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Supply Chain News: Time for a New Generation Operating Model, McKinsey Says


Excellent Procurement Execution Drives Significant Improvement in Key Enterprise Metrics


June 10, 2019
SCDigest Editorial Staff

Sometimes viewed as something of a corporate backwater, procurement is a key driver of overall corporate results, but the function needs rethinking in the digital age.

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To achieve seamless execution of these components requires close coordination and synchronization between procurement and its stakeholders.

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Those are a couple of takeaways from a recent article from the consultants at McKinsey, which notes that achieving procurement excellence "requires a concerted effort to align a variety of capabilities, insights, and activities in an integrated manner across the whole organization."

There are a variety of factors, including digitization, advanced analytics, growing focus on risk management and more that require the C-suite to "reexamine, rethink, and reimagine" the procurement function, McKinsey says.

And the rewards for getting procurement right are significant.

As seen in the graphic below, procurement leaders drive substantially improved results in annual procurement savings, reduction in cost of goods sold, and margins versus companies with middle of the road and lagging procurement performance.

But it's time to shake things up in procurement, McKinsey says, recommending adoption of a "next generation procurement model."

McKinsey says the model reframes the procurement function (the comprehensive set of interconnected activities it should either lead or participate in) as well as the enabling elements (the critical elements needed for efficient and effective execution of these activities).

Interconnections across the enterprise are key to driving maximum results, McKinsey says. For example, insights gained through business partnering influences such processes as specification definition, demand management, and sourcing decisions.


Source: McKinsey


Similarly, decisions made during contracting will have implications for payment-optimization strategies. There are many more such examples.

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The next-gen operating model framework from McKinsey is shown below.

McKinsey's Next-Generation Procurement Operating Model


McKinsey says that the six elements surrounding the procurement strategy represent the comprehensive set of activities needed to capture and to sustain value.

"To deliver value, the procurement function must do more than develop appropriate sources of supply," McKinsey writes. "It must ensure transactional and compliance-driven activities are performed correctly, to sustain performance and avoid potential value leakage - which can be substantial."

To achieve seamless execution of these components requires close coordination and synchronization between procurement and its stakeholders, both internal (business operations as well as corporate functions such as finance, IT, internal audit, HR, and legal) and external (the supplier community), McKinsey says.

In turn, enabling the efficient and effective execution of these six elements requires that companies achieve excellence in six enabling components of the operating model - processes, digital, organization, capabilities and culture, governance, and data and analytics - represented by the outer ring of the model.

McKinsey then goes into some depth about the element in the center and the outer ring of the model, which SCDigest will summarize in part 2 of this article.

Is it time for a new operating model in procurement? What do you think of McKinsey's new model? Let us know your thoughts at the Feedback section below.


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