There’s no question that procurement has slowly transitioned from “cost cutter” and into a department that helps organizations achieve competitive advantage in their respective markets. A new McKinsey report backs up this fact while also illustrating how transactional procurement departments can expand their scopes of influence and reinforce their value within their organizations.
In McKinsey’s “Shifting the Dial in Procurement,” authors Tarandeep Singh Ahuja and Yen Ngai explain procurement’s role as a “workhorse for organizations,” driving savings percentage point by percentage point, contract by contract. “Yet despite the tremendous impact that strong spend management can have in value creation,” they say, “the reality is that in many sectors, procurement is still primarily a transactional function with a limited scope of influence.”
In light of the unprecedented rate of change in the world today, procurement is at a crossroads: Does it continue to operate as it always has, or should it start unlocking distinctive competitive advantages for organizations? As value chains become increasingly complex and volatile, the report’s authors say that procurement can both operate as a business function and take the opportunity to extend the scope of its influence in an organization.
“Winning in this more complex and digital future will require a complete transformation of procurement as a function,” McKinsey states, “having a broader mandate, way beyond just cost reduction; investment in digitization, automation and analytics; and rethinking the procurement organization.”
4 Ways to Shift the Dial
Based on its conversations with C-level executives over the last two years, McKinsey came up with a list of actions that all CPOs and procurement leaders should be taking in 2020. Here are the top recommendations (the full list is online here):
- Rethink the procurement mandate. Evolve from being an enabler of cost reduction to a creator of sustainable competitive advantage, by collaborating with strategy, operations and other functions to jointly uncover new sources of competitive advantage. The authors tell procurement professionals to identify the “optimal manufacturing and supply footprint” and to leverage the sourcing and supply-chain strategy to create a distinctive brand proposition (i.e., via ethical sourcing).
- Play the role of Chief Ecosystem Officer. Broaden the perspective beyond the traditional value chain and become a source of innovation for your organization. You can, for example, foster an ecosystem of innovation by supporting the adoption of innovative technologies or by exploring innovative commercial models (i.e., as-a-service contractual arrangements) with vendors.
- Leverage digital, analytics and data. Use automation and digitization to streamline procurement processes and improve internal customer experience. Establish a data infrastructure that enables more insights (e.g., using spend intelligence to automate data cleansing and analysis).
- Future-proof the organization. “Invest in new talent and capabilities for your procurement function,” McKinsey suggests, “and rethink the procurement career path to succeed in a digital world.” For example, this can include rebalancing roles towards more strategic capabilities requiring new skillsets (i.e., analytics, digital, partner selection and development, sustainability auditing) and increasing automation of transactional activities.
With global trends evolving at a quick pace right now, McKinsey says the procurement function must elevate its focus on the corresponding opportunities and respond strongly to them. “While this poses many questions around how to best redefine the role to capture value, it’s clear the [procurement] function will have a much more strategic part to play,” the report authors conclude. “Is your procurement function ready to shift the dial?”