McKinsey has refreshed its 2023 resilience toolbox to include five new priority actions for Chief Procurement Officers (CPOs) that reflect the lessons and challenges of 2024.
The global management consulting firm has added these priorities to its five existing actions and tools, to help CPOs drive sustainable impact within their organisations and better prepare for the future.
Economic volatility, supply chain disruptions, customers’ new expectations, advanced technology, ESG considerations and labour market challenges are the six market forces and trends that are reshaping the business landscape in 2024, says McKinsey.
The organisation’s 10 core CPO actions are broken down into four broader categories:
- End-to-end value capture
- New sources of value
- Integrated margin management
- Operating model of the future
End-to-end value capture
1. Utilise new-frontier analytics and AI. Employ advanced analytics to extract valuable insights from procurement data. Make strategic decisions using predictive analytics and AI for commodity forecasting, risk assessment, performance optimisation, talent sourcing and supplier negotiations.
For example, a generative AI bot can help procurement teams develop strategic decisions based on available data.
2. Create an RFP engine. Develop an RFP engine — an approach for prioritising categories and suppliers based on market development, spend analysis and supplier leverage. This analysis prioritises spending with the highest potential to drive value for the organisation, while deprioritising categories or suppliers where value will be more challenging to obtain.
3. Redesign value creation with key suppliers. Intensify design-to-cost collaborations with suppliers. Partner with suppliers or directly invest to secure the scale-up of critical supply chains.
New sources of value
4. Manage volatility. Understand exposures and coordinate responses to macroeconomic drivers, such as interest rates, commodity prices and consumer confidence.
Maintain a practised and updated playbook to recover and then control costs as inflationary pressures subside (or shift) and supply chains are redesigned. Ensure the playbook includes scenario planning that captures a broad range of potential outcomes.
This represents an evolution of the “refresh category strategies” tactical action included in last year’s priorities.
5. Optimise operations from end-to-end. Establish a cross-functional nerve centre or control tower to create transparency across internal processes, monitor markets and identify risks. This was among the enabling actions in last year’s priorities and continues to be essential today.
In addition, evolve from a traditional focus on savings to a much broader agenda emphasising value creation, resilience and sustainability. Report daily to top executives to enable rapid decision making, oversight and integrated communications.
6. Integrate ESG and optimise upstream Scope 3. Incorporate ESG factors in procurement decisions to reduce Scope 3 emissions while continuing to manage costs and other trade-offs.
Creating transparency on CO2 emissions is now necessary, given the need to comply with new regulations, such as the EU’s Carbon Border Adjustment Mechanism. In the past, energy consumption was the main focus, but now procurement’s efforts are expanding to encompass the entire ESG spectrum.
This means working with suppliers to establish clear guidelines, support and incentives for sustainable sourcing, ethical practices and environmental impact assessments throughout the supply chain.
While ESG may not be the highest priority for many CPOs at this moment, maintaining momentum is crucial for long-term success.
Integrated margin management
7. Coordinate response for integrated margin management. Enable effective pricing and contracting strategies to tightly integrate cost of goods sold (COGS) and pricing.
Beyond providing real-time information on costs, procurement can feed insights about the market and competitors to sales teams to bolster their efficacy in customer price negotiations.
Reflecting the need for action, end-to-end margin management was identified as a top three priority by 87 percent of participants in McKinsey’s recent Procurement Executive Forum.
8. Redefine portfolio and product design. Re-evaluate offerings to identify those that rely heavily on scarce materials and few suppliers. Look for ways to reduce these dependencies, expedite qualification and hence increase resilience.
Apply market research to capture emerging opportunities by actively managing costs and risks, such as those relating to labour and logistics.
Operating model of the future
9. Digitise end-to-end procurement processes. Deploy a modern enterprise data management system that connects with the rest of the organisation and external data.
Leverage advanced analytics, generative AI and leading digital tools (such as should-cost models, eRFX and contract AI) to maximise value creation and prepare the organisation for future technology advancements.
10. Build new capabilities for the buyer of the future. Prepare the organisation for procurement’s future by investing in new abilities for advanced market research, integrated technology and talent development.
Equip procurement professionals with deep insights and tools to understand and address supply market dynamics, risks, economics and ESG. CPOs can spearhead the development of institutional capabilities, centres of excellence and talent programs to drive this transformation.
