In April, the University of Tennessee Global Supply Chain Institute published “Future-Ready Procurement: Foundational Capabilities and Leading Practices,” by Dan Pellathy and Jadé Johnston. The white paper summarizes research by the Advanced Supply Chain Collaborative, a think tank partnering faculty experts with industry professionals to enhance business performance, enrich teaching, and cultivate supply chain excellence.
In my last post, I wrote about the current state of procurement and how emphasizing capabilities in customer value management, talent pipeline management, and cross-functional integration can drive results.
These recommendations are based on research conducted with companies in the Advanced Supply Chain Collaborative. In our interviews with corporate leaders, they emphasized the need for functional areas to pursue organizational goals together. Traditional silos must be broken and teams reshaped by leading-edge practices in the discipline.
Below are five major opportunity areas for enabling the success of procurement teams.
Organizational design
Consider the example of a global leader in construction equipment. The company reorganized its procurement function in response to a highly dynamic regulatory environment. Before the reorganization, communication with suppliers had been fragmented. Functional boundaries separated procurement from the business. Today, each business vertical has a VP of procurement supported by a central strategic procurement division. An additional SVP has ownership over process innovation, tools, and risk. The new structure positions procurement closer to customers when supporting cost, availability, and after-sales services.
Organizational design should reflect company goals. For most companies, supply chain design goals include supporting business growth and improving efficiency and customer experience. While procurement can contribute to these goals, current structures constrain its ability to realize that potential.
Take business growth as an example.
Procurement can speed up go-to-market efforts and enhance the success of new product launches by integrating suppliers into the new product development process. However, current structures position procurement as a downstream support. As a result, procurement is excluded from early engagement in decision-making, where it can have the most impact.
Organizational design should be adapted to company goals. No one design will be optimal in all situations. Our conversations with senior leaders suggest that leading companies incorporate design changes to position their supply chains for success.
These include:
- Establishing robust, multifunctional business processes, especially in sales and operations planning and new product introduction.
- Establishing centers of excellence to drive best practices and offer specialized skills, tools, and insights to other departments.
- Adopting flatter organizational structures to speed decision-making and empower employees to take initiative.
- Designing robust reporting systems that provide real-time data on key performance indicators, integrate advanced analytics and business intelligence tools, and establish clear reporting lines.
- Creating cross-functional liaison roles that facilitate collaboration, particularly with functional areas outside the supply chain.
Ultimately, organizational design should be assessed to determine how much it fosters procurement’s ability to improve customer outcomes.
Knowledge sharing and organizational learning
When the pandemic hit, IBM met most of its customer demand despite disruptions in its network. Through investments in geo-mapping, the company generated visibility into supply, production, fulfillment, and deliveries across its global network. Managers tracked inventories and quickly found workarounds as competitors scrambled to understand where their supply chains were breaking down.
Still, benchmark procurement leaders understand that data and tools do not drive transformation. Technologies are part of a larger strategy. This means prioritizing investments that automate routine tasks, accelerate process execution, and enhance accuracy. It also means exploring opportunities to elevate the strategic contribution of procurement teams through decision-support technologies.
Procurement leaders stress integrated knowledge sharing and organizational learning as core drivers of transformation. They recognize that their teams already have deep expertise in managing complex flows and applying technical skills to solve problems. Leaders focus on their team’s ability to share experiences and best practices to drive innovation. The goal is to transform individual knowledge into organizational know-how, enabling teams to tap collective insights to solve pressing problems.
Knowledge sharing has generated valuable supplier perspectives on competitors and broader market dynamics. Procurement leaders are establishing teams to better understand what customers value. These insights help teams segment suppliers in ways that differentiate them from competitors.
Organizational learning is critical as companies transform processes with new technologies. Leaders learn from individual experiences to adapt company practices based on what’s working, what’s not, and what could work. They also look for opportunities to enhance customer offerings based on the application of technical know-how.
Indirect spend
This can account for 10–20% of a company’s expenses. Indirect spend includes categories such as office supplies, utilities, facility maintenance, travel, marketing services, IT services, technology hardware and software, research and development, and professional services like consulting and legal fees. Because these expenditures are not directly tied to production, control systems tend to be far less developed.
A consumer electronics manufacturer tasked its procurement center with developing policies, tools, and analytics to support new efforts to control indirect spend. The initiative was well-timed. A recent analysis found that tariffs could increase costs on many indirect spend categories, especially IT hardware, packaging, and construction/capital equipment.
As noted, procurement teams are experts in structuring, managing, and tracking the procurement of goods and services. Building these best practices into indirect spend policies and procedures has the potential to generate significant savings. Procurement is critical to identifying and implementing targeted cost-reduction efforts and increasing visibility into expenses by gaining control over indirect spend to align resources to needs.
Optimizing indirect spend will require procurement to utilize foundational capabilities in customer value management and cross-functional integration.
As with external customers, procurement must craft product-service bundles that generate desired outcomes for internal customers. While technology integration will almost certainly be central to these efforts, procurement teams must have conversations about enhancing internal customer value. One procurement leader described the “sales pitch” to an internal customer this way: “We protect your budget. By letting us manage your purchases, you get to spend more money on your priorities.”
Environmental, Social, and Governance (ESG)
Procurement is at the forefront of high-impact ESG initiatives that generate significant returns. A leading healthcare technologies manufacturer has committed to designing all new products and services in line with sustainability standards by 2025. New product designs prioritize energy efficiency, using fewer resources, avoiding the use of hazardous substances, designing for circularity, and making packaging easier to recycle and reuse. These efforts have expanded profitability, increased employee engagement, and earned the company international recognition.
The connection between ESG and financial performance is well-studied. For example, a research team from the NYU Stern Center aggregated findings from more than 1,000 research papers published between 2015 and 2020 and found that 58% showed a positive relationship between ESG and financial performance, with only 14% showing a negative relationship. It’s no wonder that most companies said they would increase their spending on sustainability initiatives. Institutional investors have indicated that they will stop spending money on products that do not align with ESG.
Procurement has a significant ability to impact returns from ESG. Opportunity areas include:
- Local sourcing and regionalizing supply chains
- Waste reduction and sustainable sourcing
- Product disposition and end-of-life value capture
- Ethical procurement and maintaining labor standards
Redefining Risk
Four key areas of risk that have emerged since the pandemic.
Supplier financials
Innovations in supply chain finance have created new opportunities to support transactions. However, new financing options will likely draw increased investor and regulatory scrutiny. The International Accounting Standards Board (IASB) has already introduced new disclosure requirements to enhance the transparency of supplier finance arrangements and their effects on company liabilities and cash flows.
The role of private equity (PE) has also emerged as a risk factor that procurement managers must consider as they engage suppliers. PE firms are highly incentivized to restructure assets to reduce costs, which can lead to underinvestment in processes, equipment, and labor. Interviews suggest PE-managed suppliers have significant quality gaps and can be unstable partners. Companies must look beyond major, first-tier suppliers to assess these risks fully.
Inventory & SKU proliferation
Procurement is increasingly being asked to contribute to inventory optimization. Procurement leaders we spoke with recommended:
- Creating a scorecard for tracking both forecast accuracy and inventory investments
- Generating SKU-related spend data needed for SKU rationalization
- Validating inventory requirements and demand forecasts with operations
- Procurement’s ownership of parts menus and adopting maximum parts on the menu (one new part required, one discontinued).
Additional SKUs drive complexity, including for raw materials, safety stock, manufacturing/conversion, transportation, warehousing, and packaging. One company we spoke with had 12,000 separate logistics contracts. Procurement has the potential to consolidate, rationalize, and improve cost and quality in all these areas.
Lagging innovation
Traditional procurement practices continue to position suppliers as sources of product rather than innovation. However, procurement must engage suppliers at all levels to stay on the competitive frontier and drive end-to-end savings.
Information overload
Now more than ever, procurement must synthesize risks and communicate with top leadership. As one executive told us, “There are so many competing priorities that it is imperative to connect leadership to what’s going on in procurement.” However, this connection only happens “at the speed of trust.” Procurement must hone the soft skills and business acumen to forge these relationships.
In the third and final post in this series, I will share next steps for procurement and talk about UT’s new Future-Ready Procurement Academy, an 8-week program designed to provide managers, directors, and high-potential employees with a foundation in end-to-end integrated procurement.
To learn more about how your company can partner with us to explore advanced concepts in supply chain management, visit ASCC.
Download the white paper using the form below to read more about developing the next generation of supply chain planning talent.