Procurement teams should build a “resilience toolbox” of 10 key actions to counter price volatility, inflation risk, and supply shortages, according to a report.
Traditional operating models have become obsolete, the report by McKinsey said. Instead of sticking to the methods of the past, procurement departments should implement a “category-level… cross-disciplinary approach”.
The report said: “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. Building an agile procurement function with stronger links to internal and external partners is the key to success.”
The report emphasised 10 ways for CPOs to expand the capacities of the procurement function and ensure they can demonstrate resilience in the face of volatility, while capturing price improvements quickly.
1. Identify vulnerabilities with a 360-degree risk assessment. CPOs need transparency of supply, suppliers and cost. Tech like digital twinning can maintain this risk assessment constantly.
2. Gain real-time visibility. Rapid insights on customer demand, inventory, market pricing, and supply disruptions are crucial to strategic decision-making. Information gained from resilience systems should always be accessible to the C-Suite.
3. Refresh category strategies to drive efficiency and resilience. Market feedback must be put into effect quickly to capture emerging opportunities. This can inform innovative new relationships with suppliers and updated product specifications.
4. Enhance the risk operating model. Companies should prioritise improvements of sales risk monitoring, supplier transparency, supply and demand prediction, and modeling of measures’ impacts.
5. Optimise operations from end to end. Procurement can collaborate across business functions to review specifications and streamline internal processes, generating value regardless of market context and helping relieve upward price pressure.
6. Optimise energy consumption in the short, mid, and long term. Introducing new technologies, entering into power purchase agreements, or implementing self-generation capabilities will allow companies to pursue sustainability and cost targets simultaneously.
7. Coordinate responses for integrated margin management. Procurement can feed insights about the market and competitors to sales teams to bolster their effectiveness in customer price negotiations.
8. Redefine portfolio and product design. Product design can rely heavily on scarce materials and a few suppliers – procurement should take steps to reduce dependencies wherever possible.
9. Coordinate a holistic response through a nerve centre or control tower. Companies should establish an agile team composed of representatives of various functions to create transparency, monitor markets, and identify risks.
10. Build new capabilities for resilience. Procurement’s chief asset is its talent. More than ever, procurement leaders need to build a team with the advanced skills required to compete in today’s volatile environment.