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Kearney outlines agenda for CPOs

CPO Agenda

Earlier this year, Kearney presented its annual forecast of key trends that CPOs can incorporate into their larger strategies. Here, we revisit this agenda as the second half of 2024 commences.

Broken down into five distinct categories, the trends centre around AI, liquidity improvement and cash management, cost reduction, design of resilient supply chains and the implementation of sustainable procurement.

“This is all about peering down the road to anticipate detours, opportunities, speed bumps and potential roadblocks. For a CPO, success depends on being able to keep an eye on short-term and long-term corporate goals even while managing suppliers, costs, risks and any number of other variables,” said the leading global management consulting firm.

“Looking ahead, amid shifting consumer expectations and technological advancements, environmental concerns, geopolitical uncertainties and a possible recession, strategic procurement looks more essential than ever.”

Kearney’s CPO agenda includes:

Artificial intelligence (AI) in procurement

Generative AI is poised to colour almost every aspect of our modern lives. Procurement will be no different.

Leaders in the sector are already creating guidelines through text generators like ChatGPT. Requests for proposal (RFPs) are being written with AI and translation capabilities are being used to assist in communications across international lines. 

All of this makes other optimisations increasingly accessible. Repetitive tasks such as contract scanning are being done by AI, and relevant information is being culled from long, inaccessible documents. The contents of large data sets are being democratised. Benefits from this integration with AI include efficiency gains, cost reductions, improvements of supplier partnerships and the strengthening of supply chains.

For all of its benefits, however, AI does bring with it certain challenges. Kearney has noted uncoordinated and competing objectives, functional silos, unclear data understanding and a lack of internal capabilities and capacities.

In the short time that AI has become general across the corporate landscape, we’ve assisted clients in prioritising AI application areas, selecting providers and implementing other solutions. It’s become clear to us that to realise the full potential of AI technologies in procurement, certain hurdles need to be cleared.

Operational efficiency through data and contract analysis

Moving forward, the most agile procurement officers are going to be using artificial intelligence to analyse spending data and contracts. AI tools offer a 25 to 30 percent improvement in spend classification to their procurement departments, and they can enhance supplier allocation by 30 to 40 percent. 

Contract analytics describes the automated data extraction from contracts, which can boost employee productivity, expedite workflows and achieve P&L-effective savings. This is achieved by analysing historical contracts in order to generate improved terms and identify discrepancies between contract terms and invoices.

Risk mitigation and compliance

When properly utilised, AI can monitor supply chain risks. By analysing large data sets (weather forecasts, for instance) it can identify anomalies and detect potential production interruptions. Real-time anomaly detection allows companies to proactively take measures to minimise supply chain impacts and ensure operational efficiency. 

For compliance management, AI can also aid in monitoring procurement processes and detecting potentially fraudulent activities. When asked to analyse historical non-compliance data, AI can minimise future risks and help ensure ethical practices.

Strategic planning and sourcing strategies

When it comes to developing procurement sourcing strategies, AI can play a key role. Through predictive modelling, it can identify and adapt to current trends. Potential risks (materials shortages, for instance) can also be identified and possible future price fluctuations flagged. 

Data analysis also identifies shifts in global delivery trends, providing insight into upcoming developments. Additionally, AI can evaluate information from various public and private databases, identifying potential suppliers. Finally, AI can simulate various negotiation scenarios to test suitable tactics.

Liquidity improvement and cash management

In times of economic turmoil, businesses are often well advised to prioritise cash management. Liquidity helps safeguard against uncertainty and agile cash management plays a pivotal role in overall financial performance, especially amid rising interest rates, periodic stagflation phases, supply chain disruptions, and pressures from global markets, stakeholders and stringent regulations. 

Successful businesses focus on cash flow, EBIT, revenue growth and the precise management of inventories and receivables. Investments meant to provide financial stability and value enhancement in a dynamic market environment also play a role.

Depending on financial objectives (such as cash control through savings or EBIT control with a focus on payment terms), various optimisation levers come into play. Significant steps can also be taken by the procurement department.

Working capital management optimisation

Reviewing and shortening payment terms can increase liquidity. Other methods to optimise working capital include prioritising the inventory of raw materials and finished goods, and reducing overdue receivables, primarily managed by the sales department. 

Extending payment deadlines through bulk purchases can also increase inventory and thus negatively impact free cash flow. Interdisciplinary collaboration is crucial to understanding the overall impact of any given decision.

Capital release

A successful CPO should identify significant corporate assets and evaluate them in the context of overall corporate health. Forms of resale or reduction of service life can be negotiated. Analysing and selling vacant office space might be one example of a capital release. The same goes for unused fleet vehicles or surplus/unused IT software licences.

Implementation of cash flow forecasts and financial instruments

Applying cash flow forecasts enables better long-term liquidity planning by identifying potential bottlenecks early. Moreover, the targeted use of financial instruments, such as derivatives or hedging strategies, can help mitigate risks and optimise liquidity.

Cost reduction

Unfortunately, 2023 was marked by significant inflation. This trend remains a theme in the coming year. While economists predict a deceleration in the rates of inflation, prices are still expected to rise. This poses ongoing challenges for both businesses and consumers.

Understanding products and pricing

When it comes to big picture products and pricing, transparency is key. Buyers should keep a close eye on the pricing structure of their products and carefully monitor underlying indices. This will enable them to benefit from declining indices and prepare accordingly for any related negotiations.

Establishing design-to-source

Redesigning a product for sale provides an opportunity to efficiently optimise both procurability and costs. In this context, procurement can add value by collaborating with the development and production departments. Procurement can serve as a crucial intermediary between supplier insights and internal expertise.

Improving indirect procurement

Indirect categories offer significant optimisation potential. Redesigning the supplier relationship to involve more savings responsibility on the supplier’s part, using digital tools, organising supplier days or conducting regular tenders can help unlock untapped potential.

Optimising tail end

It is understandable that buyers will sometimes tend to focus on those products with the highest expenditures. However, this can result in less attention being paid to the “tail end,” or to those products with low individual expenses but higher overall volumes. 

High volume can, in turn, lead to expanded scope and complexity. Digital solutions, such as Simfoni, can create transparency and help realise substantial untapped potential.

Design of resilient supply chains

After a brief period of relative stability, the outlook for supply chains in 2024 remains uncertain: geopolitical tensions, macroeconomic volatility, natural disasters and the scarcity of certain raw materials cloud the horizon. Companies should revisit certain value chains, establish transparency and form appropriate teams to respond to disruptions.

Rethinking the supplier base

Building shorter value chains brings supply and demand closer together. Qualifying additional suppliers allows for a quick shift to alternatives when necessary, enhancing the ability of a company to respond to disruptions.

Establishing transparency

Visibility in the supply chain enables disruptions to be identified and responded to in kind. Without visibility into tier 2 and tier 3 supplier networks, companies can often only react to disruptions after it’s too late. To gain this transparency, companies need to invest in appropriate digital technologies.

Building diverse procurement teams

The volatility of recent years has shown that the challenges facing procurement are becoming increasingly complex and diverse. To be optimally prepared for disruptions, procurement teams should combine a broader spectrum of skills and perspectives. Creating cross-functional teams and providing targeted training for existing teams can help contribute to preparedness.

Implementation of sustainable procurement

Legal and social pressures, coupled with proactive initiatives, are prompting companies to define ambitious sustainability goals. In many cases, the corporate value chain (scope 3) standard represents a significant aspect of these goals. 

The scope 3 standard is a method by which companies can measure and account for value chain emissions outside their physical walls. Within a company, procurement is often responsible for implementing scope 3 measures and tracking progress. A range of due diligence obligations related to human rights and environmental protection also come into play. 

The following considerations will thus be crucial for CPOs in 2024:

Implementing procurement strategy

The sustainability goals of procurement should align with a company’s overarching sustainability objectives. Striking a balance between traditional procurement goals and larger objectives (scope 3 emissions, social justice and so on) in category-specific strategies is vital to ensuring that procurement contributes to sustainability goals.

Scenario optimisation for goal balancing

Executing a sustainable procurement strategy means identifying optimal suppliers that align with both your financial and environmental, social and corporate governance (ESG) goals. To facilitate this decision-making, transparency should be established across the upstream supply chain. This helps procurement better understand the trade-offs between cost savings, quality, sustainability, delivery times and supply security.

Calculating business cases for sustainability

Sustainability sometimes competes with other crucial initiatives within a company, but stakeholders can be won over by being shown positive, commercial cases that take into account sustainable procurement. Cost savings through efficiency improvements, cost avoidance and risk mitigation, as well as revenue increases through improved ESG positioning, will tend to attract both talented employees and customers.

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