McKinsey Report: Where Procurement is Going Next

In its latest report, McKinsey has outlined the future procurement operating model and where it may go.

The company’s first procurement benchmarking survey nearly two decades ago uncovered a clear link between greater procurement maturity and higher business profitability.

That link still holds up today. Despite all the recent turbulence, the latest benchmark analysis shows that companies with top-quartile procurement maturity have earnings before interest, taxes, depreciation and amortisation (EBITDA) margins at least five percentage points higher than their less mature peers.

Riccardo Drentin, Partner at McKinsey & Company and Co-lead of Asia Procurement and Product Development Practice, who wrote the report, said on LinkedIn when sharing it, “Leading procurement organisations are using a combination of digital tools, data analytics and new ways of working to unearth new opportunities for value capture.”

Procurement maturity: Adapting to post-pandemic challenges

This was seen throughout the pandemic, particularly in the automotive industry, which faced unprecedented challenges during the pandemic, highlighting the critical role of effective procurement capabilities.

As COVID-19 took hold and disrupted international supply chains, the automotive sector experienced significant setbacks.

With 2020 seeing demand plummet, automakers reduced production and cut orders for parts. When that demand rebounded, procurement teams struggled as semiconductor manufacturers had shifted production capacities elsewhere.

During this peak, lead times for automotive chips quadrupled, creating severe supply chain disruptions. As some procurement teams quickly shifted to adapt to the volatile semiconductor market, others failed to secure critical components.

In 2021 and 2022, semiconductor shortages resulted in the estimated loss of production for 13 million vehicles worldwide.

Although lead times have normalised, vehicle production and sales volumes are not expected to return to pre-pandemic levels until the end of the decade.

The pressures of procurement

Procurement teams in today’s world are under pressure to mitigate inflation impacts while managing supply and supplier risks.

These have driven a shift from traditional globalisation and supplier consolidation approaches to models prioritising supplier diversification and risk management.

Teams must also manage increased price volatility through dynamic hedging strategies and are at the forefront of the sustainability transition, tasked with sourcing resource-efficient and low-carbon inputs.

Today's procurement teams are under pressure to mitigate inflation impacts while managing supply and supplier risks. This has driven a shift from traditional globalisation and supplier consolidation approaches to models prioritising supplier diversification and risk management.

Additionally, teams must manage increased price volatility through dynamic hedging strategies and are at the forefront of the sustainability transition, tasked with sourcing resource-efficient, low-carbon inputs.

Evolving procurement strategies

Chief Procurement Officers (CPOs) are working to reinvent their organisations as the ongoing shortage of significant talent in traditional procurement skills and advanced digital technologies underscores the necessity for digital solutions, which many companies have initiated but are now concerned about the pace of progress.

Despite this, CPOs are rising to the challenges, advocating for procurement's strategic roles within companies.

However, the new procurement landscape exposes weaknesses in processes, tools and digital infrastructure. Executives report challenges in obtaining comprehensive and accurate spend data, often hindered by data quality and integration issues.

Co-author, Samir Khushalani, added on his LinkedIn, “Leading procurement organisations are using a combination of digital tools, data analytics and new ways of working to unearth new opportunities for value capture.”

No shortcut to procurement excellence

McKinsey outlined in its long-term findings that procurement excellence requires proficiency across multiple dimensions.

Top-quartile organisations excel in procurement strategy, category management, digital, data and analytics, organisation and skills.

An international petrochemical company transformed its procurement performance by investing in digital tools, analytics and training. This initiative identified US$100m in annual savings opportunities, ultimately reducing spend by US$120m.

Digital transformation as a key differentiator

Top-performing procurement organisations significantly outperform their mid-tier peers in strategy, digital, data and analytics.

These leaders have invested in digital infrastructure and analytical tools, understanding that success in today’s environment demands data-driven decision-making.

The report outlines how a global retail chain leveraged a data-driven procurement approach to achieve substantial savings, reducing indirect spend by 11% and saving over US$500m in total cost of ownership.

Sustainability and procurement

McKinsey’s benchmarks reveal that leading procurement organisations closely align sustainability goals with their overall performance strategies. These companies develop tools and capabilities to assess and improve sustainability performance.

Conversely, lower-performing companies often lag in sustainability maturity, potentially risking future access to low-carbon materials. It suggests that these companies have yet to grasp the challenge of sustainable sourcing.

Given the expected low-carbon and low-impact materials shortage, companies that move quickly to develop sources and supplier relationships may enjoy preferential access to these products in the coming years.

Technological advances levelling the playing field

Some sectors, including automotive and consumer products, have a high percentage of leaders, thanks to a long-term focus on sourcing as a source of competitive advantage.

Over the years, however, McKinsey has discovered high-performance procurement organisations across every industry.

Across all sectors, the highest-performing companies in the benchmark tend to be large organisations, where the volume of purchases makes it easier to justify investment in advanced digital infrastructure and specialised capabilities.

Changes in the technology landscape are eroding the advantages traditionally enjoyed by larger organisations.

Sophisticated analytics tools and data platforms are increasingly accessible through lightweight, cloud-based, or modular deployments. This makes it faster, cheaper and easier for organisations of all sizes to access the digital capabilities they need.

For small businesses, this shift could be transformative. Improving their data analytics engine would reduce the number of procurement laggards in this group by 8%.

From enhanced digital capabilities to integrated sustainability strategies, leading procurement organisations leverage innovative approaches to stay ahead.

While larger companies have historically led the way, advances in technology are creating opportunities for smaller players to elevate their procurement practices. Moving forward, the ability to adapt, innovate and harness data-driven decision-making will be crucial for procurement excellence in the next decade and beyond.

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