Referencing the direct material 2003 ERP story from Procurement Insights (see below), here are the core points to consider:
- The faster the gains on tech, the more rapid the decline in value – diminishing return.
- The practitioner agrees to pay licensing and maintenance fees to an ERP solution provider.
- With a new implementation, there are initial returns.
- However, as the efficiencies offered by the new ERP system are increasingly integrated and expanded into normal operations, the savings rate steadily declines even though the licensing and maintenance fees remain constant.
- You hit a Savings Event Horizon where the diminishing returns erode previous gains.
The Inherent Danger of a “Pull-Through” Strategy (Procurement Insights 2003)
The majority of e-procurement initiatives initially tend to focus on the high-dollar, low transactional volume spend within an enterprise. As a result most vendors have developed their solutions to manage centrally negotiated contracts that are combined with an aggressive supplier compression strategy.
However after lengthy implementation periods (usually involving a change management program), the anticipated and sustainable savings have rarely materialized to the point of justifying the original and ongoing technological investment. It is at this point that both process and technological misalignment occurs.
One example of process and technological misalignment is actually indirectly supported by a 2003 CAPS study on Reverse Auctions (let me know if you would like to receive a copy). The report’s findings stated that the organizations that had utilized a Reverse Auction tool indicated that their cost of goods savings diminished with each event so that by the 3rd or 4th auction there were no longer any appreciable gains in this area. The study did suggest that there would be potential process-related savings.
However, based on our findings that the procurement cycle time for Direct Material acquisition only accounts for approximately 10% of a purchasing department’s time, the ongoing savings were ultimately disproportionate to the software vendor’s licensing and maintenance fees. Therefore, and as a means of justifying the technological investment, most organizations tended to employ a transactional “pull-through” strategy whereby the entire enterprise’s spend (both Historic Flat Line and Dynamic Flux commodities) fall under one umbrella. Unfortunately the purchasing processes that apply to one type of commodity characteristic do not apply to the other – hence misalignment. This ultimately leads to the compliance and change management problems experienced by most organizations.
By applying the same purchasing process used for Direct Material (Historic Flat Line) procurement to Indirect Material (Dynamic Flux) commodities, the perceived volume discount savings are virtually negated within a very short period of time (in some cases almost immediately). This is one of the factors that fuel the buyer refrain that they can usually beat the centrally negotiated contract pricing with a single phone call to a local supplier.
What About An AI Savings Event Horizon?
- The concept of “AI scaling laws” refers to the observed relationship that increasing the size of AI models and the amount of training data typically leads to improved performance. However, recent developments indicate that this approach is encountering diminishing returns, meaning that simply expanding model size and data does not yield the significant performance gains it once did. This trend has prompted AI research labs to explore alternative strategies to enhance AI capabilities. TechCrunch (Nov. 2024)
- “Current AI scaling laws are show diminishing returns, forcing AI labs to change course.” – TechCrunch (Nov. 2024)
- The diminishing returns observed in AI scaling laws suggest that ProcureTech firms need to pivot from strategies focused solely on increasing model and data size. Instead, they should invest in innovative, efficient, and tailored AI solutions that align with specific procurement needs and challenges. TechCrunch (Nov. 2024)
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Procurement Insights
Are Diminishing Returns Undermining AI Initiatives The Way It Did With ERPs?
Posted on February 1, 2025
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Referencing the direct material 2003 ERP story from Procurement Insights (see below), here are the core points to consider:
The Inherent Danger of a “Pull-Through” Strategy (Procurement Insights 2003)
The majority of e-procurement initiatives initially tend to focus on the high-dollar, low transactional volume spend within an enterprise. As a result most vendors have developed their solutions to manage centrally negotiated contracts that are combined with an aggressive supplier compression strategy.
However after lengthy implementation periods (usually involving a change management program), the anticipated and sustainable savings have rarely materialized to the point of justifying the original and ongoing technological investment. It is at this point that both process and technological misalignment occurs.
One example of process and technological misalignment is actually indirectly supported by a 2003 CAPS study on Reverse Auctions (let me know if you would like to receive a copy). The report’s findings stated that the organizations that had utilized a Reverse Auction tool indicated that their cost of goods savings diminished with each event so that by the 3rd or 4th auction there were no longer any appreciable gains in this area. The study did suggest that there would be potential process-related savings.
However, based on our findings that the procurement cycle time for Direct Material acquisition only accounts for approximately 10% of a purchasing department’s time, the ongoing savings were ultimately disproportionate to the software vendor’s licensing and maintenance fees. Therefore, and as a means of justifying the technological investment, most organizations tended to employ a transactional “pull-through” strategy whereby the entire enterprise’s spend (both Historic Flat Line and Dynamic Flux commodities) fall under one umbrella. Unfortunately the purchasing processes that apply to one type of commodity characteristic do not apply to the other – hence misalignment. This ultimately leads to the compliance and change management problems experienced by most organizations.
By applying the same purchasing process used for Direct Material (Historic Flat Line) procurement to Indirect Material (Dynamic Flux) commodities, the perceived volume discount savings are virtually negated within a very short period of time (in some cases almost immediately). This is one of the factors that fuel the buyer refrain that they can usually beat the centrally negotiated contract pricing with a single phone call to a local supplier.
What About An AI Savings Event Horizon?
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