Throughout history there have been multiple attempts to trace the historical development of procurement. While most initiatives focus on specific countries or timeline, this is an attempt to document the history of procurement from a holistic perspective right from prehistoric times to today’s tech-savvy world.
Most people regard the procurement process as a modern innovation. However, a look back at the history of procurement can reveal that it dates back to 3,000 BCOpens a new window when the Egyptians started building the pyramids.
The scarcity of supplies and competitiveness is a major concern that stretches back to ancient times. A concept that was used by the Romans to William the Conqueror was further developed in the 19th century, culminating in today’s procurement processes.
After the second world war, the Soviet Union cut off infrastructure to West Berlin, supplies and provisions to the enclave was only provided through airlift. Shipping manifests for these critical supply drop-offs were in different forms and sometimes, even multiple languages, as a result, recording food and supply flows was nearly impossible.
Electronic Data Interchange
To solve this problem, Edward A. Guilbert from the US military was managing the logistics of Berlin Airlift and developed a standard manifest system that can be transmitted by telex, radio-teletype or telephone, to enable shipment of nearly two million tons of supplies until 1949. Guilbert applied his concept of transmittable standardization in the civilian world around the 1960s.
Rail, air, road, and ocean transportation providers were the first to implement this method, eventually resulting in the evolution of the first electronic data interchange (EDI) specifications in the 1970s. As the rapid development of EDI enabled swift information flow and improved inventory management, even manufacturing giants like Ford and General Motors demanded their suppliers to adopt this approach which led to reduced costs and better accounting functions.
Due to the rapid adoption, EDI became a formidable way to electronically transmit procurement documents like purchase orders, invoices, shipping notices, and more, directly to a vendor or another stakeholder’s computer. ANSI X12 and EDIFACT were some of the most frequently used standards for procurement forms.
Materials Requirement Planning
Although EDI facilitated information flow, it did not streamline procurement processes completely. There were still a lot of process gaps when it came to ensuring material availability while catering to the demand. This is where materials requirement planning came in.
In a production environment, it offered a comprehensive breakdown of the components that are required to build the end item. By tying every component with an existing inventory level, purchasers were able to draft an accurate timeline as to when every item must be purchased to meet the demand.
These MRP systems provided procurement officers the capability to determine the type, quantity, and time of need together with calculations relating to when and for quantity a purchase order should be raised. Thus, MRP offered an effective way to plan requirements which helped meet intended deadlines and service levels while minimizing costs.
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Manufacturing Resource Planning (MRP II)
Although MRP seemed like the best thing that ever happened to procurement, it reached its limit pretty quickly and issues associated with its application became apparent. Challenges in data integrity like incorrect bills of material and lead time data led to the development of MRP II.
MRP II integrated additional information flows to and from finance, marketing, and other departments. This improved integration enhanced the planning capability of the organization helping procurement leaders to ascertain capacity and labor requirements. Best of all, it allowed managers to obtain direct feedback from the shop floor using which plans can be adjusted.
This “back and forth†information sharing approach called closed-loop system came with the advantage of taking resources like equipment capacities, sizing rules, and economic order quantities into consideration to create sales and operating planning, production planning, and capacity requirements planning.
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Enterprise Resource Planning
The need for sophisticated and widespread integration across an organization resulted in the development of ERP systems. These ERP systems played a huge role in enhancing informational flows within and across departments.
The major element of an ERP system is its use of a single relational database to store data for various system modules ranging from purchasing and marketing to finance and human resources. The illustration given below displays the variety and diversity of departments/functions that can tap into an ERP system.
The Impact of the Internet
While ERP virtually integrated every function in an organization with each other, it had its own set of disadvantages. After its commercial inauguration in the 1990s, purchasing quickly recognized its significant potential and adapted it in the late 1990s. This early adoption of technology elevated procurement to new levels, a trajectory that continues even today.
The Internet streamlined purchasing activities in numerous ways like providing an extensive supplier base, identifying best prices, shortening process times, offering better access to purchasing documents, and consolidating all supply-related information in a single interface. This also led to a demand for revising current procurement approaches and strategies to fit around the technology.
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Electronic Procurement Suites
Not surprisingly, the Internet-led revolution had a considerable impact on ERP systems. The Internet changed the way transactions and communications were actually handled. Early adopters started using the Internet to capture orders and provide order status visibility back to other stakeholders.
As a result, organizations started to move away from standalone mainframes and ERPs with the demand for a solution that was compatible with the internet. Software providers started offering focused and specialized solutions for spend management, invoice, processing, and more.
Initially, these early development tools were primarily standalone and did not play well with each other. However, with time, these siloed procurement suites started offering integration advantages similar to ERP. These procurement suites allowed users to create and approve purchase requisitions, send purchase orders, and retrieve delivery information on the internet.
Today, the industry has matured a lot and there is a wide range of procurement suites that cater to organizations of all sizes. With the help of these procurement suites, purchasing teams are capable of working with accurate, up-to-date information to more strategically plan, assess, and improve supplier performance and relationships.
Current State of Digital Procurement
Over the last decade, there has been a significant rise in the number of electronic sourcing suite providers. Although each technological provider is trying to tap into a specific capability and offering, there has been a lot of consolidation in their offerings as well.
Irrespective of an organization’s size, these procurement suites enable businesses to buy smarter, streamline their purchase-to-pay cycle, and help them manage supplier relationships better. Technological innovations have helped procurement evolve into a critical management function that will continue to grow in significance.
So, what are your thoughts about the impact of technology on the procurement domain? Share your thoughts in the comments below.
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