… 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 instalment, we’ll tackle the next three actions, which they group under the heading of:

OPERATING MODEL OF THE FUTURE

9. Digitize end-to-end procurement processes. A-

This is yet another action that you should have been working on since the first Procurement platform hit the market over 25 years ago, but an action that you likely couldn’t have completed until recently when the introduction of orchestration platforms made the interconnection of all systems used by Procurement affordable for the average company, even when the company needed connectivity with systems in Finance, Logistics, Risk, and Supply Chain to access necessary pieces of information for Procurement to adequately do its job. (Before these systems, you needed to be a large enterprise with a huge IT budget to afford the integration work to attempt this.) Plus, the “AI” tools you need to digitize paper documents used by old-school, classify data, process contracts to identify potential issues, etc. used to be too pricey — now that seemingly every vendor has them, they are affordable to.

10. Build new capabilities for the buyer of the future. A+

Prepare the organization for Procurement’s future by investing in new abilities for advanced market research, integrated technology, and talent development. Equip procurement professionals with deep insights and tools to understand and address supply market dynamics, risks, economics, and ESG. Given how supply chains have been in constant flux since the start of COVID, with no end in sight as a result of geo-political conflict, natural events (drought in the Panamanian canal) and disasters, supply shortages, rampant cost increases, and so on, the organization is going to need every capability available today, and a few not invented yet, to survive tomorrow. Start researching, testing, and developing now … before it’s too late. (Just leave Gen-AI out of the picture!)

So, putting it all together, the grades were B, B, A, B+, A-, A, B+, A+, A-, A+. Not a bad report card.

… 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.

… 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 second instalment, we’ll tackle the next three actions, which they group under the heading of:

NEW SOURCES OF VALUE

4. Manage Volatility. B+

If Procurement doesn’t manage volatility, those savings they project never materialize. Hence, this is something Procurement should be doing every single year, so this is not really a next step — it’s an ongoing action. However, macroeconomic drivers are in flux and need to be monitored, and planned for, more regularly this decade than in the 2000s and 2010s. The organization needs to have multiple sourcing strategies for each of its categories based on potential shifts in the market driven by these macro-economic drivers, and be ready to play offence instead of defence.

5. Optimize Operations End-to-End. A-

Procurement should be constantly optimizing its operations, so this is not something that should be new. However, it needs to take another step up the optimization ladder and go beyond Source-to-Pay+ and include supply chain operations in its planning and make sure everything is in synch in its planning. In addition, a deeper integration with finance and market monitoring, risk management and risk monitoring, and logistics and delivery monitoring is also required for better optimization of procurement operations.

6. Integrate ESG and optimize upstream Scope 3. A

While sustainability should have been a front-and-center concern since it became clear near the end of last decade if you didn’t get ahead of it, you’d be behind (and in trouble when the legislations rolled into effect). However, while sustainability was clear, and targets were clear, it wasn’t necessarily clear (without thinking about the issue) that you would have to focus on not only tacking upstream Scope 3, but on how you will need to help those suppliers, possibly a few tiers down in the supply chain, optimize Scope 3 as there is nothing significant you can do to control your carbon debt if you don’t minimize it before it gets to you.

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

Let’s backtrack. 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 going to discuss each one, give credit where credit is due (they are pretty good at strategy after all), and indicate 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 first installment, we’ll tackle the first three actions, which they group under the heading of:

End-to-End Value Capture

1. Utilize New Frontier Analytics and AI. B

Even though you should have been doing this since the introduction of spend analysis over 20 years ago, the recommendation to employ advanced analytics to extract valuable insights from procurement data is definitely A+ because analytics gets better every year, knowledge of which analytics to apply to a vertical and category gets better every year, and the constant increases in computing power makes it an increasingly powerful tool at your disposal.

However, the “AI” part is a B- at best. Using predictive analytics for commodity and market forecasting, risk prediction, and performance optimization is good, but AI can’t predict talent and you definitely should NOT use a Gen-AI bot to develop strategic decisions! Remember Gen stands for Generative which is defined as “make sh!t up” and there is a strong likelihood that it will hallucinate and the hallucination will sound more reliable than the non-hallucinatory recommendation it gives in very similar situations. Properly used, traditional, predictable, and, most importantly, deterministic (or at least verifiable) techniques can provide great value … but new, generative, unproven AI technology (which could have embedded sleeper behaviour) is NOT the answer.

2. Create a Request for Proposal (RFP) Engine. B

The article notes that you should develop … an approach for prioritizing categories and suppliers based on market development, spend analysis, and supplier leverage. This is something you should have been doing since the day you first implemented a strategic sourcing program. And you definitely should have been prioritizing spending with the highest potential to drive value for the organization, while deprioritizing categories or suppliers where value will be more challenging to obtain. In 2024 what you should be doing as part of this RFP engine is prioritizing categories and suppliers based on potential return from the strategic effort at this time (not potential for future value, potential for immediate value to meet the organization’s #1 priority of cost control) and then shifting all of the other categories to semi-automated sourcing events most likely to generate the best return. (i.e. well designed events, not an event for every request, you don’t want the squirrels thinking you are nuts)

The organization should have a platform that supports multi-round RFX-based events and multiple templates, reverse auctions (of various types), and the intermixing thereof. It should also support supplier onboarding, API-based verification with third parties, business/insurance/certification verification where possible, and so on. A buyer should be able to select a template for a single or multi-round event, define a timeframe, define a volume, click go, and the platform should automate an entire sourcing event until it’s time to verify an award (as the the platform should also recommend the award based on the bids and RFP responses). That’s the key to cost control — everything is sourced, but the effort made is relative to the potential return on that effort. Small return potential, semi-automate everything using the right technologies and processes. Large return, put in full manual effort in to maximize the value.

3. Redesign Value Creation with Key Suppliers. A

While this is something that needs to be done on a regular basis, given that rapid inflation is back, logistics is still unstable (we went from COVID to disruptions in the red sea at the same time as Panamanian droughts, forcing a return to long, dangerous, ocean routes around the capes), consumer demand is down, relations with China are deteriorating, and so on. Furthermore, not only is cost control paramount, so is value creation to increase not only value capture, but to also maintain, and maybe even slightly increase, consumer share in a down economy.

Come back for Part 2!