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May 2019
Traditionally, procurement has been the efficient talks of trade wars, and intensifying concerns about
workhorse for organizations, driving cost savings sustainability, global supply chains are becoming
percentage point by percentage point, contract more complex, more volatile, and more risky.
by contract. Yet despite the tremendous impact Procurement functions need to be more adaptable
that strong spend management can have in as ever to respond.
value creation, the reality is that in many sectors,
procurement is still primarily a transactional function Recent changes in trade policies are forcing large
with a limited scope of influence. Minimal deference multinationals to rethink their supply strategies.
is currently given to a function that, in light of By some projections, for example, Brexit could
the unprecedented rate of change in the world cost automakers in the UK billions of dollars in
today, could in fact unlock distinctive competitive additional tariffs, and potentially force some to shift
advantages for their organization. production elsewhere. Many other industries are
also experiencing significant upheavals due to the
There are major shifts taking place globally today changing nature of trade relationships between the
to which procurement must respond: value chains United States and other countries.
are becoming more complex and volatile, with
increased risks and opportunities that accompany At the same time, by 2025, emerging regions are
that complexity; developments in digitization, expected to be home to almost 230 companies in
automation, and analytics that can unlock the Fortune Global 500, up from 85 in 2010 (Exhibit
previously untapped potential; and acceleration 1). In a rebalancing global economy, procurement
of technological advancements and innovations teams need to look beyond traditional low-cost
are now more difficult than ever to keep pace locations in China and Latin America and explore
with without external partnerships. This rapidly new emerging markets in Africa or Southeast
changing setting brings an imperative to change Asia, which have become attractive for new global
how procurement operates as a business function, sourcing opportunities.
as well as an opportunity to extend the scope of
procurement’s influence in an organization. Increasing corporate attention to socially
responsible practices adds another challenge in
Winning in this more complex and digital future will managing complex global supply chains. Greater
require a complete transformation of procurement transparency—and greater expectation to be
as a function: having a broader mandate, way transparent—means unethical behavior in even a
beyond just cost reduction; investment in tier-2 or -3 supplier has reputational impacts on the
digitization, automation and analytics; and purchasing organization. While ethical sourcing isn’t
rethinking the procurement organization. a new trend, the extent to which consumers are now
making purchasing decisions based on this is. And
So, exactly where should procurement leaders start companies are responding: in the 2017 McKinsey
to transform their functions? As a starting point, Global Survey on Sustainability, respondents across
let’s take a closer look at the most important global all regions reported significant increases in the
shifts, and the corresponding implications. adoption of sustainability-related technologies.
6 1
6 8 4 26
12 8
10 12
11
54 26
34 Emerging
regions
Other emerging²
476
Africa
South Asia
Latin America
271 China
Developed regions
3
2000 2010 2025E
Total in
24 85 229
emerging regions
1
The Fortune Global 500 is an annual ranking of the top 500 companies worldwide by gross revenue in US dollars.
2
All emerging regions with the exceptions of China and Latin America combined until 2000.
3
Fortune Global 500 share in 2025 projected from revenue share of countries in 2025.
Note: Numbers may not sum due to rounding.
locations, creating a new source of competitive technologies that are already available today
differentiation. (Exhibit 2). These advances promise to free up
resources traditionally dedicated to transactional
Automation, digitization, analytics: activities for reinvestment in strategic procurement,
fundamentally changing procurement and in seeking out innovative sources of value.
As with other functions, digital disruption in
procurement is already happening. Breakthrough Artificial intelligence and machine learning are even
technologies such as automation, digitization, and solving the perennial issue of data quality. Large
advanced analytics are enabling a transformation spend datasets from enterprise resource-planning
in how procurement operates by empowering (ERP) systems can be regularly categorized via
procurement functions to identify and capture text-mining algorithms to decipher even poorly
previously untapped sources of value. coded spend. Complex spend analyses can be
automatically refreshed via spend-intelligence
A recent study estimates that close to half of all solutions that can extract and analyze spend data
procurement activities can be automated using repeatedly to generate insights with minimal effort.
Not automatable using current technologies Technically automatable but difficult to capture Automatable
16 18
28 26
30 31
39
48
42 35
38
43 37
34
31
69
46
41
33 36
28 28
21
As corporates look to keep pace with technology • Identify the optimal manufacturing and supply
and emerging business models, investments in footprint, with consideration of the current and
Industry 4.0 start-ups have tripled in value since future global macroeconomic situation.
2013, with corporate participation in deals growing
Tarandeep Singh Ahuja is a partner in McKinsey’s Melbourne office and Yen Ngai is an expert in the Sydney office.