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You’re Doing it Wrong: The Underutilized Procurement Function

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Cost-conscious manufacturers of commodity products might be overlooking an important source of strategic value capture.

A recent article from McKinsey & Co. claims companies too often devote too few resources or attention to the procurement function. That could be working against them if one of their goals is to counter price erosion.

“Many procurement organizations have not devoted enough time and resources to effectively pursue operational improvements and strategic priorities,” McKinsey said. “They typically focus on short-term activities, such as ‘category waves,’ that generate in-year impact. But too many neglect longer-term, strategic initiatives — such as capability building, digitization and stress-testing the supply base — that promote resilience.”

Organizations need to take “a holistic approach that balances short-term activities to boost P&L with longer-term initiatives that build resilience,” McKinsey advised. “Moreover, by rethinking their approach to short-term procurement efforts — such as through applying digital solutions and the right incentives and mind-sets — companies can rapidly generate sustained savings across virtually all categories.”

The article suggests strategies including:

  • Take a full-scale approach to spend optimization — “The traditional category-wave approach, in which a company assesses only a few categories at a time, results in slow, incremental improvements relative to the full-scale opportunity,” McKinsey said. “To accelerate impact, procurement can take a full-scale approach to generate savings across all categories in a shorter timeframe.”
  • Use digital to accelerate decision-making — “To capture tangible value, procurement needs a digital solution that generates actionable insights and provides transparency into the savings opportunities.”
  • Address structural issues — “To lay the foundation for savings over the long term, companies will likely need to solve structural issues in procurement, such as lead times, payment terms and claims,” McKinsey noted. “These often go unaddressed because companies lack the specialized knowledge and resources required to tackle the challenges.”

The complete article — “Now is the Time for Procurement to Lead Value Capture” — can be read here.

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