How procurement can be a ‘trusted business partner’ in construction

24 April 2023

CPOs will play a “key role” for sustainability and profitability amid ongoing uncertainty in construction, but the profession must optimise its commercial, technical, and demand offerings.

The current disruptive environment provides CPOs the opportunity to accelerate decarbonisation and become a source of competitive advantage in construction operations, a report by McKinsey has said. 

Construction is directly responsible for approximately 40% of CO2 emissions and indirectly responsible for a quarter of all greenhouse gas emissions, with the majority of these emissions originating from Scope 3.

Given that procurement is the main interface with the construction value chain, “it’s fair to say that CPOs will be in the driver’s seat for reducing the CO2 footprint of construction projects,” the report, The strategic era of procurement in construction, said. 

“This can help elevate the role of the CPO in construction companies beyond a trusted business partner and toward a more strategic function, as seen in the automotive industry.”

The construction industry has been hit by external challenges including fragmented supply chains and ongoing financial and logistical disruptions. 

While procurement might not be able to influence external economic environments, it can help create shifts away from decentralised, project-by-project mindsets as well as establishing strategic partnerships with top suppliers and ensuring collaboration and leadership involvement.

However, the report warned the construction industry is “not keeping up with other industries” when it comes to implementing best procurement practices. 

It said: “Some construction companies have been able to overcome these challenges and develop group or nationwide sourcing strategies that capture significant savings potential. Those with best-in class procurement practices actively contribute to improving their companies’ financial results, with margins that are sometimes five to ten percentage points higher than those of procurement laggards.”

As sustainability regulations increase and become more onerous, procurement can provide support to the industry by optimising in three ways, the report said. 

By studying the “procurement leaders” in construction, McKinsey found consistently applying these “best-in-class procurement practices” could generate savings of as much as 12% for their companies:

1. Understand value

Instead of simply “buying cheaper”, companies should align their strategy with the supplier landscape, including both local and low-cost countries. Building category and supplier know-how and technical knowledge will ensure value is embedded into the RFP process. Importantly, understanding the role of emissions for materials and suppliers can enable informed sourcing decisions.

2. Forecast demand

Buying the right amount to optimise quantities will be essential to the survival of procurement in the current environment. Constant, precise forecasting can help reduce stock levels and order quantities, enabling teams to diversify their supplier base.

3. Develop expertise

Firms should ensure they are buying designs and specifications which optimise the total cost of ownership. This will include improving and optimising designs for eco-friendly and low-emissions solutions, to help capture value across product life cycles.

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