A Procurement Specialist is a role traditionally reserved for enterprises, but Ware2Go’s Director of Strategy, Samantha Smith, outlines how businesses of all sizes can use machine learning and AI to analyze their supply chain and implement best-in-class procurement and inventory management functions.
What Does It Mean to Digitize Your Procurement Specialist?
A Procurement Specialist for the Rest of Us
A Procurement Specialist or Supply Chain Manager is traditionally a role reserved for enterprises — major retailers with years of historical sales data and the clout to negotiate the best deals with suppliers and manufacturers. However, as businesses recognize the need for digitization in Supply Chains to keep pace with rapidly digitized sales channels, the dynamic is shifting when it comes to staffing and training these positions.
This push towards technological advancement is forcing businesses of all sizes to reexamine their end-to-end Supply Chain operations. Many merchants now see that a fully optimized Supply Chain is actually the foundation of a strategic business plan. In fact, in a recent survey, 67% of major retailers indicated that they would start including their procurement specialists in most or all major strategic decisions for the company.
This may have some SMB’s wondering what competitive advantages a procurement specialist could offer to their business. The truth is, that businesses of all sizes could benefit from a digital makeover to their Supply Chain management as these roles evolve and lead the charge in overall strategy. The traditional role of a procurement specialist has been to negotiate the best price with suppliers to keep costs as low as possible. However, as more businesses begin to see the potential of their Supply Chains as a strategic growth lever, they will all begin to see that materials planning is not just about getting the best price for goods. It’s also a matter of securing the right amount of inventory at the “right time” and distributing that inventory to the “right place” to best serve the end customer.
“At the right time” is actually a bit of an oversimplification, as truly calculated demand planning takes into account seasonal trends in sales and transportation or warehousing costs, market competition, and economic factors that may all affect sales and inventory costs. Putting this greater level of strategic thinking into inventory planning gives merchants several key advantages:
Cuts down on out-of-stocks leading to more sales and a better customer experience
Cuts down on costly excess inventory
Focuses on highest-performing products for greater ROI’s
Frees up capital to spend on R&D for new products, marketing, or headcount
Frees up physical and mental capital to focus on the customer
Urban Outfitters used machine learning to optimize their Supply Chain when they saw that the growing shift to ecommerce orders vs in-store purchases was driving up shipping costs and eroding their margins. Rather than simply scrambling to keep up with orders, their Supply Chain team applied an algorithm to determine which store an ecommerce order should be fulfilled from. Many retailers have learned that shipping from the closest possible fulfillment center can help them save big on shipping costs, but Urban Outfitters realized that they also needed to consider potential lost sales when a customer showed up in-store only find that the item was out of stock due to ecommerce demand. Their algorithm considered both proximity of the store to the end customer and the store’s supply relative to demand, reducing shipping costs by 7% and lost sales by 37%.
This may be great for a business as well-resourced as Urban Outfitters, but what can this type of strategic planning look like for SMB’s looking to transform their Supply Chain from a cost center to a growth lever?
Real-World Inventory Planning for SMB’s
While 67% of retailers reported plans to include their procurement specialist in major strategic decisions, 40% of respondents to the same survey admitted that they didn’t actually have the internal processes or vendor relationships they needed to achieve their Supply Chain objectives — and this survey consisted primarily of major retailers. Small to mid-sized merchants likely already feel that their internal resources are stretched thin without the prospect of adding a new and complicated internal process.
The cost of hiring a qualified procurement specialist is likely out of the question, as these roles can sometimes pay close to 6 figures a year and are currently in high demand. Although many large businesses would like to move forward with digital Supply Chain initiatives, only about 27% feel they currently have the staff in place to implement them. And even if an SMB can afford to hire a procurement specialist, a qualified candidate would likely require additional tools and costly infrastructure changes to support their functions.
In practice, demand forecasting and inventory planning looks very different from one company to the next, but in my experience, SMB’s tend to fall somewhere on the spectrum between the following 2 extremes.
Customer Story: The Chef with the Crystal Ball
On one end of the spectrum I always think of one client in particular: an incredibly talented pastry chef who decided to start a gluten free baked goods company. He was seeing tremendous success with his initial product line and was looking to expand his business into new product categories as well as enter new geographies.
He is highly skilled as a chef — a creative visionary and maniacal perfectionist when it comes to the texture, blend, and overall flavor of his baking mixes. He is not, however, an Industrial Engineer. And who would expect him to be? In the early days of launching and growing his business, inventory planning looked like notes scribbled on the backs of napkins — educated guesses with fingers crossed that he had somehow intuited something that trained procurement specialists would have painstakingly calculated with statistical modeling and algorithms.
Customer Story: A One-Woman Army
At the other end of the spectrum for SMB’s is an outdoor furniture company making nearly $10 million/year in sales. At this level, this merchant could afford a one-person Supply Chain department. This may seem like a luxury to many SMB’s but that level of demand was too much for one person to handle strategically.
Their Supply Chain Manager was highly capable, but her home-grown process of demand forecasting with spreadsheets and manual calculations was all she could keep up with. Constantly running reports to stay one step ahead of demand commanded all of her time and energy. If given more bandwidth she could have been examining their end-to-end process, finding inefficiencies, and planning ahead for growth rather than just barely keeping her head above water.
In my experience, most SMB’s fall somewhere between these 2 extremes. No matter where on this spectrum your business may fall, some level of digital enchantment to your workflow will completely transform your process and make you look at your Supply Chain in a whole new light.
Transforming Supply Chain from Cost Center to Growth Lever with a Digital Procurement Specialist
Fortunately for SMB’s, many higher level functions of procurement specialists like demand forecasting and inventory planning can be mostly automated. Partnering with a fulfillment partner that prioritizes best-in-class fulfilment technology will give you access to business intelligence previously inaccessible for most small to mid-sized merchants.
Automating this reporting will allow you to really dig into the data to optimize your inventory levels, Supply Chain costs and ultimately customer experience. This digital overhaul will transform your relationship with Supply Chain operations by:
Determining Risk Tolerance: This is where you can really customize your inventory planning. If your business has a higher tolerance for risk (namely running out of inventory) you can fine-tune your inventory levels for the least amount of capital expenditure. This high-risk inventory planning yields the highest profits and frees up capital to invest in other areas of your business. Businesses with a lower risk tolerance can optimize their inventory levels to insure against out-of-stocks. This low-risk approach requires greater capital expenditures but prioritizes customer satisfaction.
Increasing Margins: Accurate demand forecasting cuts back on the heavy burden of inventory carry costs. The cost of excess inventory adds up quickly between capital expenditure, storage fees, insurance, and obsolescence. In the best case scenario obsolete inventory is sold at a deep discount (often at a loss), and in the worst case scenario it’s written off at the end of the year. Strategic inventory planning ensures that all inventory is able to be sold at its highest possible margin.
Measuring Success by RONA (Return on Net Assets): Often, merchants will surprised to discover low profitability at times of high-volume sales. These profit challenges usually aren’t tied to sales but to the misuse of a merchant’s greatest asset (inventory). Optimizing your Supply Chain will increase your bottom line before you even increase your top-line revenue.
Stocking a Distributed Warehouse Network: It’s clear that the new expectation for fast shipping is 2 days or less. SMB’s looking to compete need to offer affordable 2-day ground shipping. The most effective way to achieve this is by forward-stocking inventory closer to end customers through a distributed warehouse network. Many SMB’s, however, don’t have the Supply Chain in place to support inventory planning across multiple locations. Intelligent reporting enables businesses of all sizes to stock as many as 3 warehouse locations to establish a nationwide 2-day delivery footprint.
Implementing a Digital Procurement Specialist
The process of implementing these digital enhancements to your Supply Chain management relies heavily on AI that learns the rhythms and cycles of your unique business. At Ware2Go, we analyze at least 3 months of historical data, either data brought in by the client from past sales or monitored through 3 months worth of shipping patterns after onboarding. The algorithm can also be adjusted for expected shifts in demand like seasonal spikes or promotions, and the longer these patterns are monitored, the more accurate the projections will become.
These projections essentially give you the expertise of an Industrial Engineer on-demand and at your fingertips. Having these insights delivered through machine learning frees up human capital to focus on Supply Chain strategy to make your procurement process that much more efficient. Your team will have the bandwidth and necessary data to negotiate the best prices with suppliers by ordering a volume that yields the highest price break at your minimum inventory level. You will also have more negotiating power when you go to the table with your manufacturers, knowing when your reorder points will be and having an accurate forecast for the coming year.
Ultimately, all of these measures mean that your supply strategy will no longer be reactive but will be forward-thinking and strategic. The primary advantage of data is confidence. Procurement and inventory planning will no longer be an educated guess or a time-consuming complexity. It will become an integral part of your long-term strategy and essential to your future growth.
To learn how Ware2Go can help your business take control of its Supply Chain strategy, reach out to one of our experts.
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