Procurement 'pivotal to sustainable construction' - McKinsey
Procurement holds the key to sustainable construction, a new paper from McKinsey says.
The paper – The Strategic Era of Procurement in Construction – says that in helping construction be more sustainable chief procurement officers (CPOs) will play a pivotal role both in helping companies decarbonise and also in improving profitability.
On profitability McKinsey says that although construction is “one of the world’s largest ecosystems” it has slim margins and low productivity improvements. Given we are also experiencing global inflation, McKinsey says construction companies are doubling down on procurement as a key driver of improving profitability and a means of navigating uncertainty.
It also points out that construction ”has a major role to play in achieving global sustainability goals”. As an industry, it says, construction accounts for 40% of CO2 emissions and is indirectly responsible for 25% of all greenhouse-gas (GHG) emissions.
“The majority of these emissions are Scope 3, meaning they originate either with suppliers or from using and operating the built environment,” says McKinsey.
It adds: “Optimising procurement can help accelerate construction’s decarbonisation efforts and can become a source of competitive advantage in the years to come.”
McKinsey goes on to outline how procurement can deliver on its dual mission of improving profitability and driving decarbonisation.
It says procurement typically accounts for 40-70% of a company’s total spending, and industry executives see the function as a trusted business partner. However, McKinsey says construction scores low on procurement practices compared with other industries.
“Those construction companies with best-in-class procurement practices contribute to margins that are sometimes 5-10% higher than those of procurement laggards,” says McKinsey.
Procurement needs to be 'thought partners' - McKinsey
On maximising margins, McKinsey says procurement teams “can work hand in hand with engineering and project management teams to make the right trade-offs and establish themselves as key thought partners rather than a delivery function”.
It continues: “Procurement teams will need to adjust the materials-mix by prioritising eco-friendly or low-emissions solutions and complementing them with the right set of tools to act as relevant advisers for value engineering in trade-offs of design cost versus CO2 emissions.
“For example, an engineering, procurement, and construction player in oil and gas developed a tool and cross-functional processes to assess how different suppliers or materials may affect the construction process and plan.
“This tool can help assess when green products will yield premiums versus traditional solutions—which 65% of developers and contractors say is important.”
On sustainability, McKinsey says having “a granular perspective on materials and suppliers” will help CPOs “take informed sourcing decisions to effectively embed sustainability in the procurement process”.
It adds: “On this point, procurement experts can work with suppliers to gather relevant inputs, such as volume, composition, energy efficiency, and fuel consumption, and complement their findings with expert research on emissions factors.”