurement takes a more proactive role and is part of the discussion from the start, it can give insights into the “how” and not just the “what”. The procurement department can also validate the costs associated with those initiatives and bring practical knowledge into the conversation. This inter-departmental collaboration will increase the visibility of the procurement department, but only if procurement experts are able to back up their sourcing decisions with data.

### Risk management

The pandemic uncovered a series of weaknesses in the supply chains of organisations that relied too heavily on single-source or overseas suppliers. Therefore, another advice for procurement leaders who want to drive sustainability in their organisations is to **focus on risk management** and future-proofing their supply chain. As Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy, recommends: 

> “Try to integrate the risk dimension and build the risk case for sustainability internally: demonstrate how sustainability in procurement can contribute to the overall risk management of the company, e.g. by making supply chains more resilient.”

Thus, companies can use sustainable procurement to identify problematic suppliers and protect their reputation, mitigate risks from scarce supply, ensure compliance and protect the robustness of their supply chain.

## Future of sustainability in procurement

Procurement is best positioned to drive a systematic change towards more sustainable practices, as it is the only company function that has an extensive overview not only of suppliers but also of internal structures, workflows, and assets. An enterprise that aspires to have high sustainability standards can only do so if the standards across its entire supply chain match the same quality.

> “Sustainability is not just another hype. Attitudes about sustainability, and its increasingly prominent role in procurement, will change dramatically in the next years. Therefore, sustainability aspects will be an inherent part of all procurement core processes like Category Management, Supplier Management, Selection and Awarding. Procurement’s new normal will be to create value by focusing on resilience, sustainability, and appropriate cost levels.” - Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”

Procurement needs to move away from “price” or “proximity” as the only factor when considering the best supplier offers. By taking the initiative to work with more sustainable suppliers, a company can improve its procurement operations and risk management, have stronger supplier and stakeholder relationships, cut costs, create value, and future-proof their positioning.

> “It is not the proximity of the supplier to the company that is decisive for making procurement sustainable, but potential social, human rights and environmental risks, and impact of the supplier.” - Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy

Procurement needs to (and has the responsibility to) drive sustainability transformation, and requiring suppliers and business partners to meet specific sustainability criteria is only the first step towards this. Technology will be the best tool for procurement on the journey to drive this change.

> “The future of sustainability in procurement is tools that make supply chains visible and create “live” supplier networks which inform procurement about suppliers’ sustainability performance, changes and requirements.” - Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy

## Next steps: How to use technology to ensure ESG compliance

While sustainability and supplier diversity are overarching concepts, ESG brings down the topic to the actual practicalities. However, the biggest blocker for the majority of Chief Procurement Officers to implement ESG criteria (especially in indirect procurement!) is the lack of the needed tools and data. 

In fact, research by Coupa (2022) found that 65% of businesses cannot tell if their closest supply chain partners are meeting any ESG standards. The solution is simple: **technology has the power to integrate ESG supplier data into your existing procurement workflows** so that you don’t need to deal with fragmented information across different departments. So, if you have made it this far into the article, we want to leave you with one tangible next step you can take today to embed sustainability metrics into your sourcing processes.

At Lhotse, we are on a mission to make it as easy as possible for CPOs and procurement experts to make a decision when choosing sustainable suppliers. A huge concern is often the lack of comparable data between suppliers, as well as unanswered questionnaires or missing ESG credentials. This, combined with a lack of transparency and siloed knowledge, forces decision-makers to lose agility and speed when choosing the right suppliers. At Lhotse, we want to change this. 

Lhotse showcases sustainability ratings of suppliers so that you have all the information you need to make the best sourcing decision for your organisation and fulfil your sustainability procurement targets. You can easily select “sustainable” or “regional” supplier filters to select suppliers who fulfil your specific criteria, as well as get their certificates or climate-relevant data. Moreover, Lhotse increases transparency in an organisation and acts as a single source of truth, so that all stakeholders involved are always on the same page when the case for a sustainable supplier is made.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Sustainability in Procurement: ESG-compliance for a More Resilient Supply Chain

### Inflation is hitting a 50-year high

If you are feeling worried about inflation rates and how they will likely affect your business, it's not surprising. With Covid restrictions lifted in a post-pandemic climate, many of us thought that the greatest of our financial worries were being left behind. Yet, this year’s bottlenecks coupled with an ongoing supply chain crisis have resulted in unprecedented levels of inflation. The adverse geopolitical situation in Ukraine has further compounded this issue contributing, both directly and indirectly, to the exponential increase in oil and gas prices. August and September this year saw the highest level of inflation in Germany in 50 years totalling a staggering 8.8% (Hagstrom, 2022). It’s clear, then: the decade of ultra-low inflation is over and has been replaced by eye-watering price growth.

### Will inflation affect your company?

With a decrease in global demand, support for the Euro is expected to rapidly decline this year. Whilst the impact of inflation is inevitably most acutely felt by the most vulnerable in society, it seems, however large your business is, few companies are in a position of great financial stability. As Fratzscher puts it “many companies will go bankrupt” because “recession is unavoidable, we are already in a downturn” (Eyk, 2022). Recovery, too, is predicted to be a slow affair, with lasting impacts into 2023 and ’24 (Eyk, 2022). Seeing as procurement teams control a vast amount of company spend, a large task falls to them in order to increase financial security by keeping costs down. 

Read on to find out about the steps your company can take to combat inflation…

## Cost Saving: The Solution

### What can be done?

What solutions can be found for large corporations in this economic climate? Seeing as **companies spend more than 70% of their revenue on procurement** (Nome, 2022), this seems like a good place to start. Wax Digital’s recent survey certainly supports this - they found that participants who used online procurement options rather than relying on their old manual processes saved a whopping 380% on supplier costs (Ismail, 2020). If your company is on a quest to become more financially secure, cost savings will prove crucial. An added benefit: unlike income capital, taxes don’t apply to cost savings! 

### What are cost savings? 

Whereas “cost savings” as a term is pretty straightforward, it’s important to differentiate with related terms in order to better understand how company costs can be reduced while simultaneously encouraging growth – an endeavour that should ultimately be the aim of every corporation!

Cost-cutting refers to a “last-ditch attempt to save money” (Verma, 2022) and usually occurs on account of financial difficulty in a company. Examples of cost-cutting include making employees redundant or reducing their pay. Crucially, it often hinders growth. Cost saving, however, is a voluntary process that can increase productivity and, unlike its sibling term, aids in the growth of your company. 

## Steps to Effective Cost Saving 

### Step Number 1: Centralise your Data

Centralising your data allows your company to gain full visibility of spending. You can even increase this transparency by categorising data by cost category or business process.

The advantages of centralising your data are plenty…

1. It ensures that everyone in your organisation is given the correct level of accountability, regarding their spending.
2. It increases the accuracy and effective analysis of your spending.
3. It allows your company to create a complete picture of your data. This means that you will be able to access crucial information at the click of a button! You would be able to see whether sales and inventory square up or whether it would be beneficial to change suppliers in a mere few seconds.

### Step Number 2: Differentiate Between your Types of Spending 

Differentiating between your strategic, non-strategic, and Maverick buying is crucial for optimising cost savings at your company. In doing so, better decisions can be made to maximise increasingly scarce resources. All in all: it allows you to do more with less! Yet, there are also added benefits - differentiating between different types of spending allows your company to show how costs align with strategy. [Maverick buying] (https://www.lhotse.de/en/blog/5-types-of-maverick-spend) will also be reduced as a result which will increase your overall contract coverage and help to bring down costs.

Read on to find out how Lhotse can reduce your indirect spending and help your organisation to eliminate Maverick buying entirely…

### Step Number 3: Re-evaluate your Suppliers

Evaluating your suppliers can come in many forms… This can simply relate to negotiating better terms with your existing suppliers so that you reduce delivery time, and costs or improve your existing payment plans - all of which financially benefit your company!

Alternatively, if you find that your existing suppliers cannot provide competitive offers you should find new suppliers or bundle up spending by determining which suppliers offer the same product. Bundling up spend is a strategy that reduces the number of suppliers a company interacts with in order to merge requisitions into fewer contracts, reducing costs. This approach reduces your company’s number of suppliers which enhances your ability to reduce prices through negotiation. 

### Step Number 4: Automate your Processes 

Automation can come in the form of stand-alone software or ‘add-ons’ like Lhotse which easily integrate into your existing systems. Using AI or machine learning to automate your processes stops your employees from having to perform repetitive manual tasks.

Taking away the pressure of unnecessary manual tasks from your employees frees up their time. This means that they can focus their attention on strategic activities, such as analysing data and generating insights – creating more value for your company!

The age-old phrase ‘time is money’ has never been more relevant than in the procurement industry. Automation can save up to 75% in the purchase order requisition, submittal, and approval processes.

### Get involved and don’t miss out…

These cost-saving strategies are already being implemented by many organisations. In fact, a recent DC velocity survey suggested that as many as 50% of companies are now actively looking for new suppliers, with 44% renegotiating contracts with existing ones (Staff, 2022). But there is much more to be done, especially when it comes to innovation and digitalisation in the procurement field.

If you have read up until this point, we wish to leave you with a final procurement tool that will streamline your entire cost-saving process for you…

## Introducing Lhotse

### Who we are

Lhotse is a procurement solution that focuses on your company’s non-strategic spending. We enable a more effective relationship between organisations and suppliers, reducing processing and administrative costs in the process. The Lhotse app automatically identifies suppliers, requests offers, and provides a transparent overview of the best options. We also use suppliers' historic data to ensure that your company uncovers the largest savings potential.

### Supercharge your procurement workflow

Our front-to-end process of communication with suppliers is entirely automated and we ensure that all of your data remains in one place. By automating anything in a procurement workflow that doesn’t require human judgment, we enable procurement teams to spend less time on manual work and divert their focus to strategic tasks, adding more value in the process. What’s more, the easy-to-use interface ensures that anyone in your company regardless of department and experience can use our app. Lhotse helps you do more with less and get 3x more competitive supplier offers with our in-app sourcing and negotiation features.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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## Bibliography:

Eyk, H. (2022, September 10). Scholz Says Germany Prepared for Russia Gas Halt Over Ukraine. Bloomberg. Retrieved September 14, 2022, from https://www.bloomberg.com/news/articles/2022-09-10/german-chancellor-says-country-is-prepared-for-russia-gas-halt?leadSource=uverify%20wall

Hagstrom, A. (2022, September 4). Inflation in Germany hits near 50-year high amid energy crisis. Fox News. Retrieved September 14, 2022, from https://www.foxnews.com/world/inflation-in-germany-hits-near-50-year-high-amid-energy-crisis

Ismail, N. (2020, July 21). eProcurement produces 720% ROI – research reveals. Information Age. Retrieved September 14, 2022, from https://www.information-age.com/eprocurement-roi-research-123472994/

Nome, S. (2022, February 7). All You Need to Know About Spend Management. Retrieved September 14, 2022, from https://www.igniteprocurement.com/blog/all-you-need-to-know-about-spend-management#:%7E:text=According%20to%20the%20Chartered%20Institute,benefits%20to%20the%20bottom%20line.

Staff, V. D. C. (2022, August 11). Procurement pros say inflation is top concern. DC Velocity. Retrieved September 14, 2022, from https://Https://www.dcvelocity.com/articles/55259-procurement-pros-say-inflation-is-top-concern

Verma, P. (2022, August 18). How to Uncover Millions in Hidden Procurement Savings in 2022. Retrieved September 14, 2022, from https://www.igniteprocurement.com/blog/how-to-uncover-millions-in-hidden-procurement-savings?utm_campaign=uc-enable-savings&utm_content=218412040&utm_medium=social&utm_source=linkedin&hss_channel=lcp-10506387

A Recession is Coming: Save Costs Through Procurement

Our latest edition of the Digital Procurement Club was all about "New kids in procurement". Our guest Lukas Wawrla, Co-founder of Archlet, joined Lhotse’s Co-founder Henning Hatje to share their insights into the founding days of ProcureTech start-ups. Big Thanks to Gundula Ullah (Chief Procurement Officer at FUNKE Mediengruppe) and Sebastian Lücke (Head of Supply Chain Innovation & IT Landscape at E.ON) for leading this exciting discussion!

## Building foundations for ProcureTech start-ups

About 15 years ago, the procurement sector was relatively static. Companies knew the best-in-class providers on the market and the choice of procurement solutions was limited. This has changed drastically in recent years. In the last 5 years alone, over 200 start-ups have been founded in the procurement sector, offering new solutions and opportunities to the market. But how are the right foundations built, from idea generation and financing to product and team growth? 

Lukas Wawrla, Co-founder of Archlet, and Henning Hatje, Co-founder of Lhotse, share their "behind the scenes" experiences and learnings from their start-up journey.

> "Looking for a problem to solve rather than looking for an idea"

It is an illusion that all you need to start a new business is an exciting, unique idea which will automatically scale your business. Instead, it is much more sustainable to find a common problem for which there is no solution on the market yet. This can be validated, for example, through stakeholder conversations to find out if the problem is common enough that it could affect many potential future clients.

## Choosing an investor is "like a marriage"

Once the solution has been validated, there are several ways to start scaling a start-up. Particularly common in the procurement space is funding from universities, as well as self-funding or funding from external investors. But before bringing in investors, **it's important to determine what the company wants to achieve and whether the product is scalable**. Why? Because at a certain point, investors want to see a return on their investment.

In order to avoid being pressured to deliver and grow too quickly (while often the product quality suffers), investors need to be chosen carefully. Here, it makes sense to find investors who are "founder-friendly". This means that the focus is not immediately on the financial business model, but rather that they have confidence in the solution and the development of the start-up. These investors should be open and willing to support the company with advice, so that the company and product can develop. After all, finding investors is like getting married. You stay together for many years and have to overcome countless ups and downs together.

## Why should corporate procurement work with start-ups? 

Changes in the market imply changes for large corporations as well. Big corporates have to be willing to compromise on new solutions, just as much as start-ups compromise and adapt their product to their customers' requirements. In doing so, it is a question of focus in order to really move forward. After all, not every customer is ideally suited to the start-up's solutions, even if it is hard to say 'no' to customers at the beginning. The wish of many start-ups is therefore an honest and open interaction. Otherwise, it remains to be seen whether or not the solution makes sense for the customer and really solves their specific pain points. 

But even if the cooperation between a corporation and a start-up does not work, it is still an exciting experience. Start-ups try to solve a certain problem for which there is no solution yet with the greatest possible effort. In this way, they offer corporations the chance to develop new ideas or try out new approaches with young teams. It is similar to investing in innovation training for the corporate teams. 

Watch the video to find out more...

## Collective starting points 

In addition to financial health, the question of the technical health of start-ups should also be considered. Large corporations usually already use well-known procurement solutions such as SAP Ariba, Coupa or Jaggaer, and start-ups can form vertical best-in-class add-ons to these and be integrated into existing systems. Therefore, the question of the start-up’s technical integration capabilities often arises. 

However, for clients it is just as important to know what exactly they want to achieve with an integration. This is because companies themselves are often not yet aware of what the final process should look like and what goals are to be achieved with the integration. Likewise, questions about the duration of discovery to deployment or release periods can be used to estimate how suitable the solution is for the company. 

Through intensive exchange with customers, start-ups can learn which product ideas are desired or which further solution approaches are needed. These discussed topics can then be included in future roadmaps or be quickly built into the next development cycles. **One of the biggest advantages of start-ups is speed.**

## Finding the right solution 

Finally, there is the question of how companies can find the right solution to their problems among the more than 200 start-ups out there and get to know the founders and their approaches. There are many opportunities to meet new companies through webinars, market maps or networking.

However, events are the clear winner as the most popular recommendation. They offer the opportunity to get to know new solutions and start-ups in person and to educate yourself about problems you might not have considered before (e.g. [Consequences of maverick buying] (https://www.lhotse.de/en/blog/consequences-of-maverick-buying)). Event organisers often summarise the main procurement problems and the right start-ups which offer suitable solutions. 

**Psst… make sure to [follow Lhotse on LinkedIn] (https://www.linkedin.com/company/lhotse/mycompany/?viewAsMember=true) to stay up-to-date on our upcoming event appearances!**

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Digital Procurement Club: "New kids" in procurement

FUNKE Mediengruppe has the motto “Passion for journalism” and this is exactly what they are famously known for. Founded in 1948, FUNKE has a long history of leading the way with its now 1,500 journalists and 4,500 media makers, all of whom are sharing the same dedication and zest for news, media, and creativity. Looking to optimise their procurement processes, FUNKE partnered up with Lhotse (and has never looked back!).

## The story: Lhotse x FUNKE

We sat down with **Moritz Vogt**, Head of Digitalisation and Strategy in Procurement at FUNKE, to discuss the company's past, present, and future of procurement, and how partnering up with Lhotse helped them along the way.

Moritz is responsible for defining the procurement strategy and implementing innovative eProcurement technology for the whole FUNKE Group. His passion for working at FUNKE stems from being part of a media company, which is often at the forefront of many social and political issues. He also has the unique opportunity to build up a new and fresh digital landscape at FUNKE and to define and drive new procurement processes from scratch.

We wanted to find out what was the **biggest challenge FUNKE was facing** before starting to work with Lhotse.

Moritz shared a story we hear far too often: their procurement team was facing many obstacles, especially because of all the **manual work** buyers had to do. **Capacity shortages** only made the situation worse and led to bottlenecks. They didn’t use any automation at the time, which meant that buyers had to manually handle a lot of specific purchase requisitions without any clear process - this was simply a process step they had to do when using SAP and was accepted as “the norm”.

## The ‘aha’ moment

Moritz first heard of Lhotse at the Procurement Summit in 2019 when he spontaneously met two of our co-founders, Henning Hatje and Can Akin, who showed him the first version of the Lhotse app. After a demo, we launched a pilot project together and integrated Lhotse into FUNKE’s processes and systems. 

The results?

1. Time savings of 76% [1]
2. Up to 3x more supplier offers
3. Final offers with up to 20% lower prices [2] 

[1] Median of all submitted requisitions.
[2] Compared to the median of all offers collected.

## Working with Lhotse: start-up vs. enterprise

We were curious if anything was holding FUNKE back from starting a partnership with Lhotse - after all, many big enterprises prefer to work with other similar enterprises, not start-ups.

For Moritz, **working with a start-up was actually an advantage**, as it allowed them to be more flexible and have shorter implementation timelines, compared to other bigger companies. It also gave them access to an innovative product that was addressing issues that legacy procurement software could not solve at the time.

Moreover, it made it possible for FUNKE to **discuss ideas and brainstorm** directly with the creative people building the Lhotse app - something you rarely get to do when you are one client out of hundreds. For example, the Lhotse team traveled to Essen, Germany to have an in-person hackathon with FUNKE’s team of operative purchasers to discuss the challenges they were facing day-to-day, and to ideate and build a feature to solve those obstacles.

The result is the new Lhotse dash button (i.e. a browser plug-in for their procurement team that makes it even easier to create and fulfil requisitions), which Moritz mentioned to be his favourite feature of the app.

## Lhotse app - supercharging procurement

So what does working with Lhotse look like? 

FUNKE started a pilot with Lhotse in March 2020 and since then the app has been integrated in their internal processes and is successfully used on a daily basis today. 

> “The onboarding process with Lhotse was quick and easy, without the need for long lead times or complicated trainings.”

From a technical perspective, Moritz was quite impressed by Lhotse’s easy-to-use UI, which makes it simple even for regular business users (who are not procurement experts) to use the app, without the need for a training. 

Moritz shared that working with Lhotse gave their team access to the start-up culture, with its creative problem-solving and open communication.

## Top tips for new Lhotse customers

Moritz shared his top tips for new Lhotse customers - number one is **“think outside the box”!** Procurement is a very process-heavy industry, but just because something has been done the same way for a long time does not mean that there are no other better options out there.

Secondly, **“rely on the technology”**. Digitalisation and innovation are driven by technology in procurement, so explore different tools and functions to automate and remove bottlenecks. For example, Moritz was initially critical of automation, as he didn’t see a case that it could work at FUNKE. However, with Lhotse they managed to automate their whole requisition process for print materials. Instead of a person managing requisitions and manually looking for suppliers, now they have automated the whole workflow, thus freeing up their (already quite limited) capacity to focus on more complex projects. 

However, Moritz’s biggest advice is to: 

> “Take a deep breath of the amazing Lhotse culture and team spirit!”

For Moritz, collaborating with the Lhotse team brought a lot of positive change in their procurement department. A true partnership can only work when your values align, which is why when you are on the same wavelength, working together can feel like a breeze.

## What does the future look like for procurement?

Moritz believes that expectations of shorter delivery and lead times will rise rapidly. People are now used to the Amazon model and 24-hour deliveries in their personal lives, so why wouldn’t they expect the same at work? Companies need to find a way to combine fast delivery, lower costs, and good quality, but the old-school way to do so is no longer working. This is why, Moritz says, technology and new tools will disrupt the procurement industry, bringing up innovation of magnitude we haven’t witnessed before.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Partnering up with Lhotse: FUNKE’s Secret Procurement Weapon

Procurement as a field has changed drastically over the past few years. And unsurprisingly, so has the role of the Chief Procurement Officer. But how is this change affecting the industry and how can CPOs ensure they stay relevant? Read below to find out more…

## How has the role of a CPO changed over time

There are no two ways about it, the role of the Chief Procurement Officer (or Head of Procurement) today has evolved dramatically - they are no longer “just” the go-to persons for managing suppliers, contracts and orders. Today, a modern CPO often plays an integral role in determining the business strategy of an organization and brings a multilayered skill set and perspective to the table.

As Dr. Kathrin Thiesen, Head of Procurement at Düllberg Konzentra, notes:

> “The role of the CPO has changed significantly in recent years: the focus has shifted from pure cost savings as a KPI of the purchasing organisation to ensuring the availability of raw materials and services, minimising risks and building a resilient supply chain.”

Recent technological advances have made it mandatory for CPOs to learn and adapt, so that they can **spearhead innovation in their organisations**. eProcurement tools are a great example of this - they have enabled CPOs to handle and process huge amounts of data effectively, something that would have taken an immense amount of effort and time only a few years ago. AI, machine learning and big data analytics are just a few examples of new tools in the arsenal of the modern CPO, who wants to drive innovation. 

> “The CPO or Head of Procurement has changed from a mere owner of a back office function to a very proactive driver of efficiency and innovation. For a long time, the focus has been on product innovation only but people forget that there are so many external suppliers that can bring more to the table than just the one product you need.” - Nils Brauckmann, Procurement Lead at Personio

The pandemic, combined with supply chain disruptions, shortages and ever-increasing inflation rates, hasn’t skipped the procurement industry either. New digital solutions are more readily adopted, as the need for digital acceleration is becoming more urgent. Thus, **CPOs are playing a key role in the long-overdue digital transformation in their organisations.**

## What makes a good Chief Procurement Officer?

A CPO today has to wear many hats, but one thing raises a good CPO above the rest - an in-depth understanding of the business, the practical priorities of their organisation, and how it all ties together.

> “A good procurement leader will not only understand the numbers they are expected to deliver but also the business needs, and will be able to manage both things equally. Differentiating between nice-to-haves and realising when an opportunity will really pay off is a key element. Managing this together with all stakeholders makes a good CPO.” - Nils Brauckmann, Procurement Lead at Personio
 
Procurement leaders today have become **skilled strategists who are able to prioritise based on a deep understanding of the business environment they operate in and the up-and-coming procurement trends.** This skill can often be the differentiating factor that takes a CPO to the next level.

> “A good CPO can connect the dots, foster relationships and not only manage the bottom-line but also add to growth.” - Nils Brauckmann, Procurement Lead at Personio

Finally, CPOs today need to lead and guide their teams, even when times are tough. As Dr. Kathrin Thiesen, Head of Procurement at Düllberg Konzentra, puts it:

> “A good CPO is like a "captain on stormy seas": they keep an overview, set the direction and the goal, and motivate their "crew" even in difficult times.”

## How to stay relevant as a CPO

How can CPOs future-proof their careers and make sure that they stay relevant and ahead of the curb? The answer is simple:

> “Similarly to every other employee or function, by delivering and creating value. The big difference in procurement is that you have to learn to enjoy and foster the success of others. If other teams realise and appreciate the role you played in their success as opposed to you being just another hoop to jump through, you’ll have no problem staying relevant.” - Nils Brauckmann, Procurement Lead at Personio

**CPOs provide the biggest value as “connectors” and enablers **- they are in the very center of a complex interconnected network of suppliers, customers, employees and other stakeholders. In order to stay relevant, CPOs need to educate their organisation on the value that their department brings, as procurement is often considered “a black box” for many.

> “The CPO has the task of optimising the image of purchasing within the company by emphasising its value contribution and importance, following the motto 'do good and talk about it'.” - Dr. Kathrin Thiesen, Head of Procurement at Düllberg Konzentra

Another important factor is **adaptability and willingness to learn**. With the ever-changing makeup of the procurement industry, CPOs need to remain flexible and continue learning, e.g. to understand and apply new regulations such as the Supply Chain Act. Building on existing knowledge and expanding their skillset is often the competitive advantage many CPOs need to remain relevant.

## The future of the CPO role

The landscape of procurement is ever-changing and this will ultimately lead to an evolving future of the CPO role. While technology and innovation will equip procurement teams with the tools they need to be more efficient, procurement will continue to require human interaction for strategic decisions.

> “A lot of people think that the future of procurement is super technical and abstract. I both agree and disagree. We have a lot of power on our hands with all these tools on the market. At the end of the day, procurement is still a business that requires human relationships as much as anything else.” - Nils Brauckmann, Procurement Lead at Personio 

But what are some of the biggest trends we see affecting the future of the CPO role?

### Innovation and digital transformation 

The value chain has evolved from a linear process into an interconnected network of systems that is constantly being transformed. **Innovation and digitalisation are the driving forces of this transformation.**

> “The CPO of the future will be leading a team of data-driven project managers and will feel the pressure of constantly innovating to keep up with the mass of information coming in.” - Nils Brauckmann, Procurement Lead at Personio 

More and more CPOs are spearheading digitalization in their organisations by implementing innovative sourcing, planning and analytics procurement tools. They are also becoming the ones enabling other parts of the organization to drive change and disrupt the status quo by scaling up digital solutions.

### Sustainability 

Sustainability in the procurement field has become a crucial topic. More and more companies are addressing the environmental footprint and social impact of their supply chains, as a result of growing consumer expectations.

The result? **Sustainability in procurement is now re-classified as a strategic initiative** with a lot of visibility, both inside and outside of the organisation. The driver of this initiative is highly likely to be the CPO, who will merge responsibilities connected to the supply chain, procurement and sustainability into their role.

### Risk and crisis management

During the pandemic and the infamous periods of supply chain disruptions, many CPOs were in the center of risk management campaigns. They had to guide their organisations through a dynamic business and economic environment, and build a crisis-proof supply chain. This will likely continue to be the case in the future and **it will require CPOs to strengthen their organisation’s ability to be agile and resilient against unpredictable market conditions.**

> “The importance of the CPO will remain or even increase: the current global crises have to be well managed by Purchasing - only if this is successful, a company will survive. A good CPO and their team will tip the scales in the competition for raw materials and resources.” - Dr. Kathrin Thiesen, Head of Procurement at Düllberg Konzentra

In conclusion, the role of the Chief Procurement Officer has undoubtedly evolved and is now essential in corporate management. This trend will likely continue in the future, with growing strategic importance of the procurement team. CPOs who want to stay relevant and ahead of the curb need to prioritize digitalization and innovation, thus increasing their organizational capacity for agility in difficult times.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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Role of the Chief Procurement Officer: Essential in Corporate Management

Suppliers are often the backbone of a company, and although supplier onboarding is a tedious process, it's often crucial. However, most companies spend their energy on strategic suppliers and lack management of the non-strategic or tactical suppliers, including marketing, IT, and services. 

Although non-strategic suppliers represent only 20% of the procurement expenditure, they can be up to 80% of the supplier database – something called 'tail spend'. That's a big database with a lot of potential to work with. The main problem is: **onboarding non-strategic suppliers for a one-time purchase is just as time-consuming as onboarding strategic ones.** When left unmanaged, the time and effort put into onboarding them are wasted – and in the end, represent a large amount of data with dormant potential. 

Supply chain resilience is crucial to business health and growth. Managing a growing network can be a challenge, but this article will show you how supplier onboarding can prevent issues down the line, and how technology can leverage your existing supplier base to improve business relationships and save money. 

This article will also explore:

- What supplier onboarding is, 
- Why procurement teams should do it, 
- What are the biggest challenges,
- How to perform supplier onboarding in a few steps,
- And how to leverage your existing supplier database.

## What is the supplier onboarding process?

Supplier onboarding consists in registering a prospective supplier in a company's system. It's not simply purchasing goods and services, but sourcing them – which involves more complexity. Overall, supplier onboarding includes integrating the following:

- Data collection,
- Background checks,
- Risk assessments,
- Legal approvals,
- Sustainability compliance,
- Privacy compliance,
- Corporate social responsibility policies,
- Supply chain integration.

Supplier onboarding is specific to procurement teams, and can sometimes be overlooked in the company. Although there are many ways to improve this process, many companies are stuck with years-old processes and unidentified bottlenecks. 

## But why do companies have to onboard suppliers in the first place?

Supplier onboarding allows companies to conduct more efficient businesses, purchase goods and services, and organize supplier payments – not only in enterprises but in small and medium businesses as well. More than that, a structured onboarding process drives a more transparent supply chain – and will help your organisation to meet the legal requirements like the Supply Chain Act, since it can ensure the exclusion of unwanted suppliers and improve risk-based supplier selection.

In the light of these regulations, the task of onboarding new suppliers, owned by most procurement teams, will also gain greater importance in the future, as Dr. Elouise Epstein - futurist and a supply chain and procurement author, argues: 

> “The profession will be responsible for facilitating value creation with third parties. It will go from serving the business to being the business. Enterprise ESG goals will be owned by procurement, with CPOs adopting the mantle of Chief Sustainability Officers.” 

Mitigating risks, increasing efficiency, streamlining processes, and strengthening business relationships are only a few of the benefits that come from taking supplier onboarding to the next level. The more organised the onboarding, the more a company can benefit from their supplier relationship.

## 3 steps for the ideal supplier onboarding
If the benefits have piqued your interest, here are three crucial steps to start implementing a more optimized supplier onboarding: 

- Step 1: remove emails from the equation. During a typical onboarding, requests, orders, and permissions have been granted by email, and the process is unstructured. It can involve managers from different departments, including procurement and even legal and security teams.
- Step 2: centralise data collection. When a supplier is officially onboarded, they fill out different forms, such as general information details, main points of contact, and financial information. This might involve several stakeholders in the organisation, and information might be stored in different locations. 
- Step 3: minimise human error. Once the supplier submits the information, someone is responsible to ensure that the data is complete and must manually transfer the information into the company's Enterprise Resource Planning (ERP) system – a time-consuming, error-prone task. Once that's done, the supplier onboarding is complete.

Technology advancements can dramatically improve the process above. According to the Aberdeen report, The Value of Strategic Supplier Data Management, that was based on a survey of supply chain practitioners:

> “Supply Chain Leaders are over 30% more likely to have an efficient supplier data management process to accelerate supplier onboarding.” 

## Common challenges in supplier onboarding

OnboardingChallengesNot only supplier onboarding can be time-consuming, but a lot of **the processes can lack transparency** – creating information silos within the organisation. That means that employees are unable to see the bigger picture, and the onboarding process creates a snowball effect, generating: 

- Frustration for the team members dealing with suppliers, since they might lack an overall understanding of how the supplier fits the company or what the current status is,

- Twice as much work for the procurement team, since they might approach the supplier with a more strategic goal, renegotiating terms and prices,
- A lack of transparency and delays in the financial department, since they might process orders and invoices separately,
- Confusion for the supplier, who might end up talking to different people about the same topics over and over again.

With the current technical advancement, supplier onboarding can be smooth and additionally foster a good relationship with the supplier right from the start. It's entirely possible to streamline the workflow – and the supply chain – of the whole organisation, improving information exchange and even generating savings along the way. 

## How technology strengthens your supplier database (without extra onboarding) 

When non-strategic suppliers comprise around 80% of the total supplier base, there's a lot to work with. But when that large amount of data is left unmanaged, there's no exploring the true potential of your supplier database. 

A large part of non-strategic expenses are one-time purchases that require the same onboarding steps as long-term partnerships – a time-consuming process that might be left unmanaged in the end. Luckily, technology can change that: leveraging your existing supplier database with technology can simplify these complex manual processes, making information more transparent and accessible within organisations. It can also help to strengthen existing relationships with suppliers to built a more resilient supply chain: 

> “Suppliers are the critical component to building tomorrow’s supply chains. We need to treat them as partners instead of interchangeable commodities. As we learned during the pandemic, today’s commodity can quickly become tomorrow’s strategic advantage. All too often suppliers and their contributions are overlooked or undervalued.” Dr. Elouise Epstein, Partner at Kearney 

Plug-and-play solutions like Lhotse are fully automated, and use AI to provide procurement teams with intelligent supplier selection, saving teams precious time and supercharging non-strategic procurement execution. 

Here's how Lhotse's solution saves time on onboarding: 

- **Lhotse leverages your existing supplier base: **when up to 80% of all suppliers are non-strategic, most of the data is left unmanaged. We take your existing internal and external risk data to the next level, integrating it into a streamlined sourcing process. 
- **Lhotse covers ESG scenarios** by implementing relevant ESG data (e.g. EcoVadis scores) directly in the supplier identification process. Procurement teams get transparency about their suppliers and tendering processes, enriched with data and suggestions on sustainability, sanctions lists, and much more.
- **Lhotse ensure compliance with the Supply Chain Act** and other procurement policies by excluding unwanted suppliers using a risk-based supplier selection approach. Your existing data is now usable, regulatory data.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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## Work Cited:

Kearney. “2022 IS A TIPPING POINT FOR SUPPLIERS | INTERVIEW WITH DR. ELOUISE EPSTEIN.” Procurement Foundry, 28 Juni 2022, https://procurementfoundry.com. Accessed 30 Juni 2022.

Aberdeen Group. “The Value of Strategic Supplier Data Management.”

Kearney. “2022 IS A TIPPING POINT FOR SUPPLIERS | INTERVIEW WITH DR. ELOUISE EPSTEIN.” Procurement Foundry, 28 Juni 2022, https://procurementfoundry.com. Accessed 30 Juni 2022.

The Daunting Task of Supplier Onboarding: How to Fully Leverage Your Supplier Base

Welcome to the second part of the Lhotse’s series on the **German Supply Chain Act**. 

In the first article, we provided you with the most relevant information that procurement departments and other stakeholder need to be aware of when it comes to new regulation.
 
**Read the full article here**
 
In this article, we will go a step further and discuss one of the most important due diligence obligations of the Act - **Section 5 “The Risk Analysis”** - and its relevance for indirect procurement.

## Risk Analysis obligation: How does it apply to you?

Let's start with clarifying the difference between direct and indirect spend: 

- Strategic or Direct Spend: The spend that is directly associated with the product a customer is selling to their end customer. For example, a car manufacturer’s strategic spend would include the material costs incurred in building a car.
- Non-strategic or Indirect Spend: Non-strategic spend or indirect spend includes any purchase that supports the business without contributing to the manufacturing of the product itself. This includes HR costs, facility management, transportation costs, etc.

An ambiguity that often arises in connection with the risk analysis obligation is the distinction between strategic and non-strategic suppliers.

Do non-strategic suppliers need the same extent of diligence as strategic suppliers?

One might think that it would be sufficient to focus only on important strategic suppliers with high spend volume. However, **the Act makes no distinction in terms of applicability between strategic and non-strategic purchasing.** It states: 

> "All goods that an enterprise purchases to manufacture its products or provide its services are part of the supply chain and are therefore part of the risk analysis. This also applies to goods that enterprises purchase to ensure they continue to exist, but which are not directly incorporated into the final product.” 

This implies that goods and service that are not intended for resale, such as office supplies or software systems, are also covered by the law.

So does this mean, that every non-strategic supplier has to be analysed in detail? For some companies, that would mean investigating tens of thousands of suppliers.

## The key word is "Prioritisation"

When it comes to the risk analyses obligation, enterprises do not have to consider all risks in equal detail.

They should focus on the most important ones, i.e. prioritise them.

Whether risks need to be prioritised by the enterprise depends on the criteria of appropriateness, in particular on how serious the risks are seen to be and what the enterprise’s potential influence is on effectively countering these risks.

The goal of the whole process should be to sort out non-substantial suppliers where no significant risk could be identified and focus on the higher risk suppliers.

Thus, **indirect purchases still have to be considered when performing risk analyses**, but they can be analysed - under certain circumstances - with less effort. 

**Psst... do you want to stay up-to-date on all the latest procurement news and upcoming trends?**
 
## Understanding the Risk Analysis process

In practice, the Risk Analysis process could look something like this:

1. Starting with a list of all active suppliers, non-substantial (i.e. low risk) suppliers should be excluded based on the nature and extent of the enterprise business activities.

2. For instance, suppliers with no risks related to countries of origin, commodities or their business fields can be sorted out and no further analysis is required.

3. The substantial (i.e. high risk) suppliers must then be classified by their risks based on several conditions, including the severity and probability of violations and the degree of influence the company has over its suppliers.

4. In the absence of a comprehensive list of risk criteria, the question may arise whether suppliers below a certain annual spend level can be ignored.
The regulation prescribes that the analysis has to consider the risks for the affected people and not the risks for your company. For example, a small volume supplier may indicate low financial risks for your company, but can **still have a significant risk of negatively impacting people and the environment.**

Therefore, the risk analysis should not be based on expenditure volume as the only criterion, but should include several relevant risk indicators.

## Complying to the Supply Chain Act: Best Practices

To summarise, implementing the corporate due diligence obligations is an individual, ongoing process that must be regularly reviewed and improved. Most effort and focus will be on the risk assessment of important strategic suppliers. Nevertheless, non-strategic suppliers must at least briefly be evaluated in order to sort out non-substantial suppliers or identify potential at-risk suppliers where further assessment is required. 

Apart from the in-house risk analyses, enterprise can also use other external risk data, but should keep a few things in mind. For instance, a self-disclosure statement such as a written assurance signed by a supplier is not sufficient to fulfil the due diligence obligation with regard to that supplier. External sustainability ratings, on the other hand, can serve as evidence within the framework and can be used as important indications of the fulfilment of the due diligence obligations.

Hence, an **appropriate risk analysis and scoring should be a multistage process** and include a variety of risk assessment data such as:

- Internal supplier data,
- External supplier sustainability ratings, and
- Supplier self-assessments. 

## Lhotse makes your existing regulatory data useable

The **non-strategic supplier base** comprises around 8**0% of all suppliers** within most companies and it is, therefore, often unmanaged and not transparent.

Lhotse leverages your existing internal and external risk data and intelligently integrates it into a seamless sourcing processes. The exclusion of unwanted suppliers and a risk-based supplier selection approach ensures the compliance with the Supply Chain Act and other company-relevant procurement policies. 

In short, Lhotse offers a solution to **bring 100% of your tactical spend under management.**

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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## Bibliography 

Act on Corporate Due Diligence Obligations in Supply Chain of July 16 2021 (2021, July) https://www.csr-in-deutschland.de/SharedDocs/Downloads/EN/act-corporate-due-diligence-obligations-supply-chains.pdf?__blob=publicationFile 

CSR - FAQ. (2022, May 16). www.bmas.de. https://www.csr-in-deutschland.de/EN/Business-Human-Rights/Supply-Chain-Act/FAQ/faq.html;jsessionid=15B6B132CA4910618B88C4CE4990B11F.delivery1-replication

CSR - Implementation by enterprises. (2022). www.bmas.de. https://www.csr-in-deutschland.de/EN/Business-Human-Rights/Supply-Chain-Act/Implementation-by-enterprises/implementation-by-enterprises.html

Plug and Play Tech Center. (2022, March 24). Workshop: The German Supply Chain Act. YouTube. https://www.youtube.com/watch?v=-MYmplioRIk

Supply Chain Act: Don't Neglect the Non-Strategic Suppliers

We want to look back at our DPC “Risk & Crisis Management” and share our insights with you! Together with some interesting guests from the procurement space, we had the chance to discuss the topic of supply chain risk management in times of a crisis. Thanks to Gundula Ullah from **Funke Mediengruppe**, Sebastian Lücke from **E.ON** and Henning Hatje for leading this exciting debate. 

## Learn from previous crises

In times of an acute crisis, immediate actions need to be taken to keep business operations running and to minimise potential threats within the company’s supply chain. As a first step, the current situation and its implications on the operations have to be assessed. An emergency plan should then be developed in collaboration between management and departments. In such cases, a task force may be formed to facilitate fast communication and information exchange between top management and other relevant inside and outside stakeholders. Once an acute crisis has been brought under control, the crucial work only begins. A thorough analysis of the lessons learned should be directly implemented into a **preventive risk management strategy** in order to be better positioned for next crises. The relevance of preventive crisis management is indisputable when looking back at the last two years and should be prioritised at board level. 

## Preparation pays off in the long run

A proper risk strategy is a mixture of supplier management, project planning and execution and the right use of technology. Building a collaborative and sustainable relationship with key suppliers is essential to ensure a **resilient and stable supply chain**. For instance, fair **price negotiations** also in times of a buyer market will increase the chance that relevant suppliers will be available also in uncertain times. 

Setting up an overall risk strategy is a complex and time-consuming process across departments and management. Ideally, a company should initiate the process in a non-crisis phase and start with setting up a risk taxonomy across the company. Depending on the capacities and size of the company, it may be useful to hire external consultant teams working collaboratively with the compliance department to assess the risk in Operations, Finance, Tech and Procurement. It is only at the end of the process that one should think about **implementing digital solutions**, always with the question in mind of what to solve and why. 

## Technology can unlock additional strategic capacity 

Technology and human minds should complement each other. One can not replace the other. Digital tools can not solve the analytical and creative capabilities of a human mind. Especially an ad hoc crisis like the current one needs the knowledge of a procurement expert to conceptualise solutions and implement preventive measures. Technology should help in the sense that it takes operational and standardised work away from the procurement experts so that they can focus on the strategic issues. For instance, **AI can be used in areas such as data enhancement and management**, predictive analyses or in the form of procurement management tools. 

The business case for digital solutions should be clear for everyone!
Implementing and actually using digital procurement solutions is still a huge challenge for many organisations - especially for SMEs. After an acute crisis has ended, companies often fall back into old working habits instead of using the momentum to implement and leverage digital solutions along the procurement process. The providers of such solutions, in turn, should consider this when approaching customers by making sure that customers really understand the business case also in non-crisis times. 

## The perfect time to get started is now!

The number of supply chain disruptions in the past two years should be reason enough to get started right away and set risk management in motion. For many companies in Germany, a sustainable supply chain will soon become mandatory anyway. With the **Supply Chain Act**, which will be effective from 1 January 2023, companies are required to ensure human rights and environmental standards in their supply chains. The new regulation can be seen as an opportunity, as affected companies are now forced to act and can not push these tasks away for much longer. Setting up improved and transparent risk management mechanisms will be a competitive advantage, as those who have a better understanding of their suppliers also have a better data basis for their supply chain management.

**Wenn Sie mehr darüber erfahren möchten, wie Lhotse Ihnen helfen kann, Ihre Beschaffungsprozesse zu verbessern, buchen Sie noch heute eine Demo mit uns!** 

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Building a Crisis-Proof Supply Chain

We want to look back at the DPC 'From Buyer to AI-Enabled Buyer' and share our insights with you!

For now, we would like to thank Philipp Müller and Konstantin Hokamp from Signatrix for the expert presentation and all participants for the insightful discussion. It was again great fun to discuss highly relevant topics in procurement in a controversial way.

Since artificial intelligence is expected to become part of many purchasing processes in the medium term, the journey from buyer to AI-enabled buyer was discussed. In addition to possible use cases for purchasing and specifics of AI procurement, the limitations that buyers encounter in AI projects were explained in particular.

We take away the following lessons learned from the event.

## AI is already finding diverse applications in the ordering process optimisation. 

In general, AI can be used where repetitive tasks occur. Examples in ordering process optimisation are the definition of requirements or the supplier search. Based on historical data from the company, or from external public databases, an AI application can make suggestions and support the buyer in his decision. Consequently, the speed and quality of the procurement process is increased. This is reflected in cost and time savings.

In the long term, AI should also be able to make forecasts on price developments or supply chain risks. At the moment, however, this is still hindered by the difficulty of collecting the relevant data.

## AI combines elements of a software & service capability that need to be considered in the procurement process 

AI is far more than just software. At the heart of an AI application is a set of trained data models. For example, they interpret images, transcribe voice recordings, or perform other complex tasks. Maintaining/training these data sets is costly and results in AI being a combination of a service and software.
The success of an AI application is therefore based on the one hand on the data models but also on the competence of the partner. Consequently, data quality and quantity is absolutely critical. However, it is problematic that data in companies is often disorganised, difficult to access and non-transparent. Furthermore, most AI projects fail due to a lack of communication in the initial phase. An ideal partner should therefore have clearly articulated expectations, talk about implementation issues from the start, and make pragmatic decisions. 

## An insight into the testimonials from our participants AI combines elements of a software & service capability that need to be considered in the procurement process 

There is a lack of clarity around the term AI. For example, buyers are not always sure which concepts fall under AI and which do not. Finding a universally valid definition for AI is difficult. This problem derives, among other things, from the fact that the concept of intelligence is not clearly defined. In the discussion, Optical Character Recognition (OCR) fell as an example. Here it can be argued that OCR is only pure text recognition, while AI would be able to draw insights from the text. However, analogous to this example, there are many other cases where the boundaries of AI are not clearly formulated. The lack of conceptual ambiguity logically complicates the acquisition of AI.

Furthermore, the problem of data availability, already mentioned in the presentation, was confirmed in the open discussion. For many companies, this is the biggest hurdle to implementing AI solutions. It requires data backup systems in which data is backed up dynamically, can be restored at short notice and, above all, is always available. Again, this also means that data security standards have to be adapted. It can therefore already be deduced that establishing a high-performance data infrastructure is very resource-intensive. However, data availability is not only essential for AI, but in general also for future competitiveness.

Lastly, the scoping of AI projects was critically examined. Often, from the beginning, too high expectations are created for AI. Misleading statements lead to disappointing results and negative attitudes towards AI. Here, AI companies are also responsible for making statements that are too high when marketing their solutions. But the conceptual ambiguity of AI also plays a role, and prevents buyers from intervening early in the scoping process and from raising expectations too high.

We're excited to see how AI will evolve in companies (and especially procurement).

If you missed the DPC, and have questions or comments about the journey from buyer to AI-enabled buyer, we're always happy to exchange ideas! And also, if you have any exciting purchasing topics that the DPC should definitely discuss, feel free to contact us anytime!

**Don't miss the next webinar. The DPC team is already working on the next event!***

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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The Journey From Buyer to AI-Enabled Buyer

## The clock is ticking for a legally compliant supply chain 

It is no secret that environmental, social and governance (ESG) issues are a top priority for many procurement departments and executives globally. According to the 2021 Deloitte Global CPO Survey, the importance of Corporate Social Responsibility (CSR) saw the largest rise compared to other topics, within the last two years. This underlines the decisive role of procurement in shaping an organisation's ESG footprint. Despite regular discussions at the board level and a prevailing general understanding of the importance of this issue, ESG compliance is still a voluntary measure and most companies struggle to turn this into a clear vision or strategy. In Germany, this will change with the introduction of the Supply Chain Act that will apply from 2023 onwards. The German law also serves as a template for a draft law for Europe-wide supply chain regulation, which the EU Commission plans to present soon. 

This is an urgent topic for procurement departments as they have just under 9 months left to cope with the extensive requirements and to create a legally compliant supply chain.

In this article, we will provide you with the most significant information that procurement departments need to be aware of!

## Who is affected? 

The Supply Chain Act (SCA) was passed in June 2021 and will be effective from **1 January 2023**. It applies to all companies that have their central administration, headquarters, or registered offices in Germany and employ at least 3,000 employees. Starting 2024, the threshold will be lowered to 1,000 employees for both German and foreign companies, which is expected to increase the number of companies subject to the Act from around 700 in 2023 to 2,900 in 2024. 

The Act imposes, for the first time, a binding obligation on these companies to establish, implement and update due diligence procedures to **improve compliance** with specified core human rights and environmental standards in their **supply chains**.

The German Federal Office of Economics and Export Control (Bafa) will monitor compliance with the due diligence obligations and impose sanctions in the event of violations. Administrative penalties and fines can be imposed, ranging **up to EUR 8 million** for companies with annual sales of less than EUR 400 million. For higher sales, a fine of up to two percent of annual sales may be imposed. Above a certain amount, a company can additionally be excluded from public tenders for three years. 

## How should companies prepare now? 

Companies that operate globally and have complex supply chains are particularly affected, such as companies from the pharmaceutical and chemical industries, but also automotive manufacturers and technology groups. The requirements apply to their own business operations (i.e., all subsidiaries and affiliates) as well as to their direct suppliers. In this case, the respect for human rights and the corresponding control mechanisms must be contractually guaranteed and defined. Companies are also obliged to conduct a risk analysis at least once a year and offer development and training programs. 

For indirect suppliers, the due diligence requirements are only monitored passively. However, if a company becomes aware of a possible violation at an indirect supplier, it must immediately conduct a risk analysis, implement a concept for minimization and avoidance, and establish appropriate preventive measures.

Scroll down for a brief overview of the individual obligations. 

## Supply Chain Act - Obligation or opportunity?

The urgency to act is obvious and companies should have already started focusing on implementing new procedures. However, the corona crisis has left many struggling with supply chain bottlenecks. They have pushed aside future obligations and are afraid of confronting suppliers with new compliance requirements. Apart from the current market environment, companies affected by the Act are also facing capacity constraints. Setting up a risk management system to determine which suppliers may be at risk of violation is a complex and time-consuming process, especially when the number of suppliers is in the hundreds of thousands. CPOs are now urged to look closely at the quality of their current risk management systems and identify weaknesses within their processes.

Although procurement executives consistently rate risk management as a top priority, many leaders are simply not aware of all the end-to-end supply chain risks. Setting Up appropriate systems still remains a challenge. A survey by Deloitte conducted in 2021 indicates that around 70% of CPOs believed that they had good visibility of the risk that existed in their direct suppliers. Yet, only 26% of the respondents were able to confidently predict risk within their supply chain and only 15% had visibility into indirect suppliers or beyond. 

Despite all the challenges, the new regulations can also be seen as an opportunity. Companies are now forced to act and can not push these tasks away for much longer. Setting up improved and **transparent risk management mechanisms** will be a **competitive advantage** as those who have a better understanding of their suppliers also have a better data basis for their supply chain management. In that sense, the Act not only entails an accumulation of obligations but can become a driver for the optimisation of a company’s entire supplier network. 

## Lhotse sheds light on your tactical procurement processes

Across firms of all sizes, the focus lies on the strategic spend. What is often overlooked is the tactical spend, although it comprises around 80% of all suppliers and purchasing orders within most companies. As a consequence, the majority of a company’s supplier base is often unmanaged and opaque. Against the backdrop of the Supply Chain Act, it is therefore all the more important to have a transparent overview of your indirect suppliers as well.

We at Lhotse offer a simple execution platform for tactical procurement. Our solution can help you to shed light on your company’s indirect spend and make compliant sourcing easy and intuitive. Lhotse consolidates your non-strategic suppliers and de-risks your supplier base. Regulatory data is integrated directly into the sourcing process to ensure compliance with company-relevant procurement policies, such as the Supply Chain Act. 

In short, Lhotse offers a simple solution to bring 100% of your tactical spend under management.

**If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!** 

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The Supply Chain Act Will Push Your Company’s ESG Standards

When procurement departments make strategic decisions related to tactical spend, there is often still lots of room for modernisation and improvement. There is no doubt that the talent in charge of procurement is skilled and proficient. However, in many cases, the way in which supplier networks are built leads to unoptimised processes.

## Maverick Spend

About 80% of suppliers interact with the tactical spend, which are expenditures not directly tied to the goods/services sold by the company. Consequently, strategic spend expenditures directly related to the goods services sold, account for only 20% of overall supplier transactions. Nevertheless, only a limited set of resources are devoted to optimising tactical expenditure. Following are the two main reasons.

Firstly, suppliers are loosely scattered across the market. In the Business Continuity Institute’s 2017 report on global supply chain resilience, 69% of respondents said they do not have full visibility of their supply chains. Secondly, a vast majority of pricing offers are not even included in supplier choice. Also, maverick spend (a form of spending that doesn’t follow the pre-established company buying strategy) is regularly unavoidable. The unfocused, murky image of supply, inevitably leads to market inefficiencies that drive up the price of company purchases.

## The status quo 

In firms today, maverick spending is widely known to be an expensive lack of oversight, that leaves management with a losing lottery ticket. Why? Because employees invest too much time and effort into building preferential agreements as well as long-standing relationships with suppliers to drive down the price. Creating long-lasting connections built on trust and loyalty is one of the cornerstones of good business practice. However, it is crucial to precisely evaluate the cost and return on time invested.

On one hand, the FTE (full-time equivalent) of procurement employees to tactical spend projects is either immensely high (as a result of the time invested into building long-standing and labour intensive supplier relationships), or FTE is negligibly low, owing to the fact that indirect spend is handled in the business units of the business without even ever reaching procurement. On the other hand, suppliers effectively utilise their customers' goodwill to build oligopolies in a market that is actually capable of providing many more options. Preferential pricing agreements are great, but they are often not diversified or mobile. “World-class procurement organisations now operate at 21 percent lower labour costs than peers, and have 29 percent less staff, according to new world-class performance advantage research from The Hackett Group, Inc.”. But “procurement is now at an inflection point [...] both world-class and typical procurement organisations will need to turn to digital transformation to ensure that they can continue to reduce costs and add value.”

## Ideal world 

In the hypothetical ideal, every firm's catalogue of suppliers is equally rich in quantity as in quality. Supplier choice would be plentiful and the selection of offers easily digestible, there would be transparent data on pricing and logistics. Relationships would be personal, completely reliable and trustworthy with frictionless integration of the entire requisition communication process. 

But of course, this is not the reality. In practice, major innovations are yet to be implemented. This leads to various forms of information asymmetry that keep prices high. According to research done by Anvyl, small and medium businesses could reduce their shipping costs by almost 30% if they were not forced to make costly last-minute shipments due to foreseeable and preventable delays.

## Dynamic solutions for a dynamic market

A vast majority of companies today are investing in more interactive supplier relationships to “improve resilience and agility”, according to Gartner's "Future of Supply Chain: Crisis Shapes the Profession''. Furthermore, companies view diversifying their supply base as a critical strategy necessary in order to ” establish more business resilience”. 63% and 23% of companies, respectively, plan on investing into these areas within the next two years.

With the current digitisation wave, it is crucial for companies to be quick on their feet, shareholders and managers expect this. They should be able to make short-term decisions tied to a few suppliers, while at the same time being able to choose between hundreds in no time

What if, instead of investing time and money into building just a few, labour intensive supplier relationships, a centralised platform was the answer? Instead of scouting the whole market for friendly prices, it is now possible to enter a plaza full of vendors with whom Lhotse is establishing relationships.

We invest the time and energy into procurement software that most small and medium-sized enterprises just don’t have. We have developed data-fuelled algorithms, catering to the D-A-CHian supplier market. We have established an excellently engineered bridge between requisition and offer inputs, with all transactions and communication being facilitated on the platform. Diversification, nimbleness and lower prices are assured. Currently, we are developing a smart supplier scoring system, it is one of our most anticipated features and will bring transparency and reliability.  We are reshaping the procurement landscape of SMEs.

**Don't miss the opportunity to get a free consultation with one of our experts! **

The Decentralised Nature of Supplier Relationships, and Why it Matters

Maverick buying is non-compliant behaviour by employees who do not follow the company's official purchasing processes and contracts. This article is the last in a series on why maverick buying is costly to companies and how to stop it.

Maverick buying is non-compliant purchasing

This article discusses several solutions that can prevent maverick buying. Check out the first and second article of the series to learn about 5 different forms of maverick buying and what their consequences are.

**Article 3/3**

## How to stop maverick buying

There are many approaches to preventing maverick buying, each tailored to a specific form of it. This will be discussed below. First, however, there is one general approach that can stop maverick buying. The most recognised solution is the implementation of a digital procurement system. Researchers agree that a functioning digital procurement system not only leads to less maverick buying and more transparency in spending, but also brings significant savings.

**Maverick buying can be eliminated by providing end users with a highly efficient and user-friendly digital procurement system that frees them from old buying habits**

Satisfaction with the procurement solution is critical. Buyers within companies will be hesitant to use the solution if it is not easy to use. Employee satisfaction should be a priority when implementing a digital procurement solution.

## How Lhotse stops maverick buying

The success of a solution is ultimately determined by the users of the software. Everyone needs to be able to use the solution immediately, whether or not they are procurement specialists.

Lhotse is an intuitive SaaS platform that automates and simplifies procurement journeys, intelligently guiding employees from request to supplier identification, coordination, and offer selection. One of the highlights of Lhotse is an intuitive and simple user experience.

**Improve Convenience. Reduce Maverick Spend.**

This is necessary for the solution to be embraced by its users. Lhotse is a solution that users love. Most employees are accustomed to smooth user experiences at the B2C level, they often struggle with B2B software. This is not the case with Lhotse. Lhotse levels up the B2B buying experience to a B2C experience. This is a solid basis for eliminating non-compliant buying. Building on this, every form of maverick buying must be approached differently.

### 1: Solving unintentional Maverick Buying

This form of maverick buying is the easiest to resolve. The employee simply does not know the procedures and has no intention of harming the company. First, companies must create simple purchasing procedures. They should be quick to understand and easy to remember. It is also important to communicate these process flows. They should be part of the onboarding process for new employees and internal employee training. Assigning responsibilities also helps provide clarity. For example, one person could be responsible for overseeing purchasing in the business unit.

Lhotse does not require extensive communication or a change in management structure. It provides easy access to purchasing and is simple to use. Once employees are onboarded to Lhotse, this form of maverick buying is no longer an issue.

### 2: Solving forced Maverick Buying

The only way to solve forced maverick buying is to empower the business user by providing them with a user-friendly platform that guides them through the procurement process. If no product or service is predefined, then the business user can create a free text request specifying exactly what they want.

One advantage of Lhotse is that business users are given different rights depending on their department and seniority. That way, if a business unit needs to make an emergency purchase, they can easily do so. Also, different business units can be automatically paired with the appropriate procurement experts.

### 3: Solving casual Maverick Buying

The casual buyer is aware of the formal purchasing process but continues to purchase according to their preferred process. Their behaviour is driven by self-interest, laziness to change, and a lack of organisational incentives.

This type of malpractice is characterised by egoistic employee behaviour. To solve this form of maverick buying, companies simply need to create processes that benefit solely the company. Nowadays, this is easier said than done because of complex procurement suites and processes.

In contrast to complexity, Lhotse brings clarity to the purchasing process. Lhotse has one central search engine that can search all relevant catalogues, historic purchases and more. Lhotse takes away all of the tedious steps that do not require human judgement, for example identifying and approaching suppliers. With Lhotse, the buyer can use previous requisitions as a template and quickly contact preferred suppliers.

Minimal change in management is required to solve for this form of maverick buying. Once the buyer realises that Lhotse is the most convenient and simplest option, casual maverick buyers will make the switch.

### 4: Solving well-intentioned Maverick Buying

Well-intentioned employees are aware of existing contracts and official procedures but ignore them because he or she believes it is in the best interest of the company. The employees believe that they will find a better offer. This form can be difficult to solve. Insight into the total cost of ownership can greatly improve this behaviour.

One way to avoid the well-intentioned maverick buyer is to lead the buyer directly to preferred suppliers lists, such as through catalogues accessible through Lhotse's central search. Further, Lhotse improves the comparability of alternative offers by presenting each offer in a simple and most intuitive way. This allows for easy comparison of offers and can avoid unwanted consequences such as late deliveries or other surprising factors.

Lhotse does not replace talented procurement teams, instead it augments their capabilities to execute more efficiently and conveniently. Thereby maximising business impact while minimising manual effort. Moreover, Lhotse makes it easy to collaborate among users and departments.

These factors help the procurement team gain credibility within the organisation and build stronger relationships between procurement and business users. This, in turn, helps dispel business user’s misconceptions.

### 5: Solving ill-intentioned Maverick Buying

This form of maverick buying is the most difficult to resolve. The buyer is aware of official procedures but ignores them out of self-interest and resistance to change. Changing the buyer's mind requires a significant amount of change management, and even that is no guarantee for improvement.

To solve this form of maverick buying, Lhotse takes a similar approach to the casual maverick buyer. Much of the “resistance to change” is due to undesirable procedures and complex processes. The driving force of the ill-intentioned maverick buyer is opportunism and self-interest. An easy-to-use and highly efficient platform can lure buyers away from bad habits.

**Are you experiencing maverick buying as well?

You can book a consultation and get a free assessment of the issues and possible solutions.**
 
Here are the **key findings** from the entire series:

(1) There are five different forms of maverick buying. Each form has its own incentives and motives for ignoring the formal processes.

(2) Maverick buying leads to higher procurement and process costs, as well as a loss of control over spending and suppliers. In addition, maverick buying makes it more difficult to achieve ESG goals and poses a major risk to companies in terms of legal standards.

(3) Maverick buying can be solved by offering end users a highly efficient and easy-to-use digital procurement system. The customer satisfaction is critical, and the software should be on a B2C customer experience level.

(4) To finally eliminate maverick buying, each form must be addressed individually. It is not possible to solve the “forced maverick buyer” and the “ill-intentioned maverick buyer” using the same method.

6 Tips to Stop Maverick Buying

Many organisations are faced with an unexpected drain on their resources. Often this is the result of maverick buying. This takes money away from the company, and it can be difficult to stop because it is spread across so many employees. This article is the second in a series on why maverick buying is a problem and how companies can stop it.

**Article 2/3**

## What is maverick buying?

Maverick buying is non-compliant behaviour by employees who do not follow the company's official purchasing processes and contracts. 

**Maverick buying is non-compliant purchasing**

But what are the various consequences of maverick buying and why should it be avoided? Continue reading to find out more...

## Financial cost of maverick buying

A serious consequence of maverick buying is the additional financial cost. Additional costs come from an increase in actual purchasing costs as well as an increase in process costs. These are mostly downstream costs that arise from additional manual work such as registering new suppliers and managing the growing number of suppliers. Not only are there more purchasing costs, but there is also less purchasing leverage, which brings us directly to the next consequence.

## Procurement loses control

The second result of maverick buying is that the procurement team loses control over the procurement process and the supplier base. Excessive fragmentation of processes and suppliers leads to a lack of transparency and a lack of visibility into procurement spend. Visibility into processes, suppliers and spend is critical to optimising a company's procurement.

## No expertise, no excellence

Another consequence of maverick buying is that the buyers lack the negotiating skills and experience of a procurement expert. This often results in poor product quality, late deliveries and claims for damages due to breach of contract.

## A threat to ESG goals

Maverick buying is also a major barrier to achieving ESG goals, this is because it contributes to lack of control over the procurement process. In addition, maverick buying can also damage the image of the entire company. This happens when maverick buyers purchase from suppliers that do not meet ESG criteria or are involved in scandals.

## Maverick buying and legal issues

Other problems associated with maverick buying include legal and compliance issues. For example, the disclosure of confidential information to external parties is a risk. Also, corruption is linked to ill-intentioned maverick buyers.

## How to stop maverick buying

While there are many tailored approaches that mitigate the different types of maverick buying, there is also a general approach that can stop maverick buying. These solutions and approaches will be discussed in our next article.

**Are you experiencing maverick buying as well?

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Consequences of Maverick Buying

Many organisations are faced with an unexpected drain on their resources. Often this is the result of maverick buying. This takes money away from the company, and it can be difficult to stop because it is spread across so many employees. This article is the second in a series on why maverick buying is a problem and how companies can stop it.

**Article 1/3**

The first article of the series discusses all 5 forms of maverick buying, each of them have different reasons and causes. To stop maverick buying, we need to understand the different motives for non-compliance.

# Where is maverick buying particularly relevant?

Maverick buying is often caused by maintenance, repair and operations as well as office supplies, hotel contracts, travel, printing, IT hardware and software. In general, maverick buying occurs mainly with indirect products and services. In most organisations, indirect products and services account for up to 80% of purchase transactions and up to 40% of total spending. Consequently, deviating purchasing behaviour with small losses on each transaction can add up to an impressive figure. In other words, the savings potential is enormous.

According to Aberdeen Strategy & Research, the pharmaceutical company GSK loses between $80 and $120 million annually from non-regulatory purchases. This represents approximately 20-30% of unrealised cost savings. Aberdeen estimates that across all industries, the average savings from compliant purchases is 22% compared to non-compliant purchases.

# 5 forms of maverick buying

Researchers have identified 5 different types of maverick buying. All maverick buying across organisations can be traced back to them.

Each cause of maverick buying must be approached differently. It is not possible to stop maverick buying without addressing its root causes. Each form of maverick buying mitigation strategy. Therefore, maverick buying can only be countered with tailored concepts. There is also a general solution, which will be discussed further below.

## 1: Unintentional Maverick Buying

Unintentional maverick buying occurs when the employee is not aware of official sourcing processes. The employee is not an expert and has not been adequately trained. Because there is no negative intention, this form of maverick buying is the most desirable, it is easiest to resolve.

## 2: Forced Maverick Buying

Employees are often forced to bypass official procedures. There are several reasons for this. One cause could be that products or services have not yet been defined by the procurement team and are therefore not available through official processes. Another reason could be that the production function needs to make an emergency purchase outside of the procurement department’s business hours. In cases like this it makes logical sense to not have the production line waiting all night for the procurement team to buy the appropriate piece at 8am. In this case, the maverick buying is forced. Similarly, this form of maverick buying has no intention of harming the company, it is rather a sign of lacking flexibility in purchasing systems.

## 3: Casual Maverick Buying

A casual maverick buyer is an employee who intentionally does not follow the official purchasing process. Possible reasons are convenience and reluctance to adapt to new processes. The employee’s behaviour is driven by his or her own interests and habits. The employee is aware that he or she is breaking official rules. However, a lack of transparency in the procurement process allows for this sort of behaviour. The maverick purchases are often simply not noticed.

## 4: Well-intentioned Maverick Buying

This employee is aware of existing contracts and official procedures but ignores them because he or she believes it is in the best interest of the company. The employee believes that they will find a better offer, this can have two causes: perceived superiority of an alternative and perceived superiority of their own purchasing expertise. In most cases, a lack of insight and knowledge about total cost of ownership leads to this sort of behaviour. Well intentioned buyers aren't trying to hurt the company, on the contrary, they believe that they are helping the company.
 
## 5: Ill-intentioned Maverick Buying

This form of maverick buying occurs when the buyer is aware of and could use preferred contracts, but deliberately does not. The reasons for this can be opportunism and resistance to change. The introduction of centralised procurement teams in recent decades has left some employees with the feeling of being treated unfairly and having their power curtailed. The purchaser knows that he or she is breaking the company rules with his or her behaviour. The difference to the casual maverick buyer, is that the ill-intentioned buyer has the intention of causing harm.

# Consequences of maverick buying

There are many consequences that arise from maverick buying, these will be discussed in the next article.

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5 Types of Maverick Spend

Robust supply chains are the backbone of today’s value chains. Most recently, the COVID-19 pandemic and the Suez Canal obstruction exposed the business risk of supply chain disruption. Those events regularly turn the spotlight on supply chain diversification. However, this neglects supplier consolidation strategies. It is important to balance both strategies. They are not mutually exclusive, and both depend on a meaningful data foundation.

# Consolidation vs. Diversification

The main motivation for supplier consolidation is cost savings. Supplier consolidation facilitates closer, longer-lasting supplier relationships. This results in fewer mismatches between suppliers and customers. Furthermore, larger requirements and closer relationships increase customer’s bargaining power, resulting in cost savings for them. Also, having to manage fewer supplier relations decreases transaction costs and, ultimately, contributes to cost savings. However, supplier consolidation carries risks. For instance, always engaging the same suppliers can reduce innovation potential. Furthermore, the risk for supply chain disruptions might increase in spite of better supplier relationships. This is because supplier consolidation reduces the number of alternative suppliers in case of unexpected events.

Thus, risk mitigation is one of the central arguments to pursue supplier diversification. A broader supplier base allows companies to respond more quickly to external supply chain risks and changing consumer demands. Besides that, a broader supplier base generally means more competitive prices and more innovation. However, managing many supplier relationships is not only time-consuming and expensive but also introduces specific risks, such as inconsistent supply quality standards. If quality standards vary across suppliers while the purchased goods/services are essential to value creation, efficient supplier diversification can be highly complex if not impossible.

# Complementary strategies- depending on a strong data foundation

Comparing supplier consolidation and diversification strategies, one might think they are mutually exclusive. However, both usually coexist in resilient and performant supply chains. Whether to consolidate or diversify always depends on the individual context of a sourcing case.![blog-00.jpeg](https://media.graphassets.com/RGuCFUUsSRGO7hKm3JYo)

For instance, diversification is often advantageous for strategic procurement. In particular, if the procured goods are essential for value creation, and expected quality standards are able to be met without much involvement from procurement teams or the functional departments. In this case, risk mitigation should be a priority.

For most tail spend processes, however, consolidation is preferable. Since procured goods are strategically less relevant, the risks of failures along the supply chain are weighted less strongly. At the same time, significant cost savings are achievable through process automation, optimised supplier selection, and bundling, e.g. Taking all factors into account, those make a case for supplier consolidation in tail spend.

Eventually, the strategy should adapt depending on the different requirements of each sourcing case. Both consolidating and diversifying, however, are time- and research-intense. Procurement teams have to gather relevant data about existing suppliers and potentially identify alternatives. Unfortunately, quick, and effortless access to that data is lacking in many companies. Truly resilient and performant supply chain management requires the right data at the right time integrated into procurement processes.

# Lhotse sheds light on your procurement processes

This is exactly where Lhotse can contribute. Lhotse empowers buyers by seamlessly injecting intelligence and analytics into procurement processes. Leveraging companies' supplier data and purchase data, enables buyers to gain unparalleled visibility into their supplier base. Beyond that, Lhotse supplements supplier information with external data to always offer the full range of alternatives at the user’s fingertips. This not only facilitates requisition bundling but also eliminates supplier redundancies. Additionally, Lhotse provides you with the best and most relevant supplier suggestions for each requisition.

In short, Lhotse offers a simple solution to bring your procurement execution to the next level.

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The Tightrope Walk: Balancing Supplier Consolidation and Diversification

Efficient sourcing has long been one of the automobile industry's biggest levers in attaining profitability. Competition among suppliers is fierce because price pressure directly finds its way to all parts of the supply base. It is difficult for both OEMs as well as suppliers to carve out a profitable corner. The following will give an overview of the procurement function in automotive companies and how their relationships with suppliers are evolving.

# Understanding the Landscape

Currently, OEMs face many hurdles in securing an efficient supply chain and procurement process. Among other factors, they have to deal with the increasing complexity of builds, new entrants to the marketplace, supplier and market complexities, and global component shortages. Furthermore, consumer demand and next-generation technology are not only forcing billions in research and development spend, but it is also leading to a massive change in carmakers' priorities. According to Roland Berger, the biggest drivers of disruption in today’s automobile industry are new types of mobility, autonomous driving, digitalization, and electrification. Following are some of the most critical developing procurement focuses.

# Building supplier-manufacturer goodwill

It is becoming increasingly important for automobile companies to foster closer relationships and integration with component suppliers. All OEMs have realised the importance of a trustworthy supplier relationship, it is however extremely difficult and time-intensive to implement one. Research shows that good relationships with suppliers lead to faster development processes, quality improvement, and reduced costs, year over year.

For instance, a 2003 OEM benchmark survey, used to gauge supplier-manufacturer relationships, found a significant advantage in close relationships. The company’s Honda and Toyota were far at the top of the list. Specifically, they value open communication, are more trustworthy, and care more about the profitability of suppliers. Instead of bullying their suppliers, they aim to act as a “parent” in raising production standards and showing them how to best integrate. The goodwill and close long-term relationships pay off by a variety of metrics. For instance, Toyota and Honda take just 12–18 months to design new cars while their American counterparts take an average of 24–36 months. Furthermore, close integration reduced production costs of key models such as the Camry and Accord by 25%.

# Why integration is increasingly important

In the past, many components that manufacturers needed were commodities. It was possible to switch suppliers in the medium term if needed. However, this practice is becoming increasingly difficult. Self-driving technology and other tech features require exhaustive and detailed planning. In many cases, suppliers are the ones who are innovating the tech that make it all possible. Suppliers are inclined to sell their technology to OEMs who treat them fairly.

# Diversification

While companies have typically worked with just a limited number of suppliers to achieve optimal quantities of scale and scope, they are now seeking to diversify the number of suppliers producing the same product. This mitigates supply chain failures and provides new avenues for expansion. For instance, it is possible to more easily change supply numbers in case of changing market conditions. This change is also happening on the supplier side of the equation. In the past decades and even now, suppliers have typically had a very high revenue concentration coming from a limited number of OEMs. They are gradually shifting away from this practice in order to eliminate risk.

# Leveraging Data in combination with best practices

Digitalisation is leading to new aged sourcing technology, advanced negotiation models, and data-backed decision making. This in turn streamlines the sourcing process, completely changes the workflows of employees, identifies best practices, and identifies cost optimisation potential. The knockdown effect has the potential to lead to greatly increased profitability as well as smoother workflows and results.

# Tomorrow's procurement function

These three priorities show that the procurement function is significantly changing. Technology is driving procurement departments out of their comfort zones. There has always been close collaboration between all parts of the design and manufacturing process, which includes procurement. However, the advancement of technology has significantly increased the value that excellent sourcing can bring to the table. Technological advances and new tools fundamentally change procurement’s ability to impact companies’ bottom lines and business trajectories. Companies that do not embrace the change, will find it increasingly difficult to compete in the future digital playing field.

# Sources

[1]Knapp, O., Dressler, N., & Marlinghaus, S. (2019, September 11). Automotive procurement has reached an endgame. Roland Berger.

[2]Building Deep Supplier Relationships. (2014, August 1). Harvard Business Review.

[3]Nehra, R. (2018, November 23). 5 Key Trends in Automotive Sourcing. Infosys BPM.

[4]Gifford, D. (2019, August 21). Why OEM-Supplier Relationships Need to Evolve. WardsAuto.

Tomorrow's Automotive Sourcing

Almost all organisations have realised the importance of a good strategic spend strategy. Therefore, procurement departments rightfully focus on optimising them. Nobody disregards the key role that Strategic spend has on stakeholder interests, however, companies have yet to realise the untapped potential that tactical procurement optimisation offers. The reason for the deprioritization of tactical spend varies, yet its neglect is ubiquitous.

# Deprioritization where there exists massive potential

Indirect spend (of which tactical spend is a part) has been growing globally by an average of 7% yearly since 2011 [1]. This explosive growth coupled with massive leaps in digitalisation could produce department overreaching savings. However, balance sheets show no such leaps. According to McKinsey, it is difficult to pinpoint the exact reasons for this inefficiency; however, three major ones come up [1]. The fragmentation of spend across business units, locations and categories make company-wide inefficiencies difficult to identify and realize. Furthermore, the lack of influence that indirect procurement leaders possess, inhibits them from accessing the right talent and technology. Finally, most companies lack the proper mechanisms to monitor and identify the effects of tactical savings on financial statements. All potential solutions to tactical spend, must not neglect these three core barriers. Digital transformation offers a way out. Through the successful integration of tactical procurement tools, firms can work around these barriers to achieve a tangible and direct impact on the bottom line and other stakeholder objectives.

# An objectively undeniable reality

Similar to how the procurement function has developed from a clerical order taking role, to one that requires top talent, procurement tools are evolving from analog to automated. Even though 76% of CPOs report making digital transformation a top priority [3], just 22% of purchasing departments report making optimal and sustained use of digital solutions [2]. Attitudes are however changing, as evidenced by the fact that in 2019 only 56% (compared to the above mentioned 76%) of CPOs had digital transformation listed as a top priority [3]. However, it takes more than a high place on the priority list to change companies’ procurement processes. The implementation of the best software solutions is key to realising their goals.

# Types of software solutions

When assessing companies’ e-procurement needs, it is important to differentiate between software platforms and tools. Tools are standalone software products that are designed for specific functions. For instance, in its current form, Lhotse is a tool. It is designed for the specific function of sourcing competitive offers for tactical spend needs. Platforms on the other hand are databases, operating systems or large pieces of software that build the foundation of employee workflows. In order to reap the benefits that come with the power of a platform, Lhotse is currently transitioning its tool in that direction. Some of the hallmarks of platforms are that they allow for the development of an ecosystem and can be integrated with external tools, data, and teams.

# The importance of tool integration

Developers of large platforms annually receive thousands of requests from customers asking for special features. Most are not implemented due to the high cost of development and the risk of over-complicating the user experience of all users. This is where tools can help. Special features can be added to digital workflows without first having to convince platform developers to integrate them. This allows for a tailored set of software tools within employee workflows. Companies who manage to successfully pick and choose the correct tools, can greatly improve workflow efficiency and save costs.

In order for the integration of tools to be successful, two main conditions must be fulfilled. These being synergy with existing systems and successful integration into employees workflows

# Lhotse ties it all together

Lhotse has developed an easy to integrate tool that addresses the key challenges facing tactical procurement. Lhotse allows companies’ procurement teams as well as employees from all functional areas to easily get competitive offers for their tactical spend needs. Lhotse works by letting employees easily specify their tactical procurement needs. After that, Lhotse’s procurement specialists work with the right amount of automation to give customers the very best offers.

During its past and continuing development, Lhotse worked with two goals in mind. Lhotse wants to offer a solution to the systemic issues plaguing the tactical spend process while simultaneously being mindful of the importance of plug & play integration to existing systems. Lhotse has achieved just that. To date, users have been able to generate 12% cash savings and are spending an average of two hours less on each tactical purchase. Users are also finding that Lhotse integrates well with existing platforms while simultaneously being able to function as a stand alone solution. Lhotse offers a simple solution to decades old neglect.

# Sources

[1] https://www.mckinsey.com/business-functions/operations/our-insights/revolutionizing-indirect-procurement-for-the-2020s

[2] https://www.pwc.de/en/strategy-organisation-processes-systems/digital-procurement-survey.html

[3] https://www2.deloitte.com/content/dam/Deloitte/us/Images/Misc/infographic/us-2021-global-cpo-infographic.pdf?icid=learn_more_content_click 

The Critical Role of Software in Ending Tactical Procurement's Neglect

Advances in technology in combination with digitalisation are bringing sweeping changes to the way in which companies compete, tackle issues, and innovate. Understanding the why and how of procurement spend optimisation is one of the most important topics that a company can pursue. Small changes in companies procurement processes can have massive effects on performance and success.

# Procurement 101

Similarly to how consumer purchasing behaviour shifts based on the item being purchased, companies adjust their purchasing strategy based on the classification of goods or services. The most basic classification is the differentiation between strategic, tactical and operational purchasing.

# Operational Purchasing

Operational purchasing, makes the best possible use of existing potential for success. It is the short-term purchasing of everyday catalog products. Supplier selection is quick and uncomplicated — most companies work with several catalogs that are customised to their specific business requirements.

# Strategic Purchasing

Strategic spend usually involves large purchasing volumes, which are associated with high costs. Consequently, there are certain “best practices” that should be pursued in order to minimise supply risks. Supplier selection is based on a variety of factors such as price, past performance, quality, and spend analyses.

Strategic purchasing is geared towards the medium to long term. Wrong decisions or bad investments can only be corrected with a great deal of effort. Due to the risk involved, purchasing decisions are made based on either extremely thorough assessments of new suppliers or years old relationships with existing suppliers.

Detailed supplier evaluations, product evaluations and negotiations are the cornerstone of strategic purchasing strategies. Digitalisation is helping to simplify supplier evaluations. If correctly implemented, companies can leverage software and technology extremely efficiently. They are starting to develop the ability to make their choices in digital networks. With this approach, potential suppliers compete for orders and companies can directly access supplier data. Companies are implementing digital technologies to improve supplier transparency and improve the strategic purchasing process as a whole.

# Tactical Purchasing

Tactical purchasing is somewhere in-between strategic and operational purchasing. Here, strategic decisions are made, according to best practices laid out in corporate policy. However, best practices are often not optimally applied to tactical spend because the effort is seen as “not worth it”. Tactical purchasing decisions are often quickly made by individual departments. A clean supplier audit or negotiations to optimise costs only infrequently take place.

Tactical purchasing is a delicate balancing act. The problem is, that the cost of tactical spend items is not high enough to warrant a time intensive procurement process. Due to a disregard of best practices, massive costs arise. As purchasing decisions are made quickly and pragmatically, the organisation incurs costs that could be avoided through competition and proper supplier selection.

The importance of a sophisticated tactical purchasing strategy becomes especially apparent in time sensitive situations, such as the procurement of corona tests for employees. For many companies, short term procurements put a lot of pressure on those responsible. Decisions have to be made quickly and there is a rush to process orders. Non-optimised tactical purchasing can become costly. In most cases, there exists a lack of synergy between the person placing the order and the software.

In order to remain efficient, strategy differentiation and various approaches need to be made between the three spend classifications. The development focus should be on the constant optimisation of the purchasing organisation. However, purchasing departments often do not have the time and tools to work effectively.

# How software helps

Software tools save time and money. They enable companies to quickly get the best offer, without having to reach out to countless prospective suppliers. Suitable suppliers can be found at short notice and be easily contacted using information in existing databases. The bidding and submission process is also simplified by standardised formats.

Automated processes simplify buying, strengthen business relationships, and allow for quick decisions. They enable purchasing departments to be highly efficient and responsive, by giving the human talent the tools that they need. 

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The Importance of Differentiating Purchasing Strategies in the Age of Digitalisation

Lhotse, reaching an elevation of 8,516 meters, is the fourth highest mountain on planet Earth.

It sits right next to Mt. Everest and for this reason, you have likely never heard of it. Attention is focused on the highest mountain on Earth entirely neglecting its smaller sibling, Lhotse. The same holds true for tactical spend.

Across companies of all sizes, focus lies on the 80 % of spend considered to be strategic. The final 20 % of ‘tactical spend’ is overlooked and remains largely unoptimised.

At Lhotse, we want to change that.

# Procurement is thirsty for a change

Long gone are the days when companies had ample resources to ensure all operations are working at full tilt. Management makes hundreds of decisions every week of where and how to most effectively allocate scarce resources. This is felt most acutely in departments that have long been considered ‘support functions’.

Procurement is thirsty for a change. Pre-2000s processes were manual- via pen, paper, and phone (fax, anyone?). The early 2000s saw processes being transcribed (digitalized) but not fundamentally challenged or indeed changed. In recent years, procurement is starting to shift from being seen as an internal support function to becoming more and more strategic. This is a near reproduction of what we saw with the Finance, HR, Compliance and IT functions. Covid-19 and climate change have accelerated this shift.

To sustain and drive this shift, innovative technological solutions are needed. Software will enable procurement to unleash its potential of becoming one of the biggest internal drivers of value. Value in terms of bottom line but also in other dimensions, incl. supply chain resilience and ESG (and in ESG, there is not just E, but also S and G). At Lhotse, we have a strong conviction that procurement will only achieve its potential with the help of a new generation of modern, verticalised software.

# Tactical procurement remains overlooked and opportunities are being missed

While the shift in procurement towards becoming more strategic is evident, it is also clear that tactical, non-strategic spend remains overlooked. It's clear: the lack of internal resources and attention means companies focus on the big buckets.

However, tackling tactical spend is a key driver for Procurement to push bottom line profitability. At Lhotse, we are building the foundation for autonomous tactical procurement — unleashed from the processes, structures and tools companies are stuck with today. We take “lack of resources” out of the equation. Procurement software has rarely been a driver of competitive advantage — we are convinced it can be exactly that!

# Plug and play solution that brings tactical spend under control 

At Lhotse, we are building a powerful plug and play Procurement Software-as-a-Service (SaaS) that manages tactical spend in the most holistic way. Users are top-of-mind and we provide ROI almost instantly. Acting as a system of procurement intelligence, Lhotse enables true automation and collaboration — within and across company boarders. Lhotse embeds data and recommendations right into our customers’ operative sourcing processes, avoiding system breaks and minimising touch points wherever possible.

Our vision is to break down those (artificial) borders within and between companies. Instead, we build an inter-company layer for truly collaborative, intelligent procurement software.

# Find inspiration for your organisation 

If you feel that your Procurement technology agenda resembles a blue ocean, we would love to have a conversation with you. We are interested in understanding the needs of your company and share our best practices on how to get started with bringing next generation procurement software to (your) life.

**If you would like to get in contact with our experts, make sure to book a call with us:** 

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Lhotse — Our Take on Tactical Procurement

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