Some procurement organizations may seek to minimize risk exposure by structuring contracts to build in performance incentives. Information on Latest Trends and Supply Chain Market Information Knowledge centre on COVID-19 impact assessment A cloud-based platform enables all functional departments to share information in real time, while a “control tower” can monitor impact. Joint responsibility for the process by category owners and budget owners improves accountability. The 'place of procurement' refers to positioning procurement within the entity to optimize the influence and impact of procurement on internal and external stakeholders. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more. SIG (Sourcing Industry Group) is the premier global sourcing association, founded in 1991 that provides thought leadership, networking and training opportunities to executives in sourcing, procurement and outsourcing from Fortune 500 and Global 1000 companies. It is also the biggest opportunity for businesses to improve their asset utilization. Watch over the finances - budgets, billing and payment, total cost of contract, and trends. Building relationships with more diverse suppliers may help companies withstand further disruptions in supply availability. At the onset of the pandemic, some of the most dramatic value-pool shifts occurred in commercial real estate and oil and gas, which were among the sectors most affected by forced shutdowns. The zero-basing process is supported by standard procedures to build and negotiate budgets, including knowledge, guidance, and practices that equip the organization to negotiate at scale. A company can gain competitive advantage by applying the bottom-line savings to fuel growth and innovation. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. The company is now implementing a multistep plan addressing 100 suppliers, with the aim of reducing high-risk spend by 40 percent. 3. Spend categories differ vastly within each organization in the retail … The main objective of strategic sourcing is to save money but other reasons include improving the acquisition process, supplier performance and minimizing risk. Scope of the report The main scope of this report is cloud computing service procurement best practices in public research organisations. Digital procurement solutions help teams reduce the repetitive operational parts of … Use minimal essential Consequently, the role of purchasing ha… But these are just the starting point. To monitor and sustain performance, the company must plan resources, track revenues, and refine the process for continuous improvement. These new ways of working require new skills: data engineers and data scientists are becoming increasingly commonplace in leading procurement departments, and demand for data capabilities is increasing across the function. Best Practices for Managing Strategic Suppliers effectively. More than 161.000 people in 154 countries in firms across the PwC network ... PwC’s Global Best Practices®, as well as practical tools & templates to drive results during and after the project. n Use consistent language, e.g., terminology adopted from NIST to facilitate effective communication and coordination. BCG’s Procurement Excellence Monitor (PEM) helps organizations assess their internal processes, policies, governance, tools, systems, and practices to identify areas for improvement. ... McKinsey & Co. Never miss an insight. Spending is often fragmented among multiple locations, business units, and categories, making it hard to identify and capture enterprise-wide savings opportunities. Procurement*rsquo;s performance can be measured using scorecards linked to annual run-rate cost savings. A program to transform indirect procurement begins with setting clear goals and focusing on categories and subcategories. While the impetus for change is largely consumer-driven, the burden of the transition will fall squarely on chief procurement officers (CPOs) who know sustainability is a necessity, not a luxury. Please use UP and DOWN arrow keys to review autocomplete results. In an agile organization, category-specific managers are replaced by a working group of managers that perform negotiations for different categories, depending on variables such as the timing of the negotiation and the required expertise. 1 on Gartner SC Top 25 Supply Chain list. Partnerships of this type are likely to continue as outperformers look to create competitive advantages by partnering with suppliers for new products or services. These benefits, in turn, allow the company to more accurately identify the level of funds available to reinvest in growth and strategic projects. Use minimal essential Procurement leaders will need to collaborate even more closely with sales and demand-planning teams to anticipate and react to market shifts quickly. Our flagship business publication has been defining and informing the senior-management agenda since 1964. Most transformations fail. Several of them also re-ported a benefit they considered the most valuable: Use of an e-procurement system has freed sup-ply management and other personnel to focus on creating value for the enterprise. Many are trapped in pilot purgatory, making small investments in select use cases that never scale up to achieve real business impact. Industries ranging from energy and transportation to banking and telecommunications are seeing early successes with zero-basing, following examples from consumer industries. Intelligent spend engines can, for example, identify similar maintenance parts used by both companies and consolidate vendors. … Machine-learning features improve the tools and perform data cleansing, categorization, and enrichment activities. SIG (Sourcing Industry Group) is the premier global sourcing association, founded in 1991 that provides thought leadership, networking and training opportunities to executives in sourcing, procurement and outsourcing from Fortune 500 and Global 1000 companies. But for procurement to lead the way, companies will want to reimagine not just what the function does but also how it operates and which new capabilities it will need. We strive to provide individuals with disabilities equal access to our website. Please use UP and DOWN arrow keys to review autocomplete results. Procurement savings can be made in a number of areas within a Purchasing Department. Cognitive agents and natural-language processing tools comprise a virtual workforce that can support employees and customers through the parsing and analysis of task descriptions. Digital upends old models. our use of cookies, and Reinvent your business. Press enter to select and open the results on a new page. Certainly, digital technologies and best-in-class practices provide the foundation. The time is right to do a thorough assessment of supply-chain risks and manage them more thoughtfully. collaboration with select social media and trusted analytics partners McKinsey is the gold-standard for presentations. This requires taking tactical actions that instill the necessary mindsets and behaviors, as well as building the hard and soft capabilities required for the organization to reach and sustain the full potential. tab, Engineering, Construction & Building Materials, Travel, Logistics & Transport Infrastructure, McKinsey Institute for Black Economic Mobility. Flip the odds. To overcome the challenges, companies need a new vision for indirect procurement that combines cutting-edge tools and practices, as well as traditional approaches to category management, to address fundamental issues relating to processes, capabilities, and data. Please email us at: McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Here are seven best practices in procurement for SMBs and the advantages they can deliver. The comprehensive suite of digital solutions that we have discussed has enabled cost savings of 15 to 20 percent. However the reality is that most Procurement functions have not moved as quickly to address supply chain efficiency as some organisations have demanded. Subscribed to {PRACTICE_NAME} email alerts. Taking procurement digital is a critical step in making procurement activities future-ready. Visualization software translates the results into reports and drillable dashboards. The working group is a pool of multidisciplinary professionals drawn from all categories. Victorian Local Government Best Practice Procurement Guidelines 9 1. Best practices are always made to ensure that your company does the best it can to allow for the best optimisation of the company’s resources. Something went wrong. This best practice builds a case for the strategic placement of the procurement function to maximize the effectiveness of procurement within the entity, which is critical … The solution tracks the status of initiative implementation and projected revenue. Based on our research and feedback from global procurement leaders, we believe that companies can continue to rely on procurement to recover from the current crisis, in much the same way that they used the function to recover from past crises. Today, in addition to recovering profitability and finding ways to preserve cash, companies face the added challenges of shifting supply-market dynamics, changing ways of working, increasingly volatile demand, and de-risking their supply chain to make it less vulnerable to disruption (Exhibit 2). Using this coordinated, technology-enabled approach, global companies are already achieving marked improvements that allow them to capture the untapped value of indirect procurement. Corporate buyers can efficiently qualify and onboard vendors, manage orders, and track vendor performance at a glance. 5 The tool is supported by a basic finance boot camp. Digital upends old models. To unlock the full potential, these elements must be applied comprehensively (exhibit). Spends should be segmented as required by the business into logical groups of similar items or services from suppliers. Although existing best practices across organisational enablers remain relevant, digital and data & analytics as self-standing enablers play a stronger role. Experience has shown that the 7 step* strategic sourcing process developed in 2001 has stood the test of time and with variations, has become best practice. We use cookies essential for this site to function well. Without best practices, it is easy for the company to spiral because there is a lack of a set structure to follow. One global electronics manufacturer conducted a detailed stress test of its supply chain, finding that around a quarter of its spend was at high risk—concentrated in three critical component categories. To better understand why improvements in procurement practices and supply-chain can be disruptive for the construction industry, this report will present a Never miss an insight. Our analysis suggests that procurement could gain the most by focusing its strategic initiatives in five key areas: strengthening supply-chain resilience, zero-basing the design of category value-creation strategies, investing in supplier partnerships and innovation, accelerating adoption of digital and analytics, and transforming to an agile operating model. Business-continuity planning has taken on a new meaning, designing contingencies not just for a single supplier plant to go offline, but for entire countries to be inaccessible. People create and sustain change. What we found was that – overall – there is a significant gap between where Procurement is now and where they could be. Companies with complex supply-chain networks, such as automotive and technology manufacturers, are especially vulnerable. Simply put, evolution is not enough. (For more, see “A next-generation operating model for source-to-pay.”). To succeed in the 2020s, companies need a revolution in indirect procurement. As of this writing, many of the world’s largest economies were experiencing record-breaking economic contractions. In a separate column, a McKinsey pricing sheet played up pandemic-only add-ons, whose language read like action-figure packaging: “COVID team includes COVID analytics and best practices.” Leading organizations are adopting virtual training methods and gamified digital tools to engage experienced workers and develop their talent. States that avail themselves of such a comprehensive approach will be poised to reach the procurement office’s full potential through savings, budget reallocation, … If you would like information about this content we will be happy to work with you. The time has come for all companies to join the revolution. Advanced analytics solutions. Procurement Savings 15 Ways To Increase Procurement Savings, Lower Purchasing Costs & Supplier Prices. Work from home was becoming popular even before the pandemic. Better procurement practices can help hospitals achieve rapid supply cost reductions of 20 percent or more and keep future cost escalations under control. McKinsey, the implementation of procurement and best practices can result in 5 to 10 percent of productivity improvement and 3 to 5 percent of cost savings at the construction industry. Unleash their potential. Forward-looking companies will go a step further and completely reimagine what the function looks like to enhance the value that it can deliver. Information on Latest Trends and Supply Chain Market Information Knowledge centre on COVID-19 impact assessment. Includes best practices, top skills, examples and free templates. 12 July 2018 Written by: bemelmans; Categories: Procurement, Supply Chain; Managing strategic suppliers effectively is essential to drive competitive advantage for modern global organizations. Take a look here at links to 30+ McKinsey presentations. As evidence, procurement in 2002 We offer client support throughout the entire global sourcing process by leveraging best-cost country (BCC) suppliers. By integrating data pools and analytics functions, the tools can recognize cross-category synergies. In the Appendix, we set out the differentiating features of each element of the approach. Procurement @ McKinsey After years in a multinational corporation, Michael came to McKinsey’s Operations practice because it offered new challenges. n Be readily available as a single comprehensive document with department-specific subsections, as needed. But these are just the starting point. In reviewing the state of procurement services and practices in the United Nations system, the Inspector finds that the procurement function has evolved over the past ten years from a relatively obscure administrative activity to a financially high-profile and high-risk function. Agile organization. n Use consistent language, e.g., terminology adopted from NIST to facilitate effective communication and coordination. Learn about Periodically searching for new vendors is important to avoid the high costs that result from being “locked in” with a particular vendor. compliant to EU procurement regulations. procurement’s digital strategy: It will be characterized by greater usability, making employeesmore productive and engaged; and it will provide access to more content the organization can use to facilitate core procurement activities. 2 20/01/2016 www.picse.eu . By establishing joint targets with functional peers, procurement experts can ensure that these peers have skin in the game when it comes to achieving excellence in category management. We'll email you when new articles are published on this topic. Create a procurement committee or supply chain counsel that includes executive stakeholders and representatives from key departments. Public Procurement Practice CYBERSECURITY FOR PROCUREMENT In general, a cybersecurity plan should: n Be regularly updated. The COVID-19 pandemic has put an enormous strain on global supply chains, at times halting manufacturing while shutting down airports and seaports, interrupting delivery of raw materials and finished goods. Instead of contracting with IT suppliers on the basis of time and materials, procurement departments can look to peg contractor fees to performance. Companies have a lot to bounce back from. The key lies in the ability to extract the best from key partners. In Australia, in the immediate aftermath of the crisis, supermarkets in need of extra personnel to handle a sudden surge in sales contracted with thousands of airline workers who had been sidelined when airlines downsized. Based on our experience of working with a large number of businesses, we recommend the following ITAM best practices. The company should use historical performance as a benchmark for setting aspirations. Leading companies have created a B2B offering catalog that lists all online marketplaces, additional services, and supplier offerings. The company gains the benefits of improved forecasting and budget planning and clear visibility into how procurement influences the P&L. This will require attracting new talent and upskilling the existing talent. Procurement can drive an organization’s pandemic recovery efforts. Select topics and stay current with our latest insights, Revolutionizing indirect procurement for the 2020s. Cross-functional collaboration is powered by visualization and communication tools that allow managers to share information and monitor and make inter-departmental decisions instantaneously. For your larger partners, the best way to improve the partnership value is through consistent and collaborative communication and problem solving. While procurement can again play a crucial role in recovering from a crisis, this time procurement leaders will want to take a different approach to the function in addressing a range of new issues. We also found that companies with top-performing procurement functions saw valuations return to pre-GFC levels an average of three years faster, and were able to lower costs of goods sold (COGS) as a percentage of revenue, thus improving EBITDA by 3 percentage points more than bottom performers. Best practice is to set up periodic (quarterly, semi-annually) meetings to problem solve a partner scorecard, future initiatives, needs, etc. Rees urges the following: 1) Identify and involve all stakeholders in the outsourcing process from the start, and do not leave key issues to either the procurement department or the CMC group. 2 Procurement Transformation PwC firms provide Industry-focused Assurance, Tax and Advisory services to enhance value for their clients. To successfully deploy the new approach, a company must create the right culture and bring new digital and analytics skills to the procurement team. At the pandemic’s onset, procurement departments switched to crisis-management mode to help companies alleviate disruptions, including sourcing personal protective gear for employees and helping smaller suppliers manage their cash flow. The purpose is to identify industry-specific best practices and trends in the Procurement space, as well as to quantify key operational metrics for comparison of participants We gathered and evaluated 53 quantitative benchmarks* and qualitative practice points Most metrics and practices were organized along three primary themes: VALUE CREATION These digital tools, blended with machine-learning technologies, use automated engines to classify and categorize spending. Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. DESIGNING THE PERFECT PROCUREMENT OPERATING MODEL When it comes to defining the most efficient and effective operating model for procurement functions there are, unfortunately, no easy answers. June 28, 2017 After working in a big multinational company for several years, it was time for a change in my career. Flip the odds. Best-practice purchasing is now an even more potent source of value creation for private-equity leaders. Decades-old paradigms are being upended: ever-increasing global sourcing now potentially giving way to regionalization of supply, and lean inventory targets being reset in favor of higher buffer stock. The procurement function can lead efforts to change procurement practices throughout the organization. An Asian steel manufacturer improved collaboration in procurement by adopting a cloud-based supplier-negotiation platform. Clean sheets—bottom-up estimates of a supplier’s costs for specific parts and services— are especially valuable analyses. Online B2B platforms—such as Alibaba, Amazon Business, and ThomasNet—are e-marketplaces that are used for supplier evaluation and selection, cross-category orders, and financial traceability. These tools also promote the transition from spot checking to total quality control. What are the enablers of this next-generation procurement model? Here, we describe the most advanced solutions relating to each element. What makes the new vision for indirect procurement so powerful? States have the potential to adopt appropriate procurement best practices from leading federal and private-sector organizations that approach transformation as a large-scale, multiphase undertaking that spans people, processes, and tools. The rapid adoption of new ways of working that the pandemic necessitated forced companies to accelerate the shift to digital. The best practice examples in this report have all achieved these benefits. Companies deploying automated P2P have achieved 15 to 25 percent savings in most transactions and reduced processing times from days to minutes. The best way to use these KPI’s is by procurement benchmarking. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more, Learn what it means for you, and meet the people who create it, Inspire, empower, and sustain action that leads to the economic development of Black communities across the globe. To lead in the next normal, procurement departments need to transform how they operate and collaborate with internal and external stakeholders. Unleash their potential. It is important to link processes to contract expiration and develop a calendar that sets timetables and deadlines for actions. Forced social distancing accelerated the reimagining of the workplace—and in particular the switch to remote work—faster than almost anyone could have predicted. Companies can use advanced analytics enhanced with target-setting tools to identify cost-saving and process-optimization opportunities. To rigorously challenge every dollar in the annual budget, many companies use a repeatable process that stacks costs starting from zero. Please try again later. While adopting the new approaches, companies should also stay focused on traditional approaches to achieving excellence in category management: Value capture. In a recent survey we conducted, top Asia-Pacific procurement leaders pointed to a significant difference between recovery efforts after the GFC and what’s happening now. The winning procurement organizations will adopt a continuous learning culture as a way of life. It should be operationally distinct from other departments and divisions. In the past several years, at least one company in twenty has suffered a supply-chain disruption costing at least $100 million. Leading companies have already positioned themselves for success in the 2020s by implementing the new vision for indirect procurement. Here are some of the procurement best practices for the retail industry: Segmenting the Spends. The foundation of the process is a budget-creation tool powered by software that applies zero-basing policies. Taxonomy booklets provide up to five levels of granularity on the basis of global best practices. Support from top management is essential to maximize the impact—as examples, CEO sponsorship is needed for zero-basing and the CFO must support efforts to establish the P&L interlink. All spend is required to deliver best value for money in compliance to agreed budgets. It also needs to be aligned to its supplier market. 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 it can even analyze satellite images of at-port stockpiles to give a much more accurate prediction of market prices. We'll email you when new articles are published on this topic. Financial P&L interlink. Then, most companies focused on strategies to recover from the financial effects of the recession. What are the procurement best practices in this market? To create value in commercial real estate, for example, instead of simply renegotiating leases, a procurement leader can consider how the organization’s work practices will likely evolve in the future as flexible and remote working grow. Reorienting the procurement function as sourcing advisors will avoid roadblocks to progress against mission-critical business objectives. The aim of procurement savings are to drive down procurement costs, improve supplier terms and … Yet despite the tremendous impact that strong spend management can have in value creation, the reality is that in many sectors, procurement is still primarily a transactional function with a limited scope of influence. The next normal arrives: Trends that will define 2021—and beyond, The present-focused, future-ready R&D organization. To capture or regain the potential value the shifts created, procurement leaders may need to completely rethink their strategies for the affected categories. Yet procurement has helped companies weather global crises before. Learn about Automated procure to pay (P2P). The agile operating model includes defined processes with clear ownership, involvement of internal and external stakeholders, and standard but flexible activities. Please click "Accept" to help us improve its usefulness with additional cookies. Intelligent spend engines. Strategic investments can also be an attractive option, as illustrated by digital-platform investments in sectors including financial services, industrial equipment, and retail. Unilever draws the admiration of many, including a procurement exec in transition we spoke with a few months ago, who described the reasons why: robust procurement group demonstrating best-in-class processes; strong sustainability sourcing practices; global presence and a sterling supply chain brand, as they were voted No. Select topics and stay current with our latest insights, By Tarandeep Singh Ahuja, Yen Ngai, Sukrut Kharia, and Harkanwal Singh Sidhu, Reimagining procurement for the next normal. Change management. Record keep and report - real-time audit trails and reporting 4. A company can enlist support from industry experts to negotiate lower prices from vendors. cookies, McKinsey_Website_Accessibility@mckinsey.com, Visit our Product Development & Procurement page, A next-generation operating model for source-to-pay. The insights offered by our reports will help procurement professionals streamline supply chain operations and gain insights into the best procurement practices to mitigate losses. By collaborating with HR and IT in category-strategy deliberations to determine an optimal office footprint, procurement can help in realizing better long-term outcomes, such as by emphasizing “access to space as needed” over simply “the most space at the lowest price.”. hereLearn more about cookies, Opens in new Procurement departments need to make five important shifts to support faster, decentralized decision-making throughout the business. D3.2 Procurement Best Practices Interim Report 20 January 2016 Toward the European Open Science Cloud 1 Damir Savanovic, CSA.