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TRANSCRIPT
Procurement In Auto-PilotHow Automation is Boosting Effi ciency in Procurement and Driving Organizations Forward
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Effi ciency is doing things right; eff ectiveness
is doing the right things.
Peter F. Drucker
Austrian-born American management consultant,
educator, and author. He has been described as "the
founder of modern management"
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Procurement: The Value Engine of The Company? ..................................................................................................................................................2
Why Is Efficiency So Important? ........................................................................................................................................................................................2
How To Be More Efficient? ................................................................................................................................................................................................. 3
The Old Way: Removing Manual And Low-Value Work ...........................................................................................................................................6
The New Way: Cognitive Procurement .......................................................................................................................................................................... 7
Manufacturing Case Studies ..............................................................................................................................................................................................11
Case 1: eInvoicing At Trumpf ..............................................................................................................................................................................12
Case 2: VMI And Forecasts In Real-Time At Grohe ...................................................................................................................................12
Conclusion ......................................................................................................................................................................................................................... 14
Further Readings ...................................................................................................................................................................................................................15
Table of Contents
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To make a comparison with the manufacturing world, Procurement
is analogous to an engine. The purpose of the engine is to produce
the power that powers the vehicle it is contained within. The
purpose of the Procurement function is to produce the value that
drives the organization it is contained within. To do so, Procurement
requires energy. The energy, among other things, consists of the
function itself (the people), and everything the Procurement function
needs to work (time, information systems, etc.). The less energy the
engine needs, the better!
But this is not the whole story. The engine must run and continue to
perform at an optimum level of productivity over time, and do so in a
sustainable manner!
A “best-in-class” Procurement function is thus a function whose
Value Engine continuously delivers value (it is sustainable) to other
departments / stakeholders (it is eff ective) while requiring minimum
energy (it is effi cient).
Eff ectiveness is about producing an expected result. The gap
between the target and the actual result defi nes the level of
performance.
Effi ciency has nothing to do with the result itself but focuses on
what is required in terms of resources to produce it. Therefore, “the
less, the better” is defi nitely the objective of increasing effi ciency.
PROCUREMENT: THE VALUE ENGINE OF THE COMPANY?
Effi cient
(Doing the things right.)
Sustainability
(Continuously)
Eff ective
(Doing the right things.)
The sweet spot
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Now that we have identified the two primary KPIs for the
Procurement Value Engine, we can explore how they relate to
each other and what best-in-class organizations should aim for. As
illustrated earlier, the Holy Grail is to be effective AND efficient.
However, as explained in a recent article on Spend Matters’ website
Chief Procurement Officer, it is often difficult, if not impossible, to
simultaneously maximize both. Nonetheless, as the article points
out, there is a symbiotic relationship between effectiveness and
efficiency and a failure to grasp this could result in an organization
pursuing a plateau that it might not be able to reach.
With a limited amount of “energy” (as defined earlier), your
organization can only manage a certain amount of input and
produce a certain quantity of result. This is where the organization
reaches a productivity plateau. To achieve an increase in results (or
output), the only solution is to increase the level of energy, which is
very often translated as “more people”. Another article from Spend
Matters based on an APQC study on maverick buying illustrates this
point. However, there is another way.
As described in the article cited above, you can “use efficiency to
fuel effectiveness.” The time freed up by an increase in efficiency
can then be used to fuel effectiveness by being able to do and
manage more! In Procurement, a typical example is using the newly
available bandwidth to manage more spend and therefore produce
new value incrementally.
A better Procurement Engine is one that delivers more value-
for-money (VfM). The Value-for-Money of Procurement can be
defined as “a utility derived from every purchase or every sum of
money spent. Value for money is based not only on the minimum
purchase price (economy) but also on the maximum efficiency
and effectiveness of the purchase.” Therefore, VfM applied to
Procurement is about maximizing value from each dollar invested
in the Procurement function’s people, process, and technology. At a
high level, the Procurement VfM can be described as:
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown:
WHY IS EFFICIENCY SO IMPORTANT?
HOW TO BE MORE EFFICIENT?
Governance & Category Mgmt. Sourcing/Supply Mgmt. Purchase-to-Pay
Vfm = x x+ x x x
Reduce /
influence
demand
Decrease
contract
costs
Increase
spend under
management
Increase com-
pliance with
contracts
Decrease
order-to-pay
costs
Reduce usa-
ge costs
Reduce
risk
1 Source: http://www.businessdictionary.com/definition/value-for-money-VFM.html#ixzz3vo4vv
As already mentioned earlier, efficiency can be invested
into increasing effectiveness, for example, by enabling
Procurement to address areas that have been left untouched
or sub-optimized until now because of a lack of capacity. In
addition, efficiency improvements allow Procurement to be
more agile and proactive. This leads to new capabilities and
enhancements in cycle times:
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“Don't jump whole hog into technology. Walk and
then run if it works. Establish meaningful metrics to
measure its performance. Make sure each piece
fits into a long-term puzzle.”
Robert A Rudkzi, Douglas A. Smock, Michael Katzorke,
and Shelley Stewart, Jr.
• Revisit sourcing lists (preferred suppliers) more than once
a year to ensure continuous alignment between sourcing
strategy and needs (especially critical for new product
developments),
• Manage market dynamics better: the ability to identify and
capture positive market changes (or mitigate impacts of
negative ones) by dynamically going back to market
• Improve cycle times in spend management processes that
enable other support functions or positively impacting the
product lifecycle;
• Reduce savings leakage by transforming identified
savings into actual savings because of improvements in
contract management
Another aspect of efficiency lies in the tools used by
Procurement to perform its activities. Efficiency, as stated
earlier, is about how Procurement works and, in our
technological era, it is impossible not to talk about technology.
Technology plays a key role in efficiency gains because it is
an enabler, simplifying a lot of administrative tasks and making
process integration possible.
Typical efficiency gains that are specific to using Procurement
technology include:
• Automation impacting the level of resources needed and
cycle times,
• Economies of scale from centralizing information and data
management,
• Knowledge Management (KM) based on centralizing and
securing information while making it more available across
geographies (physical or functional).
In addition to increasing efficiency in your Procurement
organization, technology also enables suppliers to be more
efficient. This means that Procurement can introduce efficiencies
into the supply chain that it can benefit from. This is also an
important aspect of the business case for better supplier
onboarding (supplier portals, EDI/webEDI for PO management,
e-Invoicing, etc.).
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But not all technologies are equal when looking at effi ciencies.
Some technologies are more cost eff ective than others.
Remember what Rudzki, Smock, Katzorke, and Stewart said in
Straight to the Bottom Line: An Executive Roadmap to World
Class Supply Management (see page 6).
Also, cost includes IT costs (infrastructure, licenses, fees, etc.)
and usability costs. In recent years, SaaS and cloud solutions
have transformed many functions, Procurement included,
because they often maximize time-to-value vs. on-premise
solutions.
In addition to reducing installation and operating costs,
most SaaS and cloud solutions rely on the philosophy of
interoperability:
• System-to-system (interfaces and communication
protocols)
• Process-to-process (interdependence and integration)
• People-to-people (collaboration)
All of this is in a context of a global economy and global supply
chains. Thanks to SaaS and cloud technologies, Procurement
can create a workspace containing all the data required for
both strategic and tactical activities. This workspace is ERP-
agnostic, meaning that it can be connected easily to multiple
and various systems (ERPs and beyond: PLMs, BWs, etc.);
internal and external systems. This:
• centralizes key information in a single location, making
data collection and analysis easier;
• fosters collaboration with various partners and
stakeholders as required by the various business
processes running in the solution;
• streamlines data management by having data directly
managed by the relevant data owner;
• simplifi es master data management (MDM) by creating
one set of master data that then dispatches the
information to the operational systems; and
• increases agility and resilience by securing data and
making it easily transferable (imagine an organizational
change that results in changes in responsibilities and the
resulting nightmare of transferring the data contained in
mailboxes!).
Other Stakeholders
Procurement
Masterdata #1
Masterdata #2
Masterdata #n
...
Suppliers
3rd Party Sources Internal Information Systems
Access Control & Roles
Business Process #1
Business Process #2
Business Process #n
...
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Historically, organizations looking at improving their
efficiencies have looked at the process cost reduction in the
VfM equation we mentioned earlier. Removing manual tasks
that add no or little value is a low hanging fruit. However, there
are also other ways.
THE OLD WAY: REMOVING MANUAL AND LOW-VALUE WORK
Capability Actions Value Platform
Exploit platform capabilities SRM/SIM (Supplier relations-hip management and supplier info. management)
Supplier performance ma-nagement (multi-criteria, and cross-functional)
Catalogs, reverse auction, eRFx
Incident tracking and correc-tive action management for issues
All spend can be under ma-nagement in the platform.
All required information is centralized and available in relevant processes providing buyers with the proper sup-plier picture when inviting to events or placing orders.
Catalogs, RFx, reverse auctions
Forms and templates / cate-gory (supplier profiles, cost breakdown/TCO models…)
Benchmark and trends over time (market indexes, internal indexes…)
Integrated Quality manage-ment: issue, return, and corrective action planning
Track and manage all Transactions
PO management (issue/chan-ge, confirm, receive)
M-way match and automatic payment approval
Automatic rejection and re-turn for error correction
Frees up wasted transactional effort by only routing excep-tions and anomalies to buyers who have more time for more strategic activities
PO management (portal, EDI/WebEDI, confirmations, ASNs, …)
Forecasts and inventory visi-bility (E.g. VMI, Kanban,...)
PO flip, eInvoicing, M-way match
Smart workflows and recom-mendation “assistants”
Use workflow and process templates
Business process modelling (smart workflows)
Supplier integration (portal, EDI/WebEDI)
Focus on exceptions
Real-time information
Extended collaboration (inter-nal and external)
Supplier portal / network
ERP integration
Smart workflows
In many organizations, there is a lot of waste in processes. Lean
process transformation can save a considerable amount in
overhead cost. A recent Hackett report found that world-class
organizations that take advantages of Procurement technology
are more efficient with 22% lower labor costs and 29% fewer
full-time equivalents (FTEs) than more typical organizations. In
certain processes, automation can decrease costs even more.
e-Invoicing is one example. Reductions of up to 70% to 80% in
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New technologies push even further the boundaries of what can
be automated. It is no longer just simple and repetitive tasks.
Automation now enters more complex domains.
The quote above illustrates how technology enhances
decision-making processes. First, technology enables teams
to collect more and more data. Especially considering the
“Internet of Things”, or IoT, that, thanks to sensors, tremendously
increases the amount of data that organizations can collect,
track, and monitor. And good data (good = accurate + complete)
is, in the business world, a key prerequisite to any analysis and
to any decision.
With regards to Procurement, this is an area that still has
untapped potential for automation. According to a study
quoted by Spend Matters in an article from July 2016, there
are still many areas of Procurement processes that are not yet
automated:
THE NEW WAY: COGNITIVE PROCUREMENT
68% percent of survey respondents [reported] no
automation in supply relationship. Half or more of
the procurement and finance professionals surveyed
also reported no automation in supplier information
management, electronic supplier commerce and
strategic sourcing processes at their organization.
Spend Matters, What Procurement Processes are
Organizations Automating the Most?
One of the main reasons we cite digitization as a
main force shaping the second machine age is that
digitization increases understanding. It does this by
making huge amounts of data readily accessible,
and data are the lifeblood of science. By “science”
here, we mean the work of formulating theories and
hypotheses, then evaluating them. Or, less formally,
guessing how something works, then checking to
see if the guess is right.
Erik Brynjolfsson and Andrew McAfee in The second machine age.
time needed to process invoices are common place. Another
recent study mentioned by Spend Matters also reveals that
best-in-class organizations process 99.8% of their invoices in a
touchless manner (average P2P organizations only achieve 45%).
DATA INTEGRATION IS AN AREA WITH HUGE POTENTIAL FOR EFFICIENCY GAINS.
This is also confirmed by the results of our recent survey on
Digital Procurement. 168 organizations took part and, among other
interesting findings, the results revealed that most organizations
still spend a great deal of time and effort on connecting the dots
across silos due to organizational boundaries or heterogeneous
information systems.
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Smart Procurement technologies can become “assistants”
for more than administrative tasks. Such technologies can be
compared to a consultant or to a colleague. There are different
ways to build such a technology:
• program it by encoding rules (e.g. “if this then that”)
• let the machine learn to develop autonomy and proactivity
Source: Gartner (September 2013)
“Actionable Intelligence is any intelligence that can
be used to boost a company's strategic position
against industry peers. The acquired intelligence
must be transferred into real actions.
Business Dictionary
LEVEL OF INTEGRATION BETWEEN PROCESSES (%)
22% No Integration
61% Manual Integration (pull)
17% Automated Integration (push)
We asked them if the integration of information was:
• a manual process to “pull” the information that is needed (e.g.
get data from a system, integrate into another one or in Excel)
• an automated one that “pushes” the information where and
when needed (data generated as output of one process and
stored in a system is available in subsequent process steps, if
needed, and in the system used to run that process)
For most organizations, data integration is a reality, but still very
manual and incomplete. More than three quarters of organizations
(78%), do integrate data. However, they do it mostly manually by
using Excel or downloading / uploading files into systems.
Even though data is critical for making the right decisions—and
even more so in our current business context—Procurement
professionals are still putting in too much effort into collecting
and analyzing data. What’s more, the quality of the data and the
ever-growing mass of data are additional obstacles that hinder any
efforts to develop actionable intelligence.
In addition to helping teams with data collection and analysis,
technology can help make sense of the collected information
and can contribute to the preparation of decisions or
recommendations. For years, Procurement organizations have
used “business intelligence” systems that were only focusing on
the descriptive piece. The rest was left to people (data analysts).
Now, technology is addressing:
• the predictive part: what will happen
• the prescriptive part: what to do to influence what will happen
in the direction I favor
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Here are a couple of scenarios that could be defined in a smart
Procurement platform to enable it to be proactive based on rules
and thresholds defined by the Procurement organization:
• If spend of supplier under XXX, then block supplier
• If quality of supplier (ppm or on-time delivery performance)
is under XXX, then launch audit / corrective action plan /
increase share of business allocated to other sources (if any)…
• If deadline or expiration date of RFQ / contract … then trigger
specific events (reminders, extensions…)
• Alert if some part of the spend has been left untouched for too
long (e.g. no RFQ or negotiation in the last XXX years)
• Alerts and recommendation for actions linked to raw material
price trends
The aim is to move from siloed processes running in isolation in several tools to a smart technological platform that enhances teams:
BIG DATA + SMART TECHNOLOGY = BETTER ACTIONABLE INTELLIGENCE
Recommendations
Decisions
Actions
SRM RFX
SCM
QM
• Weather data• Track & Trace data • Predictive maintenance • 3D printing availability
IoT Data
ERP Data
External Data
• Spend data• Requirements• Transactional data• Master data
• Financial risks• Supply chain risks• CSR risks• Classifications
IoT Data
ERP Data
External Data
f(x) Algorithm
f(x) Algorithm
Supplier
Strategy
Integrated and digital Category Ma-
nagement Using digital assistant
Technology
Scouting
Supplier categorization and
potential analysis at category level
Quality
Management
APQP, PPAP, Audits
Complaint Management
Certificate exchange
Supplier
Development
Measures Planning (PDCA),
Savings TrackingProcurement
Engineering
Measures Planning
(PDCA) Savings Tracking
Governance,
Riskmgmt.
& Controlling
Supplier Scorecard based on
hard facts and soft facts from
internal and external sources
Supplier
Selection
RFQ and eAuction with
category-level TVO analysis
based on supplier
performance and risk
Supply Chain
Execution
Electronic supplier integration
Customs declaration, Document
exchange
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Smart technologies also have to be flexible and smart enough to
adapt to the context of the activities. Not all categories are strategic.
Not all purchases require the same level of attention.
So, in order to maximize efficiency and provide adequate support
for Procurement teams, smart technology must be adaptive. This
means that in certain circumstances, it will run almost autonomously,
ultimately limiting human intervention to exceptions and special
cases:
In other circumstances, it will help and support procurement teams with running more thorough and in-depth processes:
AN EXAMPLE OF AUTOMATED PROCESS...
AN EXAMPLE OF "INCLUSIVE EXTENSIVE APPROACH"
ERP (banf)
eProcurement
Project/
Ticket
Material
database
Self (manual)
Demand / Request Strategy Bid Analysis Negotiation Awarding Contract
Suppliers &
CBD inserted
automatically
based on
Material Group
Manual selection
of CBD and
suppliers
Lead Buyer /
Commodity
Manager review
Offer analysis
& scenario
Excel export for
rich reports
CBD analysis for
raw material/labor/ma-
chine benchmarks
TCO / TVO
analysis
Soft Auctions
eAuctions
RFQ / Multiround
Face-To-Face
Offer analysis
& scenario
Internal
approval /
review
workflow
Inforecord to ERP
Purchase Order
Catalog item
Contract
RFQ initialized automatically via
interface, sourcing strategy applied auto-
matically; full compliance.
Soft auctions integrate a feedback
machanism to have suppliers submit n quo-
tes autonomously.
Selected offers is transmitted
automatically to operational systems
for ordering.
"Express": automated processUse case: recurrent, low stakes purchase, supplier strategy is defined, key driver is price.
ROI: process cost optimization and time to market
ERP (banf)
eProcurement
Project/
Ticket
Material
database
Self (manual)
Demand / Request Strategy Bid Analysis Negotiation Awarding Contract
Suppliers &
CBD inserted
automatically
based on
Material Group
Manual selection
of CBD and
suppliers
Lead Buyer /
Commodity
Manager review
Offer analysis
& scenario
Excel export for
rich reports
CBD analysis for
raw material/labor/ma-
chine benchmarks
TCO / TVO
analysis
Soft Auctions
eAuctions
RFQ / Multiround
Face-To-Face
Offer analysis
& scenario
Internal
approval /
review
workflow
Inforecord to ERP
Purchase Order
Catalog item
Contract
RFQ initialized based on strategic
decisions, inclusion of the Commodity
Team in the RFQ elaboration.
Detailed CBD with TCO/TVO (incl.
non-price items) used for fact-based and
thorough bid evaluations; face-to-face
negotiations.
Awarding is done by including
stakeholders in the loop, contracts
are set-up to ensure compliance
in operations.
Category/Commodity ManagementUse case: High stakes purchases, closed-loop approach (strategy <-> operations)
ROI: value-centric and fact based decisions, inclusive process, stakeholder manage-
ment, savings realization
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As an independent family- owned company, TRUMPF thinks
and acts with a focus on long-term sustainability, particularly
when it comes to establishing and cultivating relationships with
suppliers that are deeply integrated into product development
processes. Speed and efficiency are high priorities for the
company. The procurement organization’s key focus is the
procurement of production materials, which adds up to an
annual spend of 1.32 billion euros. TRUMPF has been using
a software solution for transactional Procurement for years to
automate the ordering and invoicing processes as much as
possible. Currently, more than 450 suppliers, which represent
60% of purchase orders, are connected with EDI. Currently,
this means that approximately 45,000 invoices can be routed
from the supplier’s ERP system to Trumpf’s ERP system each
year, as long as the invoice matches the purchase order. The
goal is to double this number within one year.
The suppliers generate 20% of the invoices with WebEDI. This
means that they select an order or individual positions from the
order overview in the JAGGAER web portal for billing, and can
generate the invoice immediately. If needed, additional freight
and packing costs can be added at this stage. The content of
the invoice is reviewed in Trumpf’s SAP system. If there are
any differences, the people responsible for the order will be
notified by a workflow, otherwise the invoice is approved for
comparison. The invoice is automatically transferred into the
SAP system as an XML file and as a standard PDF.
Grohe, the producer of plumbing fittings, has completely
eliminated their ordering processes and outsourced them to
their suppliers with the help of a Vendor Managed Inventory
module (VMI). The suppliers can organize deliveries to Grohe
independently and optimize their processes based on up-to-
date inventory levels and concrete numbers. The purchase
volume and the number of suppliers are considerable. In total,
the company conducts storage combinations for 2,000 items
in VMI, and for 20,000 more components that are provided by
600 suppliers. Today, 170,000 purchase orders are processed in
the online portal each year. The numbers indicate how complex
the requirements are for the IT solution. Grohe outlined exactly
what the portal had to be able to achieve, and had very specific
suggestions for the forecasting system and the VMI. All of the
processing routines were newly developed so that the solution
would address the tiniest details, processes, and demands.
Today, 80% of the spend transactions and purchase orders are
conducted using the web portal.
Thanks to the digital VMI and Forecast solutions, Grohe’s
logistics processes are now much more efficient and transparent.
Purchase orders and order confirmations are displayed in real-
time, and are saved in the SAP system without additional manual
input from Grohe. Suppliers can react quickly and can make more
precise deliveries, and Grohe achieves a higher level of efficiency
in production and distribution at their manufacturing locations.
The improved communication between Grohe and its suppliers
has made it easier for plants to set up multiple delivery dates
with varying quantities, and also helps them avoid idle time. Both
business partners are able to work at full capacity.
CASE 1: eINVOICING AT TRUMPF
CASE 2: VMI AND FORECASTS IN REAL-TIME AT GROHE
MANUFACTURING CASE STUDIES
CUSTOMER: TRUMPF
A high-tech company offering manufacturing solutions
in the fields of machine tools, laser technology, and
electronics
Branch: Manufacturing
HQ: Dietzingen, Germany
Revenue: EUR 2.808 billion
CUSTOMER: GROHE GROUP
World-leading producer of plumbing fittings
Branch: Manufacturing
HQ: Hemer, Germany
Revenue: EUR 1.2 billion Euro
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Every Procurement organization is trying to maximize its Value
for Money (VfM) by delivering maximum value to the rest of the
organization while using the least possible resources. The reality
is, however, there are only a few “best-in-class” organizations that
manage to achieve impressive results.
Procurement can learn from the concepts of “lean manufacturing”
and apply them to its own processes. “Lean office” is a discipline
that Procurement professionals should embrace. The immediate
starting point is to look at processes that consume a lot of
resources with manual and low-value tasks. The Purchase-to-Pay
(P2P) process can be almost fully streamlined by using technology
that has already been available for a long time. e-Procurement
and the use of online catalogs are also both quick wins. Interfacing
systems to remove manual data entries is another one.
Supplier portals and networks also enables organizations to reach
new levels of efficiency on both the buyer- and the vendors-side.
Purchase order management (POM) via a portal allows for the fluid
and streamlined processing of transactions and communications.
Electronic PO confirmations, Advanced Shipping Notice (ASN), and
invoicing via PO flip are just a few examples.
The continuous search for improvements should also address what
many consider to be more complex processes in the Source-to-
Pay (S2P) landscape. The sourcing process can also be automated
when it makes sense. It is also possible to save time and energy in
the analysis of bids. As we mentioned, “connecting the dots” and
providing all the data required for decisions in a “push” manner can
be the source of huge time savings, and can also guarantee better
decisions from an impact and from a compliance / risk point of view.
Addressing process complexity via standardization / harmonization
can also lead to efficiency gains because it allows organizations to
unlock economies of scale (less training, less documentation, fewer
errors, etc.).
Furthermore, using modern procurement technology can lead to
significant improvements. In addition to automating manual tasks, it
can allow teams to be faster and more agile in their business-critical
decision-making processes. Smart / Intelligent technology never
sleeps and can react, even anticipate, events and prepare options
or contingency plans. Other sources of efficiency savings linked to
using a unified Procurement platform within an organization relate
to IT costs. Having fewer systems also means fewer licenses, less
maintenance, fewer upgrade fees, and less need for user support.
CONCLUSION
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To explore more some of the topics addressed in this white paper, we recommend some of our other content that digs into more details:
• Whitepaper: Rev Up Your Procurement Value Engine
• Whitepaper: Boost Your Procurement Value Engine
• Whitepaper: Cognitive Procurement: The Final Frontier
• Study: Digital Procurement 2017: Just Hype Or The New Standard?
[1] Source: http://www.businessdictionary.com/definition/value-for-money-VFM.html#ixzz3vo4vvXqZ
[2] Raising the World-Class Bar in Procurement Through Digital Transformation, by Patrick Connaughton, Christopher S. Sawchuk and
Srinivasa Rao Dabbera, The Hackett Group, June 2017
The information contained in this document is proprietary. © 2018 JAGGAER. All Rights Reserved.
FURTHER READINGS
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Contact Us!
JAGGAER.com
+43.1.80.490.80 +1.919.659.2600
Simply Comprehensive Spend Solutions
[email protected] [email protected]
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