Trends reshaping the business environment during the past decade have created new opportunities for procurement to enhance a company’s overall performance. Supply markets and management have become more dynamic and complex as companies develop global supply chains and pursue growth opportunities in developing markets. What’s more, the risk of supply chain disruptions has increased as commodity prices and foreign exchange have become more volatile.
In this environment, even excellence in traditional core activities is no longer enough. Now procurement must be able to anticipate and address challenges in dynamic supply markets as well. To succeed, procurement executives will need to work closely with business partners to make decisions with a cross-functional, end-to-end perspective along the supply chain. To this end, many procurement functions now report directly to the CEO or CFO—a clear indication of their elevated strategic importance across the organization.
To fulfill their new mandate, procurement functions must develop and broadly apply a range of specialized skills that go beyond traditional cost management to materially improve the bottom line. Typically, the challenges they face include determining which capabilities to prioritize, as well as facilitating and managing cross-functional collaboration.
As leading procurement organizations have demonstrated, a structured approach to building capabilities is critical for success. Some companies that have established leading-edge procurement capabilities and addressed volatility and supply risks have improved their margins by more than five percentage points—a significant return on investment. Other benefits can accrue as well, such as developing more innovative supplier relationships, boosting growth rates in rapidly developing economies, and improving service capabilities.
For example, a major alloy producer interested in learning more about its products’ value in use involved the procurement team in discussions with customers. The team worked with the sales division and production managers to figure out how raw-material characteristics affect the production process downstream. Team members also developed and conveyed their insights on key supply markets and shared their knowledge of supply market innovations concerning the characteristics with the other parties in the discussion. As a result of this collaboration with customers, which took an end-to-end perspective on the business impact, the team was able to optimize the mix of input materials. This allowed for better material characteristics and a higher price in the end market. Procurement’s contribution played a significant role in increasing the value in use for customers while improving the alloy producer’s operating margins by up to 8 percent. (See “The Benefits of Developing Advanced Capabilities,” below.)