McKinsey Asks: How is the Procurement Function Evolving?
The combination of sustainability pressures, digitalisation and geopolitical risks is resulting in the procurement function undergoing rapid transformation.
Not only are ESG regulations and Scope 3 emissions reporting driving sustainable sourcing strategies but emerging technologies like blockchain and AI are improving supplier management and efficiency.
With this in mind, Eric Hannon, a Partner in McKinsey’s Frankfurt office, Jennifer Spaulding Schmidt, a senior partner in the Minneapolis office, Milan Prilepok, a partner in the New York office, Roman Belotserkovskiy, a partner in the Austin office and Samir Khushalani, a partner in the Houston office, explores the dynamic role of procurement as a strategic business driver.
The partners emphasises the fact that procurement has now become a prominent force in shaping corporate decision-making and resilience.
Roman Belotserkovskiy highlights: “In many cases, procurement leaders have been elevated to a position of influence and are able to drive a lot more impact for their organisations. The expectations have risen significantly. And that means we need to reimagine procurement.”
The Procurement function in McKinsey
McKinsey & Company has remained driven to advance its procurement practices through its internal operations, client services and career opportunities for professionals.
The function is a strategic priority for the company, both in its internal operations and as a consulting service for clients.
McKinsey helps businesses to drive supplier innovation, cost efficiency and risk management by providing advice on how to optimise procurement functions.
Its procurement team effectively balances cost, quality, service and risk in sourcing decisions to ensure its operations can run smoothly.
McKinsey is redefining procurement into a strategic enabler of innovation, resilience and sustainability by utilising automation, AI and data-driven insights.
It enhances long-term value creation and agility by empowering business units with talent development and self-service models.
Jennifer Spaulding Schmidt highlights this shift in the role of procurement: “Right now what we’re seeing is procurement is involved very early on, scoping and shaping the demands of the business, and then helping find the partners that the business needs - short-term partners and long-term partners.
“Over the next ten years, I think that’s only going to become a more central part of how executive teams work and function.”
The rise of technology
Technology is redefining procurement by improving transparency, decision-making and efficiency.
Blockchain drives secure transactions while AI and machine learning automate contract management, supplier selection and risk assessment.
Digital procurement platforms and predictive analytics are also improving cost savings, enabling real-time data insights and driving more sustainable sourcing strategies.
Jennifer emphasises the impact gen AI is having on the future of procurement: “I know Gen AI is a topic on everybody’s mind, and we’ve been discussing it for the last 12 to 18 months.
“We really do see it making teams more productive. It makes teams smarter, gives people opportunities to find suppliers around the world and qualify new suppliers in a way they’ve not been able to in the past.”
Samir Khushalani echoes the significant technology will have on the future of the procurement function: “Digital is the unlock for the next horizon of procurement excellence. It would be easy if there was one single app or tool that could be all things to all categories to all stakeholders. But there isn’t. Leading procurement functions are starting to invest in an ecosystem of a digital procurement engine.”
The role of sustainability
McKinsey & Company continues to highlight the importance procurement plays in improving sustainability across organisations.
Its recent climate roadmap for retailers highlights how retailers can reduce Scope 3 emissions by up to 50% with new approaches and technologies applied to their supply chains.
McKinsey’s report points to seven key themes the retailers can concentrate their decarbonisation efforts (which could lead to a 55-65% reduction in Scope 3 emissions by 2030 once combined):
- Reducing farming emissions from livestock management
- Transitioning to clean and renewable energy
- Adopting regenerative practices in plant-based agriculture
- Increasing circularity of packaging and products
- Improving process efficiency and reducing waste
- Reducing emissions in transportation
- Transitioning from animal to plant protein
Procurement must integrate carbon reduction and cost-saving strategies, implementing greener supply chains and sourcing from sustainable suppliers to ensure procurement is a key driver of sustainability.
McKinsey continues to help businesses embed sustainability into procurement to unlock long-term resilience by using AI, digital tools and strategic supplier partnerships.
Eric Hannon highlights the significance sustainability is beginning to have on the procurement function: “We’re moving now into an era of increasing regulatory pressures for people who operate globally, such as the Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM) in Europe, but then also the reporting requirements that are coming across globally.
“One trend we’ve been seeing is actually trying to marry cost programmes and carbon programs together.
“For most companies, scope 3 — both downstream and upstream — is on average around 80 percent of the overall emissions, a massive amount. So procurement actually plays an outsized role in decarbonising companies.
“That provides us some pretty significant benefits. First of all, there are a lot of win-win measures out there. Often when people think of carbon, they think of cost; that it’s very expensive to address. But across industries, around 20% to 40% of decarbonisation can be achieved with cost-neutral or even cost savings if we just find the right measures.”
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