The next generation procurement model

posted by Samir Khushalani, Edward Woodcock and Björn-Uwe Mercker
25 February 2019

It has been widely accepted that excellence in procurement is a source of competitive advantage for most companies. Historically, it can be quite a challenge to achieve this given complexity in governance as well as limitations in system support and data transparency.

To take advantage of the opportunities offered by today's fast-changing technological landscape, procurement functions need to blend these advances with the various activities for value enablement, capturing and sustainment. They also need to build deeper and more interconnected capabilities. This will allow them to continue to optimise along the six major activities for effectiveness and efficiency with classical means and still benefit from recent advances in technology, analytics, and management practice.

These capabilities are described in an operating model that organises the procurement function’s relationship with its internal business partners and supply base by reframing the remit of the function as well as the enabling elements.

Given the strategic nature of procurement and its impact on the bottom line, the operating model starts with an understanding of the overall business strategy and how to align specific procurement practices with desired outcomes.

To create new value for the business, organisations must become adept at:

Business partnering: As a pre-requisite, business partnering should start with procurement developing a clear understanding of the business’s strategies, goals, and plans. Whilst the business needs to develop an appreciation of procurement’s role in delivering its objectives, procurement should identify opportunities to provide more new impact to its business partners.

Category management: Best-practice category management today typically goes beyond commercial optimisation and captures other sources of value by proactively managing spend and leveraging a vast range of digital use cases through advanced analytics or collaboration tools. This helps to identify new insights and describe, predict or prescribe how to capture both externally and internally oriented opportunities.

Source-to-contract: A well-managed source-to-contract process creates value by identifying and selecting the best source of supply. But the true impact comes through the ability to implement the contracts across often complex organisations; an opportunity to leverage new technology to support the "user journey" at different moment of specification.

While organisations can generate significant value from the above activities, they are not enough to ensure this value flows to the bottom line. Mechanisms are needed to drive compliance to vital, value-sustaining activities of procure-to-invoice, invoice-to-pay, and supplier management.

• Next-generation solutions for the procure-to-invoice process should embed governance into how goods and services are ordered, often by digitising the buying process. Today's opportunities to support by systems or to automate repetitive processes allow to improve these processes which have historically been highly manual and potentially inconsistent and subject to long cycle times.

• A well-managed invoice-to-pay process should not just be a strong business control that ensures the right supplier is paid the right amount at the right time, it should also create incremental value for the business. Again, you should blend traditional optimisation with today's opportunity or process automation for example compliance analytics.

• Supplier management can provide an opportunity to develop strong, collaborative relationships with key suppliers that can unlock new sources of economic value through joint innovation enabled by new ways of collaboration.

What are the enablers of this next-generation procurement model?

Although existing best practices across organisational enablers remain relevant, digital and data & analytics as self-standing enablers play a stronger role. They influence the other enablers, making the concepts of agility more relevant to cope with the new requirements. To this end, we identified six enablers of superior performance that drive incremental value:

1. Process: Recent innovations in process-data mining have elevated processes within procurement organisations enabling them to go beyond defining end-to-end value streams and buying channels. They are now able to harmonise processes across business units and geographical regions and streamlining approval processes.

2. Governance: Using digital tools, next-generation procurement governance mechanisms such as automated workflows enforce policies in real time. They ensure purchases are made via the right buying channel and with the right vendor and can help safeguard against suspect purchases.

3. Organisation: By embracing agile concepts, businesses can now respond to volatile capacity requirements and address more complex capability requirements more effectively.  

4. Capabilities and culture: Next-generation procurement functions enable targeted investments in digital capability building and replacing ad-hoc legacy training efforts. They use of a mix of adult learning and open source e-learning modules to develop both technical skills and softer skills.

5. Digital: While in the past digital was very much focused on process efficiency and e-sourcing, procurement now embraces more use cases on identifying, delivering and securing value.

6. Data and analytics: Next-generation organisations are utilising advanced analytics techniques combining external and internal procurement and non-procurement data sources. They can identify opportunities and prescribe sourcing decisions that guide the value delivery and value securing.

Now more than ever, with all the new trends that have reshaped many aspects of modern business, the next-generation procurement model provides an opportunity for your organisation to capitalise on digital advances and utilise data and analytics to drive performance.

☛ Samir Khushalani, Edward Woodcock and Björn-Uwe Mercker are partners at McKinsey & Company

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