Transforming Procurement to Achieve Competitive Advantage in the Coming Decade

By P. Spiller, N. Reinecke, D. Ungerman & H. Teixeira

In this article, the authors argue that procurement must be transformed to meet the challenges that lay ahead for all businesses. After outlining five megatrends that will impact your business in the coming years, they offer concrete advice on how to use procurement to gain competitive advantage.

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. The reality is that 80% of a company’s expenditures go toward procured goods and services, and procurement is the single function that makes decisions around all external costs. It is uniquely positioned to lead a company through the turbulence of the years ahead.

In this article, we describe the five macroeconomic “megatrends” that will impact all businesses over the coming years, and how procurement is positioned to help them cope. Then, we explain the ways that procurement must transform itself in the near future, so that it can continue to provide solutions for conquering the challenges that lay ahead.

First, the five megatrends:

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The Great Global Rebalancing: Sourcing will take place across the entire world. “White spaces” that may exist today will disappear. Because the future of the procurement organization is global and multicultural, it is in a pole position to contribute to integrated company footprint discussions, including manufacturing, sales, and R&D.

The Productivity Imperative: Integrated companies will increasingly turn to external functional specialists to provide individual slivers of the company’s value chain at superior performance. Therefore, the management of a company’s end-to-end value chain will become increasingly important, with procurement having a pivotal role.

Big Data and the Global Grid: Available data and communication bandwidth will continue to increase by orders of magnitude. 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. This is particularly true of procurement, which is naturally sitting at the intersection of various data streams and relationships.

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.

The New Economic Drivers: Environmental, social, and regulatory (ESR) issues will become increasingly important, presenting procurement with new costs, risks, and opportunities.

 

Keeping these megatrends in mind, it becomes clear that the ways in which procurement functions now – and how it transforms itself in the future – will confer enormous competitive advantage. The key is to identify the opportunities relevant to your industry, company, and organization that will deliver the most to your bottom line. Then the procurement transformation process can begin.

Let’s compare, for example, how the needs of the consumer goods sector will differ from those of the retail sector and from pharmaceuticals. Consumer goods companies will need to continue managing the ever-increasing pressure on margins and the high volatility in input prices. Cost reduction will continue to be important, but it will be far from sufficient. Effective design-to-value will rapidly become a core part of the agenda, as companies more frequently update product recipes and packaging, shifting swiftly to better take advantage of consumer preferences. Global sourcing strategies will be driven ever more by scarcity and volatility of key raw materials.

In fact, we predict that many consumer players will want to establish control over raw-material costs through more upstream influence (for example, with farmer development programs). Leveraging big data will become even more important for consumer goods manufacturers, as they parse retail data in even more detail. Value creation through environment-friendly efforts and social-responsibility measures is rising, with more public attention to upstream supply chain issues, including labour rates and treatment. Consumer procurement organizations and packaged goods companies will have to play a more integrated role across the value chain to enable and drive change more effectively, and become a core value-creating function by 2020.

In contrast, the retail sector will have to find answers to the “Great Global Rebalancing.” In emerging markets, the retail sector is formalizing into national chains, while in the West, footprints are shrinking and moving away from hypermarkets to smaller formats, driven by urbanization and online growth. Customers demand integrated multichannel shopping, which in turn, through big data and the global grid, creates massive opportunities for retailers to do a better job of predicting and fulfilling consumer demand. Consumers are being more demanding in terms of health, social-responsibility, and environmental considerations. Retailers need to address these demands through sustainable sourcing models, supply chain transparency, and proper management of social-media channels.

80% of a company’s expenditures go toward procured goods and services, and procurement is the single function that makes decisions around all external costs.

Meanwhile, the pharmaceutical sector is suffering from dwindling R&D effectiveness. Drugs worth 40 percent of global pharma revenues will lose patent protection by 2015, while health-care buyers are getting increasingly sophisticated in optimizing buying and reimbursements, and emerging-market players are posing increasing competition. Overall demand for pharma companies’ products is fundamentally shifting to emerging markets, where 70 percent of consumers belong to low-income segments – elevating the need for low-cost pharma business models. Pharma companies are already responding and shifting lower-value activities to lower-cost providers, especially in manufacturing. A procurement vision for pharma must address these changing business models, advocate better end-to-end provider management, and respond to the necessity to source more knowledge and intellectual property from external parties, all within the specific quality and regulatory boundaries of the industry.

The procurement upshot: each CPO must be able to marry the opportunities and issues pertaining to his or her company’s industry with the company’s individual needs, and translate the resultant coupling into a clear procurement vision that propels the company forward. But what are the elements of this vision-setting process? In addition to business foresight that incorporates the trends most affecting your industry, your vision should be based on the factual evidence that supports those trends, as well as on the strategy and needs expressed by your company at large.

Most successful change efforts define a medium-term future for each element of the transformation. Having a sense of where you want to be in three to five years gives you the immediacy, urgency, and tangibility you need to inspire stakeholders, set a rapid pace for change, break through resistance, and motivate the entire organization.

In addition, you must set stretch goals for both business performance and organizational health. These should be tough but achievable, and inspire a new mindset and create energy. Consider how President Kennedy’s goal of putting a man on the moon inspired the aerospace industry in the 1960s, and how automotive OEMs’ quest to develop the 1-liter-of-gasoline-per-100-kilometer car inspires vehicle developers today.

Most organizations, whether they are strugglers or top performers, have more headroom than they think before their goals become unattainable. Suppose you, the CPO of a European–based organization, are kept busy with operational order fulfillment rather than strategic sourcing. If you were to tell your staff that you were planning to make the organization into an end-to-end value-chain orchestrator, that message would likely be met with skepticism, apathy, and perhaps even outright resistance.

Suppose instead that you set a goal of becoming the leader in strategic category management in your industry, simultaneously teaming up with the COO to support his or her quest to outsource more internal operations. You would build the required strategic sourcing capabilities and would be deeply involved in some concrete make-or-buy decisions and outsourcing projects. By establishing such a foundation first, the stretch goal of becoming an end-to-end value-chain orchestrator would present a more practical objective – something that could be achieved over a reasonable time frame.

After preparing a clear vision of what the procurement organization must look like in the future, it’s necessary to see where the organization stands today.

The skills in which you need to invest will depend on this vision. For example, if your vision is to become an end-to-end orchestrator of the value chain, you will need deep skills in supply market analysis, make-versus-buy determinants, benchmarking, and supplier performance management. If the need is to build an agile procurement organization that ensures continuous supply to your operations despite raw-material scarcity, you’ll need capabilities in advanced risk management, flexible supplier contracting, make-versus-buy, hedging, and product design.

Of course, if your organization is to enact change, it will need more than just performance capabilities. Its organizational health will depend on developing and promoting capabilities such as problem solving, the ability to influence senior management, and collaboration with the business units. Even more advanced skills will be needed depending on your specific vision: agile procurement, for example, calls for a highly refined ability to embrace and execute change rapidly.

You must set goals for both business performance and organizational health. These should be tough but achievable, and inspire a new mindset and create energy.

Last but not least, it’s a good idea to benchmark the capabilities needed against those found in industries that already excel at your vision. For instance, banks and insurance companies have employed sophisticated risk-management techniques for decades. The high tech sector is the gold standard for outsourcing a significant part of the value chain. And consumer-packaged-goods companies have marketed and sourced their products and innovations from low-cost countries for many years.

You will need to conduct an inventory of your employees’ capabilities against those that you’ve deemed critical for your procurement transformation. The key is to be rigorous, to base your assessment on facts, and to ensure you’ve included an analysis of the mindset of your employees in addition to an understanding of their performance capabilities. Let’s consider the aforementioned agile-procurement example: if your employees are resistant to change, they will not act with the speed and preemptive agility required to avoid a factory shutdown that could follow a flood or a supplier’s unexpectedly becoming insolvent, and things will inevitably go back to the way they had always been.

Strengths and weaknesses are institutional as well as personal. What good is it to develop flexible contracting skills if your leadership team cannot make decisions rapidly? What if the organization’s perception of procurement is so poor that cross-functional leaders do not trust that its proposals are based on fact?

Ask yourself: Can I honestly say that key leaders across the company express faith that we can achieve our vision for procurement? The perspectives of the key leaders will, to a large extent, determine whether you are successful in transforming the organization. If you lack the active support of your stakeholders, you have to consider whether you’re recruiting leaders with the right level of education and leadership skills, whether you’re approaching the training of your organization appropriately, and whether you’re successfully developing your leaders to take on roles of greater magnitude.

You must also address critical questions regarding structures and systems. Do you have the right cross-functional steering bodies in place to support making controversial decisions quickly and with the right expertise? Are the right metrics in place to support your vision? Will it be possible to measure the impact of this new vision and create positive momentum?

By the end of the assessment process, you should have a compilation of the strengths and training needs for each of the employees whom you expect to involve in the transformation. You should know which of your existing capabilities will help you meet your goals and which need work. You should understand the mindsets that will contribute to the program’s success and the three to five specific aspects that you will need to fix. And you will certainly need to know what changes to make to your structures and systems to properly support transformation.

Ultimately, the most important message for advancing change in your transformation to 2020 is to never stop adapting: the vision that you set for your organization today may require many course corrections if it is to be successful several years down the road.

 

This adapted article is excerpted with permission from the publisher, Wiley, from PROCUREMENT 20/20: Supply Entrepreneurship In a Changing World byPeter Spiller, Nicolas Reinecke, Drew Ungerman and Henrique Teixeira. Copyright © 2013.

About the Authors

Peter Spiller is a Principal in McKinsey’s Frankfurt office and leader of the firm’s EMEA purchasing and supply management practice.

Nicolas Reinecke is a Tenured Expert Principal in McKinsey’s Hamburg office.

Drew Ungerman is a Director in McKinsey’s Dallas office and leads the firm’s Americas purchasing and supply management practice.

Henrique Teixeira is a Principal in McKinsey’s São Paulo office.

 

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