Supply chains face another year of volatility and inflationary pressure. McKinsey experts have summarized 10 resilience actions that Chief procurement officers (CPOs) can deploy to craft a winning enterprise-wide response.
Procurement leaders who had hoped that macroeconomic conditions in 2023 would make their jobs easier than last year are already disappointed. As the new year began, the volatility and inflation of the previous year showed no signs of abating (see sidebar, “Macroeconomic conditions straining procurement”). Some of the most important trends may persist well beyond 2023. What’s more, the procurement function itself continues to face major changes that have made its traditional operating models obsolete. Front-running procurement organizations are increasingly distancing themselves from the rest of the pack, deploying their talent, capabilities, technology, and insights into the world’s complexity in ways that propel them far ahead of the rest of the pack.
There is no space for one-size-fits-all procurement models in 2023. A category-level response is essential. Some categories continue to experience rising prices and supply constraints, requiring a cross-disciplinary approach to improve the total cost of ownership. Other categories are seeing downward price pressures, creating an imperative for procurement leaders to rapidly capture price improvements.
Understandably, the aggregate effect of these challenges has overwhelmed many procurement functions. Procurement can play a critical role in solving today’s most pressing business problems, but it cannot do so on its own. Winning now requires an entirely new level of resilience improvement and value creation built through a coordinated enterprise-wide effort.
Accordingly, success in protecting margins, containing cost escalation, and dynamically capturing opportunities requires an expanded mission for the procurement function. CEOs should consider positioning their procurement leaders at the center of the company’s response to the current context, tasked with a clear mandate to protect margins. CPOs can then mobilize executives for cross-functional impact and escalate investments in the talent and systems required to achieve and sustain outperformance.
A resilience toolbox: Ten core actions
Procurement leaders can combat volatility, inflation, and shortages and build resilience by taking ten core actions (Exhibit 1). They should start by gaining transparency into the pressures they face. Then they can apply this visibility to create value across the supply base. This requires mobilizing other parts of the business across supply chain, operations, and commercial capabilities. These efforts should be supported by a central nerve center, a control tower, and new capabilities. Building an agile procurement function with stronger links to internal and external partners is the key to success.
Create transparency to enable action
The transparency necessary to enable action includes a 360-degree view of vulnerabilities and real-time information delivered to a “resilience cockpit.”
To manage these risks, companies need to understand their tier-n upstream value chain. A digital twin can provide the insights required for scenario planning. Find out what are the top 10 risks in procurement >>
A European utility implemented a digital solution that continuously identifies and updates risks related to critical materials, key suppliers, and exposure to inflation. The solution is linked to external data sources, such as supplier intelligence and core indexes, and models inflation exposure. It notifies the company’s decision makers when any new risks emerge.
An automotive OEM created a digital twin of its value chain and automated data flows using third-party databases, transport declarations, and news sites. The resulting cockpit monitored more than 1,000 components and 100 raw materials and integrated 60 data feeds across regions and specifications. It enabled sensitivity analyses of different sources of volatility, such as foreign-exchange risk and individual site operations.
Still not sure how to navigate the digitalization in procurement? Read those tips >>
Partner across the supply chain
In partnership with the supply chain, procurement leaders should refresh their category strategies and enhance their risk operating model.
A specialty chemicals manufacturer partnered with top suppliers of inflating commodities to radically improve the total cost of ownership and reduce risk. This program was convened by procurement and included team members from R&D, operations, and finance. The internal participants worked with the supplier to rapidly qualify a lower-cost, lower-emission set of specifications that allowed the manufacturer to mitigate a double-digit cost increase.
For active management of costs and risks, such as those relating to labor and logistics, procurement needs to apply market feedback quickly to capture emerging opportunities.
Partner across operations
Procurement leaders can optimize operations from end to end as well as optimize the company’s energy consumption.
The benefits are especially valuable in energy procurement, where the category manager’s role has dramatically changed. To gain transparency on the risks and opportunities arising from the rapidly changing energy cost curve, procurement can pursue multiple partnerships. With the finance and risk functions, the partners can update risk–reward profiles and enhance hedging strategies. Procurement, manufacturing, and related functions can collaborate to better understand the deeper forces shaping demand and response management. Sales and marketing can help procurement continuously track and update the company’s cost position versus that of competitors.
One global materials producer conducted a 360-degree assessment of its energy-sourcing strategy. The team analyzed the producer’s energy mix under different market scenarios, evaluating the impact of different energy strategies on costs, emissions, and portfolio risks. The company has established a road map to revamp its energy sourcing over the next three years. The plan decreases exposure to fossil fuels while reducing CO2 emissions by more than 30 percent and costs by 20 percent relative to the base-case scenarios.
Check a summary of cost reduction strategies in procurement >>
Partner across commercial
In partnership with commercial capabilities, procurement can address integrated margin management and the company’s portfolio and product design.
A packaged-foods manufacturer used a coordinated, cross-functional approach to offset inflation’s effects on its business portfolio. First, it secured alternative sources of supply and increased its internal inventory of constrained raw materials. Then it leveraged derivatives to manage price risks for principal ingredients and energy costs, and it reinvested approximately 4 percent of COGS into value-creating opportunities. Taking these steps enabled the company to create new offerings that met customer needs while controlling costs and protecting revenues. It also helped the company improve service in seven of its top ten categories and reduce lost sales resulting from stockouts by 20 percent compared with competitors.
A consumer-packaged-goods manufacturer reviewed its product designs to identify ways to avoid stockouts and offset price increases. It used advanced analytics to assess design changes in relation to consumer tolerances. 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.
Leverage enablers
Two additional actions can serve as enablers for countering inflationary pressure.
Anticipating a recession, one global materials producer set up a process and team to rapidly track commodity markets and the implications for the company’s purchasing portfolio. The company equipped the team with an automated price analytics dashboard to track and interpret market updates. With information from the dashboard, the company could move faster than competitors to get price concessions from suppliers looking to secure their volumes amid uncertainty.
However, CPOs note that attracting and retaining top talent is a chronic challenge. Companies are therefore developing exciting career paths for procurement leaders and positioning procurement as a function where high performers come to sharpen their leadership skills and executives sponsor the trajectory of emerging talent.
An opportunity for procurement to lead
The challenges we see across supply chains are, in many cases, structural and may take years to resolve. This makes transformative action the only option for addressing volatility and disruptions. However, there is a silver lining: the resulting improvements to practices and ways of working will permanently upgrade operating models. The current context is a career-defining moment for CPOs. Procurement leaders who demonstrate value to the enterprise can become full-fledged strategic partners to CEOs, CFOs, and COOs. No longer should CPOs be merely guardians of a portion of enterprise costs. Now is the time for procurement leaders to step into a new horizon of value creation.
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