Across industries, leaders and managers may be missing a critical piece of the big picture: the increasing importance of procurement to the bottom line success or failure of their companies. In fact, 80% of a company’s expenditures go toward procured goods and services, and procurement is often the single function that makes decisions around all external costs. Therefore, it is critical that senior executives recognize that procurement is uniquely positioned to lead a company through the turbulence of the years ahead.
Research done by McKinsey & Company--including more than 1,500 global procurement studies and in-depth examinations of more than 700 organizations-- proves that best-practice procurement consistently lowers costs, identifies growth opportunities, and helps insulate companies from a variety of hazards. The evidence is all around us that procurement must take on a central role in today’s organizations.
Look at the news headlines and the experiences your company has faced in recent years. Natural disasters and scarcities of raw materials have exacerbated volatility in supply chains, disrupted operations, and caused significant swings in input pricing. External functional specialists—contract manufacturers and third-party logistics providers, to name just two—have proliferated in both the developed and the emerging worlds, and they regularly deliver new levels of innovation and efficiency up and down the value chain. And, increasingly, stringent ethical, social, and governmental requirements mean that if those specialists have a slip-up, they can spoil the brand image of the company.
In examining these changes at McKinsey, we have identified five megatrends that will transform business over the next decade. For organizations to flourish in the face of these developments, procurement must be empowered to cope with the challenges and take advantage of the opportunities they present. In brief, here are our recommendations for how the procurement function must evolve in the face of the five megatrends.
The Great Global Rebalancing: Sourcing will take place across the entire world; “white spaces” that may exist today will disappear. The future of the sourcing organization, therefore, is global and multicultural. Sourcing footprint considerations will become increasingly multidimensional and dynamic. Sourcing decisions will have to be made against the backdrop of an integrated company-footprint, including manufacturing, sales, and R&D. Procurement is in a prime position to lead these integrated company-footprint considerations given its deep cross-functional nature and thorough understanding of global and local markets.
The Productivity Imperative: Integrated companies will increasingly turn to external functional specialists that provide individual slivers of the integrated company’s value chain at superior performance—the result of economies of skill and scale. The management of a company’s end-to-end value chain will cross more and more company perimeters, requiring new management principles and attention to control value creation. Procurement is best positioned to assume the role of “orchestrating” the end-to-end chain since chief procurement officers (CPOs) control the supplier relationship and are deeply embedded with their cross-functional value-chain partners.
Big Data and the Global Grid: Available data and communication bandwidth will continue to increase by orders of magnitude in the next few years. Big data and the global grid will have a profound impact on businesses by enabling new insights, collaboration at scale, and superior, data-driven decision making. Already, procurement uses internal and external data for decision making and communication bandwidth for supplier integration and management. The advent of even more data and bandwidth will strengthen and expand procurement’s role.
The Volatile New Normal: Procurement will have to manage not only the increasing scarcity of raw materials but also substantially greater volatility that will have a significant impact on a company’s profitability and ability to do business. Defensive strategies, such as hedging or recovery plans, will be part of the solution, but not all of it. Agile procurement will allow CPOs to cope with risks; doing this well will also allow them to capture opportunities and create a competitive advantage by better managing sourcing risks.
The New Economic Drivers: Environmental, social, and regulatory (ESR) issues will become increasingly important, presenting procurement with new costs, risks, and opportunities. Governments and consumers will make fast and significant decisions on ESR; as a result, functions including procurement will have to anticipate and prepare. To incorporate ESR into sourcing decisions sustainably, procurement must define a comprehensive approach based on “total impact of ownership” considerations.
The call to action is all too clear. CEOs have to hold their chief procurement officers accountable on two levels. They must demand that their CPOs bring their procurement practices closer to those of today’s top-performing procurement organizations, which requires focusing on traditional levers to achieve significant cost savings and performance improvement. And, they must look to their CPOs to successfully exploit the value offered by a growing external supply base, in the context of the opportunities and risks of the decade to come.
Excerpted, with permission from the publisher, from PROCUREMENT 20/20: Supply Entrepreneurship in a Changing World by Peter Spiller, Nicolas Reinecke, Drew Ungerman, and Henrique Teixera. Copyright © 2013. Published by Wiley.