Download this article in PDF format.
Defined as the ability of an organization to anticipate, prepare for, respond and adapt to incremental change and sudden disruptions in order to survive and prosper, resilience is at the top of many companies’ agendas right now. The pandemic, the continued labor shortage and ongoing economic uncertainty are just some of the forces that are pushing companies to make resilience a core focus.
As strategic leaders, visionaries, supervisors and advocates of their organization’s procurement departments, chief procurement officers (CPOs) can play an important role in helping their companies improve their resilience. In fact, in industries from energy to retail—and all points in between—the mission is clear: Future disruptions and the current macroeconomic environment require a “rethinking” of purchasing practices.
In a new report, McKinsey & Company stresses this point and offers up a list of 10 different actions that CPOs can take to help counter price volatility, offset inflation risks and manage ongoing product shortages. Procurement 2023: Ten CPO actions to defy the toughest challenges also highlights some of the key changes that CPOs are dealing with right now and the role that they can play in improving organizational resilience.
Top Moves to Make Now
McKinsey says CPOs can effectively combat volatility, inflation and shortages and build resilience by taking some core actions now. Here are some of the top moves that procurement professionals can make today to get their companies on the path to greater resilience in 2023 and beyond:
Use a 360-deg. risk assessment to identify any vulnerabilities. During this exercise, McKinsey tells CPOs to focus on these three types of risks:
- Supply. How are events affecting the end-to-end value chain? Which categories may be hard to secure in the foreseeable future?
- Suppliers. What vulnerabilities—including financial, fulfillment, reputational and environmental—do suppliers face?
- Cost. How are suppliers’ costs of goods sold (COGS) trending? Can you quantify the inflation or deflation they face? What do the results mean for your company’s profit and loss (P&L)?
Improve your real-time visibility. Leading companies have set up what McKinsey calls a “resilience cockpit” that provides real-time insights on customer demand, inventory, market pricing and supply disruptions. “The cockpit automatically enriches internal data with market data. The information is always accessible to CPOs and other company leaders,” the company says.
Enhance your risk operating model. To thrive in today’s business environment, organizations have to “fundamentally upgrade their risk operating models,” McKinsey advises. This can be done using sales-at-risk dashboards that present data from weekly monitoring of risks that affect sales and profits, and by enhancing supplier transparency—a process that helps CPOs identify suppliers and then maps dependencies to assess network resilience and vulnerabilities.
Optimize your end-to-end operations. Partnering with cross-functional peers to address end-to-end levers—such as reviewing specifications, challenging demand and streamlining internal processes—has become more important than ever. “Procurement leaders have strengthened their teams’ abilities to design to value, collaborate with suppliers and reduce complexity,” McKinsey states. “These initiatives generate value regardless of market context, help relieve upward price pressure and can generate a sustainable competitive advantage when the market stabilizes.”
Think and act sustainably. Environment, social and governance (ESG) strategies are on everyone’s minds right now. For example, McKinsey says most companies are taking short-term actions to optimize energy demand in response to market disruptions. This context also offers an excellent opportunity to optimize the future energy mix—for example, introducing new technologies, entering into power purchase agreements or implementing self-generation capabilities. “Such efforts allow companies to pursue sustainability and cost targets simultaneously,” the company points out.
Redefine portfolio and product design. Finally, companies should scrutinize their product designs to identify those that rely heavily on scarce materials and a few suppliers. Then, they can take steps to reduce dependencies wherever possible and push for rapid qualification. For example, one consumer packaged goods manufacturer reviewed its product designs and identified ways to avoid stockouts and offset price increases. “[The company] used advanced analytics to assess design changes in relation to consumer tolerances,” McKinsey explains. “This made it possible to equip sourcing and R&D teams with alternative specifications and formulations that had little or no impact on consumer perception or acceptance.”
