The Digital Transformation of Supply Chains: Opportunities and risks in the Italian Industry 4.0 Landscape

Procurement is defined as the function of a firm related to the activities and processes to acquire goods and services. Its meaning is different from the one of “purchasing” because it involves a different number of activities beyond the ones required to order and receive goods, such as market research and analysis, supplier evaluation, the establishment of fundamental requirements and negotiation of contracts.

Digitizing this function will deeply change the abilities and tools required, in many organizations this process is already on its way as companies are using a variety of procedures and big data tools to connect more closely with suppliers, improve sourcing, enhancing collaboration, aid the planning process and actively manage supplier risk.

In fact, organizations are everyday facing six major sources of risk linked to supplier activity:

-Execution, related to the fact that the buyers have to stop the production because they do not receive the requested services or tools on time or in the correct location and other risks could be linked to the disrespectful conduct of suppliers towards safety and environmental regulations.

-Commercial, linked to the failure of the buyer of keeping track of suppliers’ activities in particular if they bill properly and comply with contractual terms.

-Continuity, because a great source of risk is certainly suppliers’ financial stability.

-Competition, in fact there is risk that some suppliers can have conflict of interest or they could steal intellectual property rights from their buyers or other competitors.

-Compliance, connected to the importance of knowing that suppliers must conform to legal and regulatory requirements, such as tax laws, labour laws, anti-corruption legislation, and domestic government requirements.

-Cyber, correlated to the increased use of interconnected devices that facilitates the loss of data, privacy problems, the spread of viruses and malware and will influence the IoT development. I will go back on this topic later on in the next chapters.

Another important advantage of digitization is how it allows purchasing to reallocate resources in a more efficient way by eliminating the non-value transactional work necessitated by traditional paper-based processes. That will enable organizations to use their more strategic resources, their people, to completely focus on their core competencies and consequently increase competitive advantage.

However, the evolution of the supply chain system will have numerous other consequences for the procurement function as well. Indeed, the transition to the Industry 4.0 will require firms to buy not only physical goods like sensors and electronic components, but also digital inputs and services like digital platforms, software maintenance contracts and developers. Therefore, the biggest challenge will come as software and services become a core and always more essential feature of the outputs that an enterprise produces.

Already, the software embedded in many different products, is more valuable than the physical materials by which them are created. Moreover, many organizations are now transitioning to the cloud because it enables to mitigate the risks linked to the paper-based system and the 24/7 real-time visibility of all data that the cloud provides allows procurement to analyse and use the gathered information results to focus on supply chain improvements and flexibility reducing the risks throughout the system.

Thanks to this visibility, procurement can answer to different questions immediately instead of guessing possible answers. Human resources could know which suppliers are the most reliable and which ones are not in line with contract terms, if they are over or under purchasing and when deliveries will occur and if it will be necessary to order new raw materials.

In this way, they can fulfil calendar-based demands programming all the different steps of the production process and the efficient connection and management of inputs is a critical building block in the digital supply chain network.