Procurement must adapt to era of ‘sudden upheavals’: McKinsey

Dive Brief:

Fragile supply chains, increasing price volatility, intensifying geopolitical turmoil and rising regulatory mandates for cuts to carbon emissions underscore a need for CFOs and other C-suite executives to streamline procurement and safeguard profit growth, according to McKinsey.
Although external spending encompasses from 50% to 80% of a company’s cost base, procurement “often receives less attention than sales- or productivity-improvement efforts,” McKinsey said in a report.
A company with a procurement program that embraces new high-impact technology and adapts to rapidly changing consumer needs will boost its competitiveness in “a new economic era characterized by volatility, regionalized supply chains, AI dominance and talent scarcity,” McKinsey said.

Dive Insight:

Stress in procurement at many companies has eased this year with the unclogging of pandemic-induced bottlenecks in supply chains.

Disruptions to supply chains tracked the ferocity of the pandemic since early 2020. The New York Federal Reserve’s Global Supply Chain Pressure Index surged with the outbreak of COVID-19 as China imposed lockdowns, briefly fell as world production recovered in mid-2020 and rebounded as the virus flared again.

The index, which combines metrics on manufacturing and transportation, has fallen to the lowest level since May 2016.

At the same time, war in Ukraine, a surge in oil prices since July, fighting between Israel and Hamas and lingering harm from the pandemic in many emerging economies have clouded the outlook for global trade and the world economy.

The International Monetary Fund forecast last week that global economic growth will slow to 3% this year from 3.5% in 2022, while growth in world trade will shrink to 0.9% from 5.1% last year, the IMF said.

“We are entering times defined by sudden upheavals,” McKinsey said in a report published before Hamas attacked Israel on Oct. 7. “But this seismic shift also reveals previously untapped opportunities, which procurement can be instrumental in seizing.”

Procurement staff should collaborate with sales and other company teams to secure critical and scarce materials and buy goods when volatility leads to low prices, McKinsey said.

A procurement department should also help a company reach its goals in cutting carbon emissions by working with suppliers to achieve reductions, according to McKinsey.

“Investing in procurement performance enables organizations to de-risk, decarbonize and optimize their largest cost base,” McKinsey said. “By becoming an active strategic partner with the C-suite, procurement can help shape corporate strategy, identify M&A targets, scout early-stage innovations and enhance cross-functional collaboration.”