Sep 4, 2020

McKinsey: Five ways to reimagine procurement

McKinsey
Procurement
covid-19
Sean Galea-Pace
4 min
Supply Chain Digital examines McKinsey’s report “reimagining procurement for the next normal”
Supply Chain Digital examines McKinsey’s report “reimagining procurement for the next normal...

COVID-19 has caused significant disruption on global supply chains, with manufacturing haltes and airports and seaports shut down throughout the pandemic. But how has procurement been redefined? Here are McKinsey's five ways to reimagine procurement.

  1. Strengthen supply chain resilience

As supply chains become increasingly more global and interconnected, they face a number of challenges, including climate change, the rise of a multipolar economic system, added geopolitical risks and the risk of mass healthcare events. During the past several years, at least one company in 20 has suffered a supply chain disruption costing at least US$100mn. Companies with complex supply chain networks, such as automotive and technology manufacturers, are particularly vulnerable.

It is the right time to conduct a thorough assessment of supply chain risks and manage them more thoughtfully. Companies can create better transparency by working with suppliers to gain information about their next-tier suppliers and their upstream value chains. Business continuity planning has taken on a new meaning, designing contingencies not just for a single supplier plant to go offline but also for entire countries to be inaccessible.

2. Zero-base category strategies and value creation

Procurement leaders are reevaluating individual spend categories to make the most of shifting market dynamics and addressing the risks posed by changing value pools. At the beginning of the pandemic, some of the most dramatic value-pool shifts happened in commercial real estate and oil and gas, which were among the sectors most affected by forced shutdowns. To capture or regain the potential value the shifts created, procurement leaders may need to completely rethink their strategies for the affected categories. In order to create value in commercial real estate instead of simply renegotiating leases, a procurement leader can consider how the organisation’s work practices will likely evolve in the future as flexible and remote working grows. 

Some procurement organisations may seek to minimise risk exposure by structuring contracts to build in performance incentives. Instead of contracting with IT suppliers on the basis of time and materials, procurement departments can look to peg contractor fees to performance. 

3. Invest in partnerships and innovation

Companies are seeking opportunities to create competitive advantages for themselves in a bid to counter the downturn that the pandemic has created, including through partnerships and joint innovation. Connecting with partners that have an existing infrastructure or complimentary service can make it faster and easier to adapt to a changing environment. In Australia, in the immediate aftermath of the crisis, supermarkets in need of extra personnel to handle a sudden increase in sales contracted with thousands of airline workers who had been sidelined when airlines downsized.

4. Accelerate adoption of digital and analytics

Procurement leaders have long since talked about digitising procurement for a considerable amount of time. However, its discussions with them indicate that progress has been slow. Many are trapped in pilot purgatory, making small investments in select use cases that never scale up to achieve real business impact. The rapid adoption of new ways of working that the pandemic necessitated forced companies to accelerate the shift to digital. As remote work becomes the next normal, digitisation can be an important enabler of effective collaboration across functions. In a bid to counter crisis-induced margin pressures and increased volatility, spend analytics can provide a rich source of new insights and opportunities that together creates new forms of competitive advantage. For example, in procurement of selected minerals, predictive analytics can already be used to integrate information including mining activity, shipping data, weather and economic indicators and can even analyse satellite images of at-port stockpiles to give a much more accurate prediction of market prices.

5. Transform to a future-ready operating model

To lead in the next normal, procurement departments must transform how they operate and collaborate with internal and external stakeholders. Adopting an agile operating model could allow procurement functions to scale up or down quickly to respond to sudden supply challenges. Agile methods could be applied to key strategic issues, such as assigning a cross-functional sprint team to accelerate capturing value in a specific spend category or creating a negotiation factory to deliver contract negotiations in assembly-line fashion or rapidly onboarding a new supplier.

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Aug 2, 2021

Procurement Outsourcing: Partnering with Outside Experts

Procurement
ProcurementOutsourcing
Supplychain
Sourcing
6 min
To adapt to an unpredictable world, you can transfer specific procurement processes to outside vendors—cutting costs and re-focusing on your core products

In coming years, supply and demand will fluctuate, new technology will change the way procurement teams operate, and skilled workers will be in short supply. Outsourcing procurement is now a priority. Explained John Piatek, GEP Vice President and Thought Leadership Council Chairman: “In the face of wild swings in consumer demand, trade wars, tariffs, and lockdowns...supply chains bent and frequently broke.” Therefore, companies need to know how to recover. 

The Rise of Strategic Procurement 


The pandemic placed procurement on a higher level within business operations. Executive boards that previously overlooked or undersold the value of procurement started to sit procurement managers around the table with strategic advisors to mitigate risks, optimise costs, and drive growth. ‘‘This year has demonstrated the importance of bringing CPOs into C-suite conversations”, explained Jennifer Brown, Principal, Deloitte Consulting. “They bring significant value to the table.” 

Procurement teams now race to find skilled, third-party vendors to provide services they can neither afford nor prioritise. Outsourcing of S2C can give companies access to expertise, capabilities, and scale they may not have in-house,” said Iliana Filyanova, Partner for McKinsey’s Manufacturing & Supply Chain. For example, expert outside firms can analyse market conditions, supply specialised goods such as semiconductors or uniquely designed parts, and help develop a strong IT infrastructure. 

To be clear, if your team can skillfully outsource, a whole new world opens up: you can rapidly adjust to market conditions, scale up when demand spikes, and scale down when dips hit. 

Why Outsource? 


First, you can cut costs. Suppliers in Southeast Asia and other low-cost countries can provide large amounts of materials and products at excellent prices without the political backlash that often accompanies offshoring. But outsourcing has several advantages. When you get specialists on board, you can shorten development times, hire additional staff without having to train them, and digitise your procurement systems thanks to IT experts. 

 

Additional Benefits 

  • Increases focus on core tasks 
  • Provides staff more time to fulfil their priorities 
  • Supplies next-gen technology expertise 
  • Reduces operational costs
  • Helps prevent duplicate payments 

 

These benefits only accrue, however, if your team carefully defines the scope of the operation. When you try to hit the bull’s-eye on a dartboard, you aim directly at the centre. It takes a certain angle, force, and skill. Likewise, procurement teams must figure out what and how much to outsource. Outsourcing still requires spending, and teams will want to get good data before they sign a final contract. In addition, staff members should be on board with the rationale and objectives of the outsourcing project—otherwise, your darts will miss their target. 

How To Successfully Outsource Procurement 


According to McKinsey, teams should focus on three main steps. 

 

  1. Determine which categories to outsource. Focus on non-core business areas. These are any services that support your core product, such as freight and shipping, facilities, and IT infrastructure. 
  2. Select the right metrics. Build supplier scorecards, in which your team decides upon two to three key criteria such as low unit prices, supply chain resilience, and quality of product. 
  3. Partner with the appropriate people. Ask potential firms questions to assess their domain expertise; diversify your search to take in a variety of global organisations, and consider their technical skills—even if you’re not hiring the vendor for IT. 

 

If these focus areas seem too broad, Deloitte recommends a phase-by-phase process.

Deloitte: The Seven Stages of Outsourcing


Starting the Search

First, companies should Assess and Prepare. These steps include defining vendor requirements and starting to engage. In these phases, you may do some background research but not engage with them directly. Web searches can yield initial results, and consultants can also help—especially those who know the strengths and weaknesses of your industry. After you have your list narrowed down, you can produce a strong, detailed RFP.

Naturally, your RFP will attract the relevant suppliers, and you’ll be able to move to Evaluate. If you’ve chosen strong metrics, two to three top vendor proposals should stand out. Be forewarned, Deloitte said: the next part is tricky. Committing, or negotiating your final contracts, will lock you into a potentially multi-year collaboration with a vendor. Take your time: you can deliberate over competing offers, as well as request that additional support be built into the contract. 

Negotiating the Best Deal

Advocate for your best interests! “I moved forward to negotiate with a current contract manufacturer with whom we had an important volume commitment with high prices,” said Elodie Cramer, Associate Director of Biogen. “We were in a single-source situation, with no active alternatives.” She opted to pursue dual sourcing, as well as insist on open vendor discussions. At the conclusion of the talks, she had bartered better terms: 29% lower costs, 75% less volume commitment, and improved vendor quality and service. 

Additionally, teams should discuss details such as how to optimise taxes, meet regulatory compliance, and protect ESG standards. Safety-catch measures like these may seem to extend the outsourcing process, but they’ll ensure that you don’t end up spending more over the long term. Compliance, after all, can drive 30% to 50% of savings, and talking about it upfront is for the best for all concerned. 

Closing the Case

Once you’ve reached acceptable terms, you can Transition, handing the project work and resources over to your vendor, and Optimise, following up to manage and improve the relationship. Don’t forget to dot your i’s and cross your t’s—Deloitte even recommends an end checklist. Sign the contract; create a people transition plan; complete consultations with any oversight committees. After signing the paper with a flourish, you can then rest easily, confident that you’ve followed a strategic outsourcing system. 

Companies To Emulate 

Procter & Gamble, Unilever, Slack, Alibaba, Acer: even major multinational companies seek to outsource specific systems, technical skills, or materials. When Unilever integrated its ERP platforms into a single system, outsourcing saved the company an annual €700 million. Slack outsourced its universally-known colourful design label to MetaLab. Alibaba outsourced to US firms to compete with eBay. Acer outsourced manufacturing to maintain a small, agile team. As a result, these companies improved their international reputations, offset their internal weaknesses, and built strong vendor partnerships. 

As executives increasingly turn to procurement to make their global operations less costly and more resilient, teams that strategically outsource work will stand a better chance of bringing good news to the next management meeting. Said Ryan Flynn, Principal, Deloitte Consulting: “CPOs are uniquely positioned to help their organizations navigate a historically disruptive time and build the agility required to thrive.” 

Yet to do so, they must act with intent. “Successful outsourcing—outsourcing that drives transformation and helps achieve broad strategic goals—requires companies to follow a disciplined process,” wrote Deloitte. In short: Outsourcing initiatives succeed not by luck, but by design. 

 

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