… in some cases this is money you should have been on a decade ago!

Let’s backtrack. As we noted in Part 1, McKinsey ended Q1 by publishing a piece on Procurement 2024: The next ten CPO actions to meet today’s toughest challenges which had some great advice, but in some cases these were actions that your Procurement organization should have been taking five, if not ten years ago. And, if your organization was doing so in these cases, should be moving on to true next actions the article didn’t even address.

So, as you probably guessed, we’re in the midst of discussing each one, giving credit where credit is due (they are pretty good at strategy after all), and indicating where they missed a bit and tell you what to do next if you are already doing the actions you should have been doing years ago. And, just like we did to THE PROPHET‘s predictions, grade them. In this third installment, we’ll tackle the next three actions, which they group under the heading of:

INTEGRATED MARGIN MANAGEMENT

Coordinate Response for Integrated Margin Management. B+

This is something that should have been done since your Procurement department started strategic sourcing — without a good estimate of the supplier’s cost of goods sold (COGS), there’s no way to know if the bid, or negotiated price, is good or not, or how much margin you are getting taken for (especially if there is price collusion among all the suppliers you invited to the event to keep bids in a certain range, no matter what).

However, in order to truly understand the COGS, you need to monitor commodity and raw material costs in almost real-time; understand the labour, energy and water requirements in production and the local market costs where the supplier’s production facilities are; monitor the local transportation costs (and any surges due to fuel increases, truck or container shortages, re-routings due to route closures or geopolitical situations, etc.) and that’s a much taller order than you had to worry about last decade to maintain a good grip on your supplier’s current COGS. You’ll even have to work closely with engineering, supply chain and logistics to make sure you’re getting it right.

Redefine Portfolio and Product Design. A+

While the latter is something R&D/Engineering should be doing every few years, it’s now critically important that Procurement get involved and guide engineering with respect to which products are, or in danger of, becoming too expensive due to material scarcity, a limited supply base that can manufacture the products, and changing consumer perception and desires regarding what they want from a certain product. As the article says, it’s becoming critical to help R&D/Engineering look for ways to reduce these dependencies, expedite qualification, and increase resilience by pointing out key products to address, key concerns, potential alternatives that are now available to the organization, and so on.

Procurement also needs to aggressively work with Marketing and Sales to shift demand away from products that need to be sunset due to end of life, cost, supply, or sustainability considerations, as well as shift demand to products that are more profitable, sustainable, or secure from a supply availability perspective. It can no longer be about what Sales thinks it can sell, but what Sales needs to sell for the organization as a whole to be successful.