When procurement technology provider Bid-Ops changed its name to Arkestro earlier this year, its explanation included a description of the challenges procurement professionals across the globe have been experiencing.
“With the events of the past several years, few business functions have changed so dramatically as procurement,” writer Kait Ries said in a blog post on the company’s website. “Pre-2020, procurement teams were adopting technology, but the goals had barely changed in decades. For most companies, that amounted to delivering savings. Everything changed starting in 2020.”
“Logistics challenges have become challenging for many companies, with the cost of transporting raw materials and finished products skyrocketing,” Ries wrote. “Inflation and interest rates are on the rise, wreaking havoc with both sourcing and sales. At the same time, a push for sustainability and social change has made it critically important for companies to be able to account for every step of their supply chain. In short, procurement has been rapidly catapulted into a very strategic role within companies.”
With procurement challenges abounding, it’s more difficult than ever for companies to remain competitive while attending to the bottom line. According to global consulting firm Kearney’s recently released report, some organizations are achieving excellence in procurement by adopting specific practices that have contributed to their success. Here, we’ll take a look at what Kearney identified in the procurement leaders who are paving the way.
2022 Assessment of Excellence in Procurement Study
In its intro summary of Powering through a crisis economy: 2022 Assessment of Excellence in Procurement study, Kearney said findings revealed “how an exceptional few companies are powering through a historic remaking of the global operating environment.”
Within the “severe macroeconomic stresses” of the past several years, the firm said there has been a shift of power to suppliers.
“Perhaps more than ever before, C-suites needed procurement to go to extraordinary lengths to secure essential supply and thus keep companies in business,” Kearney said.
For this year’s global benchmarking report, the 2022 Assessment of Excellence in Procurement (AEP) study, Kearney analyzed more than 600 companies globally during 2021 and into 2022. Each of the companies had at least $2 billion in annual revenues.
“The lessons gleaned from the latest AEP have particular relevance in light of the conflict in Ukraine, the latest in a series of events (including the challenge to liberal democracies, the rise of nationalism, and an ever-more powerful China) that shattered decades of globalization and unleashed the biggest remaking of the operating environment in our lifetimes,” Kearney said. “Our findings show that a relative few leaders strategically leverage third-party spend to nimbly adapt to major crises, fulfill top leadership’s strategic agendas, and tangibly improve the bottom line.”
Delivering “Extraordinary Value”
Noting that only six percent of the companies participating in the survey were identified as AEP leaders, Kearney said these leaders deliver “extraordinary value” by blending:
“Strong procurement teams”
“Close partnerships with the C-suite, the supply chain, and business functions”
Their effectiveness was demonstrated by comparisons with industry peers in which AEP leaders:
“Generate nearly 2x more total shareholder return”
“Rebounded 3x stronger through COVID, with some reaching all-time highs across key performance metrics”
“Contributed 200 basis points more to EBITDA from their third-party spend”
Making a “Broad Impact”
Kearney said it was important to note that AEP leaders also generate a “high impact across a broad spectrum,” which included cost management and the ability to navigate shocks:
“Seventy-six percent of leaders report having a high impact in mitigating supply risk versus just 31 percent of all others”
“Fifty-nine percent of leaders say their innovations significantly enhance growth and margins compared with just 10 percent of all other companies in the latest study”
“Fifty-nine percent of leaders report having a high impact on their company’s sustainability agendas versus 23 percent of the rest of our sample. The corresponding figures for supplier diversity are 41 percent and 6 percent, respectively”
Embracing Suppliers as “True Partners”
Kearney noted that although suppliers have had the advantage amidst all the turbulence, companies need suppliers to be “true partners” that join in the effort to meet evolving customer expectations and move procurement beyond cost optimization to create “broader strategic value.”
In this context, AEP leaders stood out from other participants in several ways by being:
A “customer of choice for their key suppliers, especially in times of crisis, by effectively reducing their suppliers’ frustrations and improving their experiences”
More “comprehensive in suppliers experience management than is the norm”
More “tightly interlinked to category and end product or service strategies” in their relations with “strategic” suppliers.
Citing the “greatest improvement opportunity for leaders” as the need to develop “a more immediate and granular shared digital experience with suppliers,” Kearney said AEP leaders:
Ensure the integration of suppliers into innovation efforts within the enterprise while “maintaining competitive tension”
Are proactive in defining how “supplier-led innovation” can support the company’s competitive edge, then “track and report supplier innovation metrics while nurturing other suppliers to be challengers”
Include suppliers in risk management efforts
Invest in “comprehensive, multiyear supplier relationships” that help to “accelerate leaders’ progress toward jointly held sustainability and supplier diversity targets.” In this context, Kearney said suppliers are audited by third parties, and AEP leaders “regularly benchmark supplier performance via systematic reviews of certifications and capabilities related to environmental, social, and governance (ESG).”
Leading in Technology
Kearney said AEP leaders also tended to be “far ahead” in adopting digital technologies that support “greater efficiency, effectiveness, and enhanced user and supplier experience management…”
“In the most technologically advanced organizations, procurement, finance, and business stakeholders have ready access to a comprehensive breadth and depth of accurate and timely data sets, enriched with data from internal and external sources showing 360-degree view of procurement activity,” Kearney said. “This single source of truth facilitates coordinated responses to changing demands and operating conditions.”
In this context, Kearney noted that AEP leaders take a unique approach when it comes to procurement technology, by:
Evaluating it through a “whole of business” lens instead of limiting it to procurement needs
Actively scanning the market for “disruptive new point-solution technologies and service providers, as part of a platform-based approach”
Often investing in “partnerships with digital innovators to develop and tailor new solutions, gaining a firstmover advantage and keeping close to technology’s leading edge”
“AEP leaders report successful application of technology in a wide range of activities, reaching or approaching full automation across requisition management, spend analytics, sourcing, supplier information management, and procurement master data management,” Kearney said. “As a result, they have largely freed their teams from repetitive transactional tasks and chasing data and have connected them to timely information and insights.”
Kearney also underscored how automation is shifting the need for traditional procurement skills, increasingly making them “irrelevant.”
“…the days of procurement staff serving as order takers are numbered,” Kearney said. “To deliver procurement’s full value, CPOs need to be more ambitious, take more risks, and communicate the value they can bring. And they need CEOs who encourage and nurture their role.”
Study results indicate this is a common approach among AEP leaders, who estimate that “strategic pursuits” make up 60-70 percent of the focus of their procurement teams.
Kearney said its executive roundtables uncovered several “inflation fighting keys” that AEP leaders are “uniquely prepared to pursue.”
Instead of the traditional approach of passing inflation costs on to consumers and/or reducing margins, AEP leaders are able to use their “more fully developed strategic capacity and unique insights to apply more nuanced inflation-fighting levers, such as design-to-cost analyses, design-to-value portfolio optimization, platforming, demand management, and vertical integration,” Kearney said.
Additionally, the “strategic investments” AEP leaders have made in supplier relationship management “should pay substantial dividends as the frameworks are already in place to pursue collaborative efforts with preferred partners at an executive level,” Kearney explained. “Inflation will further accelerate the trend toward improved supplier experience management, shared forecasting, improved planning, resource sharing, and joint cost-reduction strategies.”
In the following 2020 video, Kearney Partner Yves Thill explains more about the organization’s Assessment of Excellence in Procurement Study and how organizations can benefit from participating in “this globally recognized benchmarking tool.”