Procurement leaders continue to face major challenges in 2024, forcing them to adapt to a constantly changing environment. They recognize that procurement organizations must adopt more sophisticated practices to meet both short-term challenges and the long-term vision for Procurement 2030.
We have refreshed our 2023 resilience toolbox in light of 2024’s challenges and lessons, introducing five new priority actions and retaining five from the strong efforts already made in procurement. These ten actions and tools will continue to help CPOs drive sustainable impact within their organizations and prepare for the future.
The dynamic and challenging landscape
Six market forces and trends are reshaping the business landscape in 2024:
Economic volatility persists. To maintain stability and margins amid the turbulence, successful CPOs are managing costs without compromising supply chain reliability.
Supply chain disruptions, often arising from geopolitical and climate issues, have prompted companies to rethink their globalized sourcing strategies. Successful organizations are reassessing their risk and resiliency practices, including supplier relationships.
Customers’ new expectations for shipping times, product availability, and sustainability practices are motivating organizations to find new ways to future-proof their supply chains. Collaboration across business functions is essential.
Advanced technology is becoming a strategic enabler of efficiency and effectiveness. Leading organizations are learning to utilize generative AI to accelerate and improve performance.
Environmental, social, and governance (ESG) considerations are now integral to supply chain strategies. In addition to ramping up efforts to meet 2030 decarbonization targets and more stringent EU regulations, leading companies are partnering with suppliers to promote socially responsible supply chains while improving cost competitiveness.
Labor market challenges stem from talent shortages and rising wages. Successful organizations are deploying innovative approaches to attract and retain talent and boost productivity.
Ten core actions
Our 2024 toolbox includes ten core actions to address four broader topics (exhibit):
End-to-end value capture
1. Utilize new-frontier analytics and AI. Employ advanced analytics to extract valuable insights from procurement data. Make strategic decisions using predictive analytics and AI for commodity forecasting, risk assessment, performance optimization, talent sourcing, and supplier negotiations. For example, a generative AI bot can help procurement teams develop strategic decisions based on available data. “For key commodities, I see AI better managing the physical hedge programs, as well as facilitating better and faster material substitution and equivalent assessments,” observed a participant in our recent Procurement Executive Forum.
2. Create an RFP engine. Develop an RFP engine—an approach for prioritizing categories and suppliers based on market development, spend analysis, and supplier leverage. This analysis prioritizes spending with the highest potential to drive value for the organization, while deprioritizing categories or suppliers where value will be more challenging to obtain.
3. Redesign value creation with key suppliers. Intensify design-to-cost collaborations with suppliers. Partner with suppliers or directly invest to secure the scale-up of critical supply chains. The CPO of an industrial company highlighted the importance of “partnering externally with suppliers and internally with other functions and business units—with procurement being a knowledge broker, creating value from the collaboration inside and outside the company.”
New sources of value
4. Manage volatility. Understand exposures and coordinate responses to macroeconomic drivers, such as interest rates, commodity prices, and consumer confidence. Maintain a practiced and updated playbook to recover and then control costs as inflationary pressures subside (or shift) and supply chains are redesigned. Ensure the playbook includes scenario planning that captures a broad range of potential outcomes. This represents an evolution of the “Refresh category strategies” tactical action included in last year’s priorities. A Fortune 100 global CPO emphasized the need to be proactive: “Over the past three years, we have faced a series of crises, grappling with supply chain shortages, price increases, and labor constraints. Now is the time for procurement to play offense instead of defense.”
5. Optimize operations from end to end. Establish a cross-functional nerve center or control tower to create transparency across internal processes, monitor markets, and identify risks. This was among the enabling actions in last year’s priorities and continues to be essential today. In addition, evolve from a traditional focus on savings to a much broader agenda emphasizing value creation, resilience, and sustainability. Report daily to top executives to enable rapid decision making, oversight, and integrated communications.
6. Integrate ESG and optimize upstream Scope 3. Incorporate ESG factors in procurement decisions to reduce Scope 3 emissions while continuing to manage costs and other trade-offs. Creating transparency on CO2 emissions is now necessary given the need to comply with new regulations, such as the EU’s Carbon Border Adjustment Mechanism. In the past, energy consumption was the main focus, but now procurement’s efforts are expanding to encompass the entire ESG spectrum. This means working with suppliers to establish clear guidelines, support, and incentives for sustainable sourcing, ethical practices, and environmental impact assessments throughout the supply chain. While ESG may not be the highest priority for many CPOs at this moment, maintaining momentum is crucial for long-term success.
Integrated margin management
7. Coordinate response for integrated margin management. Enable effective pricing and contracting strategies to tightly integrate cost of goods sold (COGS) and pricing. Beyond providing real-time information on costs, procurement can feed insights about the market and competitors to sales teams to bolster their efficacy in customer price negotiations. Reflecting the need for action, end-to-end margin management was identified as a top three priority by 87 percent of participants in our recent Procurement Executive Forum.
8. Redefine portfolio and product design. Reevaluate offerings to identify those that rely heavily on scarce materials and few suppliers. Look for ways to reduce these dependencies, expedite qualification, and hence increase resilience. Apply market research to capture emerging opportunities by actively managing costs and risks, such as those relating to labor and logistics.
Operating model of the future
9. Digitize end-to-end procurement processes. Deploy a modern enterprise data management system that connects with the rest of the organization and external data. Leverage advanced analytics, generative AI, and leading digital tools (such as should-cost models, eRFX, and contract AI) to maximize value creation and prepare the organization for future technology advancements. Participants in our recent Procurement Executive Forum plan to pursue these opportunities: 90 percent regard digital processes to manage contracts and flag noncompliance and value leakages as business-critical going forward.
10. Build new capabilities for the buyer of the future. Prepare the organization for procurement’s future by investing in new abilities for advanced market research, integrated technology, and talent development. Equip procurement professionals with deep insights and tools to understand and address supply market dynamics, risks, economics, and ESG. CPOs can spearhead the development of institutional capabilities, centers of excellence, and talent programs to drive this transformation.
In recent years, CPOs have gained valuable experience navigating unprecedented shifts in the business landscape. They must now apply those lessons by taking a more sophisticated set of actions to strengthen organizational agility and resilience. CPOs who master the challenges will promote success for their organizations, today and in the future.
The authors wish to thank Simon Braun, Christian Doppler, Ezra Greenberg, Alli Lesovoy, and Carolina Mazuera for their contributions to this article.