Procurement best practices

From the May-Jun 2024 edition of Supply Chain Management Review.

May-Jun 2024

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Procurement is transforming. Sustainability, cost pressures, labor challenges and artificial intelligence are creating a new procurement order. Gone are the days of blindly spending with single suppliers, replaced by a complex network of diverse global suppliers. Gone are the tried-and-true management methods, replaced by technological advancements that require additional education and upskilling the workforce. Gone are the days of procurement leaders “that just know what to do,” replaced by workers leveraging technology to fill in the gaps.

The procurement business is changing. McKinsey & Co. recently identified four megatrends in procurement that touch on some of these changes. They are as follows.

1. Multipolar world
2. Artificial intelligence/machine learning
3. Demographic shifts
4. Transition to low carbon energy

McKinsey, in its report, “A new era for procurement: Value creation across the supply chain,” noted the disruptions of the past several years and the impact they have had on procurement.

“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,” it said. “To succeed in the new environment, organizations are currently embedding agility, technology, and innovation into every aspect of their value chains … consequently, chief procurement officers who have successfully navigated uncertainty in recent years have become indispensable partners to the executive suite.”

In this month’s Spotlight On feature, we identified four top trends in procurement (there are many others, which we have written about extensively online; you can find them here: scmr.com/topic/category/procurement) and offered a best practice recommendation for each.

Increase technology investment

Amazon Business released its 2024 State of Procurement Report last November and in it, 98% of respondents said they are planning investments in analytics and insights tools, automation and artificial intelligence. That is not a surprise. According to research from Gartner, top-performing supply chains are investing in artificial intelligence  and machine learning at twice the rate of their  lower-performing peers.

 “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. To succeed in the new environment, organizations are currently embedding agility, technology, and innovation into every aspect of their value chains … consequently, chief procurement officers who have successfully navigated uncertainty in recent years have become indispensable partners to the executive suite.”

Keelvar, which provides strategic sourcing solutions and software, noted that 59% of procurement and sourcing teams plan to adopt advanced technology, including artificial intelligence and automation technology, with 42% saying those are their top tech items. “2024 will be the year when true leaders and innovators get started with AI and automation and begin to separate from the pack,” Alan Holland, founder and CEO, said. However, KPMG noted that only 29% of respondents to one of its surveys were adopting more than 50% of the features from their cloud software-as-a-service provider.

Best practice: Dive into the AI pool and don’t be afraid to get your feet wet. If your company doesn’t have the resources to do this, there are third-party options available to help get started.

Improve spend transparency

According to Michal Cukier, a veteran procurement manager currently working for a major CPG company, “between 50% and 90% of a company’s overall expenditures” come from purchased goods and services, making “purchasing ... a key contributor to the net profit margin of the organization.” Additionally, a Globality report from 2023 noted that eight of 10 requests for proposals were still taking place via emails and spreadsheets, and that 82% of procurement leaders acknowledge their indirect spend is not well managed. Indirect spend is estimated to equal between 20% and 40% of revenue, Globality added. The most promising opportunities are spend analytics and contract life-cycle management, the firm said. Both of these areas offer access to accurate data that can enhance the effectiveness of procurement personnel. Category management is another area for Gen AI adoption highlighted by 50% of respondents.

Best practice: Technology is providing visibility into spend management like never before, but with nearly 80% of RFPs still taking place via emails and spreadsheets, getting data clarity and visibility is difficult. Invest in digital systems, automate where possible, and analyze the resulting data to make more informed decisions.

Build resiliency

The events of the past few years have driven home the importance of supplier diversity to build supply chain resiliency. There are many ways to do this—build better supplier relationships, find and engage with new suppliers, invest in technology, and make the necessary “trade-offs.”

“The reality is that it simply won’t be feasible to make a supply chain 100% resilient, sustainable, responsive, and still cost-effective,” a Bain & Company report noted. “That said, making only incremental changes won’t be sufficient to compete. Reinventing supply chains for the new world order clearly requires making more complex trade-offs than most operations teams have ever encountered.”

Bain suggests winning the “micro-battles”—which represent the various parts of the overall problem. Assign a small group to solve those problems and then bring those actions to scale, it advised. It’s not a fool-proof method, but it does offer hope.

Best practice: Don’t be afraid to engage your supplier base in difficult discussions about their resiliency. No matter how much you might try, the risk in your supply chain starts with your suppliers and their supply chains. Gain visibility into the entire process, and make adjustments (i.e., diversification of supplier base) as needed.

Implement benchmarking

Amid pressure to cut costs and build more resilience, benchmarking often slips by the wayside. Don’t let it. “The focus of benchmarking the procurement process is to measure its current results and see how they can be improved,” stated a LinkedIn blog post from procurement consultancy eXceeding. “By looking at the best practices, an organization can evaluate the process, procedures, and policies they have in place. Benchmarking first starts when an organization sets a baseline from its current performance, which can then be used to see how it compares to its competitors or peers.”

eXceeding suggests benchmarking cost effectiveness, staff productivity, process efficiency, cycle time, and quality. Each individual organization may also have additional aspects of the procurement process worth benchmarking, and benchmarking should also extend to suppliers.

Benchmarking helps an organization understand whether its processes and spend are in line with industry averages, and if not, why not. Adjustments, including cost control measures, can’t be effective without a benchmark to know whether they really are needed. The wrong adjustments can do more organizational harm than the savings they will generate.

Best practice: Identify, collect and analyze, implement, and evaluate. While internal benchmarking is helpful, it’s important to conduct external benchmarking to avoid bias. If you can afford it, it’s never a bad idea to get an outsider’s view, so engage with consultants who can help identify industry best practices you should be implementing.

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