A new era for procurement: Value creation across the supply chain

The world experienced significant turmoil between 2020 and 2023: supply chain disruptions, geopolitical tensions, technological advances, changing consumer needs, new sustainability commitments, and more. It’s increasingly clear that the resulting shifts in how people live, work, and play are not temporary but structural, beginning a new economic era characterized by volatility, regionalized supply chains, AI dominance, and talent scarcity.¹“On the cusp of a new era?,” McKinsey Global Institute, October 20, 2022. To succeed in the new environment, organizations are currently embedding agility, technology, and innovation into every aspect of their value chains.

As visible as these moves now are, their long-term success depends on a much less obvious action: changing what the organization buys, whether it’s raw materials that meet new environmental standards or analytics talent who can identify what consumers most value. Across performance dimensions ranging from cost and cash to carbon control and social impact, external spend plays a crucial role. Consequently, chief procurement officers (CPOs) who have successfully navigated uncertainty in recent years have become indispensable partners to the executive suite.

As the CPO of a manufacturing company noted to us, “Never before has procurement been core to so many executive-committee-level priorities. We now have a real seat at the top table. And this is not a temporary situation—this is how we will operate going forward.” The CEO of a chemicals company echoed this sentiment: “These days, to perform well, companies need a different end-to-end view on the business. Procurement is absolutely critical.” The new economic era represents a unique opportunity for procurement to step up and redefine its scope, mandate, and playbook, providing a competitive edge to organizations that do so well.

Four megatrends are shaping the future ecosystem of procurement:

1. An increasingly multipolar world that challenges the interconnectedness of global value chains. Procurement leaders are therefore shifting focus from cost improvement alone toward resiliency and assistance to businesses that are adapting to volatile market conditions.
2. Advances in AI and machine learning that can quickly extract deep insights from previously unstructured data. Procurement can make a crucial contribution by enhancing spend transparency and capitalizing on movements in supply markets.
3. Demographic shifts, including shrinking workforces and rising skill gaps, that intensify competition for digital talent. The task for procurement departments is to attract and nurture candidates with the analytical skills and data competence needed to unlock value from agile ways of working and digital operating models.
4. The transition to low-carbon energy, upending resource and energy systems. Procurement can take the lead in minimizing value chain emissions, securing high-demand green materials, and managing the capital expenditure required to achieve net zero.

The new currencies of procurement

Despite typically accounting for 50 to 80 percent of a company’s cost base, external spend often receives less attention than sales- or productivity-improvement efforts. Introducing new “currencies of procurement,” beyond traditional cost savings and price reductions, can help position procurement as a strategic function.

1. Improving net margin by outperforming the market: In a more volatile era, value creation increasingly depends on offsetting market increases and swiftly capturing downward trends. Collaboration between procurement and sales, along with other functions, becomes vital for protecting and increasing margins while managing risk.
2. Ensuring volume and enhancing growth: Procurement can surpass mere order fulfillment and instead provide a more durable competitive advantage, strategically securing critical and scarce materials while maintaining supply chain flexibility.
3. Leading value-chain emissions reduction: Procurement can contribute critical support for net-zero objectives by securing green materials and decarbonizing the supply base through localization efforts and enhanced supplier co-innovation.

Companies that prioritize the reinvention of external spend management can excel in the new economic era. Investing in procurement performance enables organizations to derisk, decarbonize, and optimize their largest cost base. Embedding the new currencies for procurement into the broader strategic imperatives is crucial to steer holistic value creation.

Toward ‘Procurement 2030’

In an era defined by volatility, procurement faces an imperative to remake itself with a new vision and new capabilities to help businesses weather coming storms. CPOs from a wide range of industries spoke with us in detail about how their roles are changing and where they see opportunities for the future. Their perceptions, combined with our analysis, coalesce into a vision for Procurement 2030 that comprises three critical challenges for the CPO: becoming an end-to-end value entrepreneur, expanding into new venues of value creation, and building the organization of the future that provides a strategic blueprint to guide procurement leaders (Exhibit 1). By embracing these challenges, CPOs can position themselves as strategic partners, incorporating innovation, resilience, and sustainability throughout the value chain.

1

Becoming an end-to-end value entrepreneur

Achieving procurement’s full potential for lasting impact means accelerating the function’s evolution from a traditional focus on savings to a much broader agenda emphasizing value creation and resilience. That has implications throughout the organization, from strategic development through to sales and marketing.

Redesign of upstream value chain. Procurement’s first opportunity is to go beyond cost management to use its deep understanding of the value chain and supply markets. By becoming an active strategic partner with the C-suite, procurement can help shape corporate strategy, identify M&A targets, scout early-stage innovations, and enhance cross-functional collaboration for long-term value creation. This allows procurement to actively shape and redesign the upstream value chain by optimizing supplier collaboration to extract maximum value from the supply base—tier one and beyond.

As the CPO of an industrial company told us, “The CPO is not only the chief procurement officer anymore, but the chief partnership officer as well—partnerships externally with suppliers and internally with other functions and business units—with procurement being a knowledge broker, creating value from the collaboration between inside and outside of the company.”

Downstream margin management. End-to-end margin management, not cost control, is where procurement can show the greatest impact. Joint governance and collaboration among sales, R&D, and procurement can then propel top-line strategies, with flexible, adaptable product mixes and dynamic pricing adjustment to maximize revenue and margins. This strategic, cross-functional co-ownership and collaboration ensures that sourcing decisions consider both top-line revenue generation and bottom-line profitability.

The CPO of a chemical company argues, “Not understanding how your price adjustment mechanisms work—decoupling them from procurement’s work rather than integrating them altogether—can be detrimental and even dangerous for margin. But to be truly part of the end-to-end strategy and not just represent the supply side, procurement will need to be increasingly holistic and entrepreneurial.”

Strategic resilience. Procurement is transitioning from assuming security of supply to optimizing the portfolio in order to mitigate the risk and impact of disruptions. That means developing a robust diversification strategy. Accelerating development of alternative suppliers, creating real-time data transparency, and incorporating procurement data into integrated business planning can identify and moderate the risk of shortages while limiting cost ramifications.

More companies say they are taking a new approach when weighing trade-offs. According to the CFO of an agrochemical company, “We are even prepared to accept higher cost in the short term to restructure the supply base and make it more resilient.”

Enabling socially responsible sourcing throughout the supply chain

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Opening new venues of value creation

Tomorrow’s looming pressures—macroeconomic, geopolitical, environmental—call for an expanded solution space, including judicious deployment of the latest innovations.

Volatility management. Thriving in the future will mean embracing volatility, so that procurement can become a truly predictive function that anticipates price increases, captures downward price movements, and creates value from uncertainty. By better leveraging technology—such as digital twins representing entire value chains—procurement gains real-time insights into cost drivers, enabling agile responses to market changes.

Senior procurement executives tell us that they are already feeling the pressure: “Volatility in the markets is at a level we have not seen before,” noted a pharma CPO. “Procurement’s ability to adapt to these changes and monetize that volatility will be absolutely crucial for success.”

Scope 3 upstream optimization. Carbon may soon achieve full cost equivalence in target setting and budgeting, with procurement playing a pivotal role in driving the sustainability transformation of the upstream value chain. By embedding CO₂ reduction into every sourcing decision, fostering expanded value chain transparency, and resetting the supply base through advanced demand-management and technical value-creation levers, procurement can align sustainability ambitions and cost-reduction targets. The CFO of a chemical company said to us, “Enterprise value is key, and the key success factor there is CO₂; it’s crucial for procurement to step up to drive Scope 3 reduction.”

High-value analytics. With high-value analytics powered by AI, procurement can harness available internal and external data to drive superior sourcing decisions. A multidimensional data pool, using AI for real-time spend analysis and insights embedded into collaborative platforms, can enhance decision making and strategic optimization. According to the 35 CPOs we surveyed, “procurement as the owner of the single-source-of-truth platform for external cost” was the highest priority for high-value analytics. At the same time, the vast majority said they lacked technology platforms that could perform thorough, integrated, real-time data processing and said, consequently, that less than 20 percent of their organizations’ available procurement data was currently used.

Building the procurement operating model of the future

Procurement’s expanded role implies a reinvention of its internal structures so that the function can respond more quickly, use technology more effectively, and support the business more strategically—developing the buyer of the future and a new talent model.

Agility through digitization. As procurement evolves, so too does its organizational structure. Together, recent breakthroughs in machine learning and generative AI are creating new opportunities (and urgency) to elevate performance and expand capabilities—with advanced digital tools enabling sophisticated, cross-functional processes. Strategic agility and digital capabilities combine into a model that comprises three central elements: strategic buying, fully autonomous operations, and agile pools (Exhibit 2).

2

First is the more widespread development of robust strategic buying teams to create winning sourcing strategies for strategic or complex spend areas. Building those teams may depend on the second change: deploying fully autonomous sourcing bots to drive procurement in standardized spend areas, thereby freeing up buyer time for more value-additive activities. But the CPO of a food business cautioned that while tail-end negotiation and optimization “should be fully automated, accurate and reliable data on your supplier base is crucial to achieving this.” Finally, by transitioning from a category-oriented team structure to agile ways of working, procurement organizations can become more responsive and effective in directing resources and competencies where they are most needed to meet business needs.

The buyer of the future. To thrive in the future, procurement needs a new breed of professionals who possess a diverse skill set. The buyer of the future combines the traditional procurement tool kit and category expertise with a new set of capabilities in advanced data analytics, sustainability, and strategic thinking. By nurturing talent with these competencies, procurement organizations can adapt to changing market dynamics and drive cross-functional innovation between the suppliers and the internal stakeholders.

The CPO of a technology company underscored this point: “Procurement professionals are going to need to be much more digitally fluent, so that they can learn from the data that is available to them. Just figuring out what are the right questions to ask the data is something that more and more supply chain professionals are becoming adept at, and that’s really going to help people be more surgical in making selections, measuring supplier performance, and building future plans.”

Gain, retain, and develop talent. The ongoing digitization of roles across industries and functions is already intensifying competition for a limited talent pool. Procurement faces an additional dilemma, having been regarded too often as only a behind-the-scenes support function—focused on cost cutting and negotiating rather than driving innovation or growth. Making procurement more attractive to high-performing talent with ambitious career aspirations—especially compared with functions such as finance, marketing, or sales—is a challenge. To gain, retain, and develop talent, procurement organizations may consider enhancing their hiring strategy, strengthening their career progression opportunities and learning platforms, and uplifting the profile and reputation of the procurement function.

We are entering times defined by sudden upheavals. But this seismic shift also reveals previously untapped opportunities, which procurement can be instrumental in seizing. With an expansive vision for value and a reinvented infrastructure—backed by leadership support, talent, and technology—procurement can take the lead.