Sharpening all your procurement tools for competitive advantage
Industrial Supply presents excerpts from a recent McKinsey & Co. research report, titled, “Where procurement is going next,” by Riccardo Drentin and Samir Khushalani with Christoph Kloos and Prachi Misra. In addition, we interviewed Khushalani for further insight to help navigate today’s concurrent and turbulent challenges.
Today’s procurement teams face multiple, simultaneous demands. They must mitigate the impact of inflation while managing the supply and supplier risks that can damage reputation or threaten business continuity. That’s driving a change in approach, with companies abandoning old approaches to globalization and supplier consolidation in favor of a new model that prioritizes supplier diversification and risk management.
In many categories, they must also manage increased price volatility by taking a fast-moving and dynamic approach to hedging against future cost increases or taking advantage of savings opportunities in favorable markets.
Procurement teams are also at the forefront of the sustainability transition, charged by their organizations with identifying, qualifying, and developing future sources of resource-efficient, low-carbon inputs. While they are dealing with those pressures, CPOs are also striving to reinvent their own organizations. Most face significant talent shortages, in both traditional procurement skills and the technical and analytical capabilities needed to deploy and run advanced digital technologies. The talent shortage is emphasizing the need for digital solutions as a potential answer. Companies have launched digital transformations but are concerned that they are not proceeding fast enough.
CPOs Step Up
From our conversations with senior procurement executives, we know that most are embracing these challenges. They’ve been arguing for years that procurement should have a strategic role within the company. Now they have it.
At the same time, the new procurement environment can expose weaknesses in an organization’s processes, tools, and digital infrastructure. Some executives worry that they don’t have the information they need to make effective decisions: They have a limited view of the organization’s total spend, too much data that is inaccurate or of poor quality, and difficulty integrating data from multiple sources to create a comprehensive and accurate category view.
A key long-term finding from our benchmarking is that there is no shortcut to procurement excellence. High-performing procurement functions don’t excel in just one or two maturity dimensions, they excel in many of them. Comparing the top- and bottom-quartile organizations in our data set shows that this is still the case. Leaders achieve twice the maturity of laggards across six broad dimensions: procurement strategy, category management, digital, data and analytics, organization, and skills.
One international petrochemical player worked on all these dimensions as part of a major project to transform its procurement performance. The company invested in new digital tools and analytics approaches, and trained more than 100 people to use them. It ran an in-depth analysis of its spend across more than 50 high-value categories, identifying total savings opportunities of around $100 million per year. It then engaged the entire procurement organization in several category-specific initiatives to capture these savings and implemented a new dashboard system to track supplier performance.
A year later, the company had exceeded its savings targets, reducing spend in the targeted categories by $120 million per year, with an average savings of 12 percent. This effort was enough to move it from the second quartile to the top quartile in our benchmark.
Digital Makes the Difference
When we compare the very best procurement organizations to their midtier peers, we find the most significant differences in a more focused set of dimensions. Top performers have maturity scores at least 40% higher than average players in strategy, digital, and data and analytics.
What kind of data do procurement teams need to be top performers?
“When we talk about procurement data, I would segment it into two buckets: master data and transactional data,” said Samir Khushalani, a partner at McKinsey and one of the report authors. “On the master data side, we are talking about things like material master data, which is all the physical goods that you buy. It can be IT hardware or software, it can be pipes, valves and fittings or MRO. It could be direct or indirect, but it’s goods––materials, SKUs, physical stuff.
Master data is also comprised of:
1) Service data – for example maintenance services, janitorial services, facilities management.
2) Supplier/vendor data – for example, vendor addresses, contact details, delivery addresses, ship-to addresses, and bank information. It may include descriptions of materials, ordering quantities, packaging details, and specific attributes and parameters associated with individual orders.
3) Catalog and contract data – representing all the goods or services that you buy from and the prices at which you buy.
4) Spend taxonomy – how you categorize all the tiers of your spend across suppliers, regions, and business units. This part of the master data is closely tied to the company’s general ledger accounts, so it has finance implications.
The second type of data procurement teams need to manage is transactional data, according to Khushalani. This is comprised of requisitions, purchase orders, RFPs, and invoices.
With master and transactional data well-managed and analyzed, the procurement team is thus empowered to map out trends, perform forecasting as well as "what if" analysis for any category of purchasing––including castings.
Bottom line, says Khushalani, is that because procurement talent is hard to find and scale, digital and data are the tools that will unlock the next horizon of performance to achieve competitive advantage.
Price Shopping and Supply Chain Considerations
Balancing price with quality was not part of McKinsey’s survey focus, but it is the reality casting buyers live in, even if they’re harness data to make smarter, proactive decisions.
Khushalani emphasized the danger of basing purchasing decisions solely on price.
“There’s a natural tendency to only look at price, but that’s a recipe for disaster,” he said. “You’re missing the forest in the trees. The advice we give our clients is, look at the total cost of ownership rather than just that initial price. What is the cost of poor quality? What is the cost of delivering those goods if you're buying from China? Have you factored in the tariffs that might be applied to the order? And there’s the logistics cost––thanks to COVID, people have moved from just in time to just in case. You should think about a risk-adjusted price when you are looking at this. Think about customs, duties, logistics, poor quality, after-market support, etcetera. So, focus on the total cost of ownership and evaluate suppliers based on that rather than just on that upfront price. I sometimes say, ‘If you pay peanuts, you get monkeys. If it's that cheap, there has to be a reason for it.”
Side-by-side with pricing on the procurement manager’s priority list is supply chain stability––and whereas offshoring had its pricing heyday, reshoring and near-shoring are returning as a safeguard against supply chain disruptions, especially if labor can support the move.
But Khushalani underscores the greater consideration of dual sourcing from different geographies, wherever they may be, to avert geographic vulnerabilities.
“If all your goods are coming from one supplier, that's a bad thing,” he said. And if they're coming from two suppliers but they're both in Thailand, for example, and say you have floods in Thailand, you still have that geographical risk. So, spread that risk geographically, but also in terms of the number of suppliers.
“Honestly, the geopolitical risks are so high today––don't ignore the geopolitical tensions that are happening,” he added. “There is now this whole notion of “friend shoring.” I really believe in that. You can see Iran, China, North Korea––many of these countries are forming alliances; and then the U.S. and the West are forming alliances. Look for suppliers with lower risk profiles, not only in terms of proximity but also in terms of values. Consider what is the likelihood of this country becoming subject to tariffs or even our country going to war with them. That's why you have companies reconfiguring the supply chains away from China, because there's so much tension in the South China Sea right now. And even thought China has been the manufacturing hub of the world the last 20 years, the current tension between the U.S. and China could play out in any number of ways. I would say it is something you should be very mindful of.”
Sustainability: Don’t Get Left in the Dust
ESG is another area where McKinsey’s benchmarks show significant differences between top performers and the rest. Leading procurement organizations achieve sustainability maturity scores that are close to their average scores for other dimensions. These companies have integrated sustainability goals into their overall performance strategy and are developing the tools and capabilities they need to assess and continually improve sustainability performance. They are progressively improving their sustainability performance, for example, by applying smart affordable decarbonization levers and dual sourcing to reduce supplier-related risks.
Among lower-performing companies, sustainability maturity tends to lag far behind most dimensions, suggesting that these companies have yet to grasp the challenge of sustainable sourcing. This could be risky. Given the expected shortage of low-carbon and low-impact materials, companies that move quickly to develop sources and supplier relationships may enjoy preferential access to these products in the coming years.
As casting buyers begin to shoulder responsibility for executing on corporate ESG commitments, foundries throughout North America are investing in a wide range of capital improvements to reduce their CO2 footprints, reduce waste, and conserve all types of natural resources. One of the world’s foremost recycling industries, metalcasters are stepping up to meet their customers’ demands in a society that increasingly values sustainability.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
