McKinsey's Report Outlines Issues Facing Procurement Leaders

Procurement leaders face significant challenges and are finding that adoption of advanced practices to tackle both immediate issues and long-term goals

Leaders in procurement continue to face new and older challenges, as they must adapt to an environment constantly shifting.

McKinsey has released its Procurement 2024 report, which outlines how leaders are already recognising the need for organisations to adopt more sophisticated methods to meet both the short-term challenges and the long-term vision for Procurement 2030.

The report also updates the resilience toolbox amidst the challenges that 2024 brings and the lessons it has taught. This includes five new priority actions, while five remain from the strong efforts already made in procurement. 

These ten actions and tools will help keep CPOs driving sustainability in their organisations and prepare for the future.

A shifting and demanding landscape

McKinsey’s report outlines six market forces and trends which are transforming the business landscape in 2024:

Economic volatility continues, with CPOs finding success in a time of turbulence, are those managing costs without compromising supply chain reliability, to maintain stability and margins. 

Supply chain disruptions, come hand in hand with geopolitical and climate issues, which sees companies take a step back and review their globalised sourcing strategies. Organisations who are finding success are reassessing their risk and resilience practices, including supplier relationships.

The customers’ new expectations for shipping times, product availability, and sustainability practices are motivating organisations to find new ways to future-proof their supply chains - with collaboration across business functions being essential.

With advanced technology becoming a strategic enabler of efficiency and effectiveness. Organisations at the forefront are learning to utilise GenAI to accelerate and improve performance.

Environmental, social, and governance (ESG) considerations have become integral to the supply chain. As 2030 decarbonisation efforts are increased to meet the target, along with more strict EU regulations, leading companies are partnering with suppliers to promote socially responsible supply chains while improving cost competitiveness. 

Labour market challenges which come from talent shortages and rising wages. Organisations finding success are those deploying innovative approaches to attract and retain talent and boost productivity. 

A shifting and demanding landscape

McKinsey’s report outlines six market forces and trends which are transforming the business landscape in 2024:

Economic volatility continues and with CPOs finding success in a time of turbulence, are those managing costs without compromising supply chain reliability, to maintain stability and margins. 

Supply chain disruptions, come hand in hand with geopolitical and climate issues, which sees companies take a step back and review their globalised sourcing strategies. Organisations who are finding success are reassessing their risk and resilience practices, including supplier relationships.

Customers’ new expectations for shipping times, product availability, and sustainability practices motivate organisations to find new ways to future-proof their supply chains. Collaboration across business functions being essential.

Advanced technology becoming a strategic enabler of efficiency and effectiveness. Organisations at the forefront are learning to use GenAI to accelerate and improve performance.

Environmental, social, and governance (ESG) considerations have become integral to the supply chain. As 2030 decarbonisation efforts are increased to meet the target, along with more strict EU regulations, leading companies are partnering with suppliers to promote socially responsible supply chains while improving cost competitiveness. 

Labour market challenges which come from talent shortages and rising wages. Organisations that are finding success are those  that deploy innovative approaches to attract and retain talent and boost productivity. 

The Ten Commandments

Within the report’s toolbox included ten core actions to address four broader topics, which include;

End-to-end value capture, new sources of value, integrated margin management and operating model of the future.

End-to-end value capture

Leveraging Advanced Analytics and AI for Strategic Procurement
Incorporating cutting-edge analytics and AI is essential for extracting valuable insights from procurement data. Predictive analytics and AI can be used for strategic decisions in areas such as commodity forecasting, risk assessment, performance optimization, talent sourcing, and supplier negotiations. Generative AI bots, for example, assist procurement teams in developing strategic decisions based on available data.

Senior partner, technology and Advanced Industries Practices at McKinsey, Lari Hämäläinen, said to the company’s website: “When we talk about gen AI agents, we mean software entities that can orchestrate complex workflows, coordinate activities among multiple agents, apply logic, and evaluate answers. These agents can help automate processes in organisations or augment workers and customers as they perform processes. This is valuable because it will not only help humans do their jobs better but also fully digitalized underlying processes and services.

Senior partner, technology and Advanced Industries Practices at McKinsey, Lari Hämäläinen (Credit; McKinsey)

“For example, in customer services, recent developments in short- and long-term memory structures enable these agents to personalise interactions with external customers and internal users, and help human agents learn. All of this means that gen AI agents are getting much closer to becoming true virtual workers that can both augment and automate enterprise services in all areas of the business, from HR to finance to customer service. That means we’re well on our way to automating a wide range of tasks in many service functions while also improving service quality.”

Developing an Effective RFP Engine
Creating an RFP engine is a strategic approach to prioritising categories and suppliers based on market trends, spend analysis, and supplier leverage. This method focuses on areas with the highest potential value for the organisation while deprioritizing less promising categories or suppliers.

Redesigning Value Creation with Key Suppliers
Strengthening design-to-cost collaborations with suppliers is crucial. Partnering with or investing in suppliers to scale critical supply chains can significantly enhance value. A Chief Procurement Officer (CPO) emphasised that "partnering externally with suppliers and internally across functions and business units enables procurement to act as a knowledge broker, creating value from both internal and external collaborations."

New sources of value

Managing Volatility
Understanding exposures and coordinating responses to macroeconomic drivers such as interest rates, commodity prices, and consumer confidence is vital. Maintaining an updated playbook to control costs as inflationary pressures shift and supply chains are redesigned is a proactive approach that includes scenario planning for a range of potential outcomes. A Fortune 100 CPO stressed the importance of moving from defence to offence in procurement.

Optimising End-to-End Operations
Establishing a cross-functional control tower to ensure transparency across internal processes, monitor markets, and identify risks remains essential. This approach, continuing from last year's priorities, expands from a savings focus to a broader agenda emphasising value creation, resilience, and sustainability. Daily reports to top executives facilitate rapid decision-making and integrated communications.

Integrating ESG and Optimising Upstream Scope 3
Incorporating ESG factors into procurement decisions to reduce Scope 3 emissions while managing costs is necessary. Transparency on CO2 emissions is crucial to comply with new regulations such as the EU’s Carbon Border Adjustment Mechanism. Efforts now include the full ESG spectrum, working with suppliers to establish sustainable sourcing, ethical practices, and environmental impact assessments. Maintaining momentum in ESG efforts is vital for long-term success.

McKinsey logo

Integrated margin management

Coordinating Response for Integrated Margin Management
Enabling effective pricing and contracting strategies that integrate the cost of goods sold (COGS) with pricing is essential. Procurement can provide real-time cost information and market insights to sales teams, enhancing their effectiveness in customer price negotiations. End-to-end margin management has been identified as a top priority for 87 percent of participants in a recent Procurement Executive Forum.

Redefining Portfolio and Product Design
Re-evaluating offerings to identify those dependent on scarce materials and limited suppliers is critical. Reducing these dependencies and expediting qualification can increase resilience. Utilising market research to capture emerging opportunities and manage costs and risks related to labour and logistics is also important.

Operating model of the future

Digitising End-to-End Procurement Processes
Implementing a modern enterprise data management system that integrates with the organisation and external data is essential. Advanced analytics, generative AI, and digital tools (such as should-cost models, eRFX, and contract AI) should be leveraged to maximise value creation and prepare for future technological advancements. Digital process management is considered business-critical by 90 percent of participants in a recent Procurement Executive Forum.

Building New Capabilities for Future Buyers
Preparing for future procurement involves investing in advanced market research, integrated technology, and talent development. Equipping procurement professionals with the insights and tools needed to understand and address supply market dynamics, risks, economics, and ESG is crucial. CPOs can lead the development of institutional capabilities, centres of excellence, and talent programs to drive this transformation.

These strategies aimed to help procurement leaders navigate the complexities of 2024 and beyond, ensuring resilience, sustainability, and value creation within their organisations.

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