Operations Practice

Procurement 2023:
Ten CPO actions to defy
the toughest challenges
Supply chains face another year of volatility and inflationary pressure.
Chief procurement officers (CPOs) can deploy ten resilience actions
to craft a winning enterprise-wide response.
This article is a collaborative effort by Roman Belotserkovskiy, Carolina Mazuera, Marta Mussacaleca,
Marc Sommerer, and Jan Vandaele, representing views from McKinsey’s Operations Practice.

March 2023
 Procurement leaders who had hoped that deploying their talent, capabilities, technology, and
macroeconomic conditions in 2023 would insights into the world’s complexity in ways that
make their jobs easier than last year are already propel them far ahead of the rest of the pack.
disappointed. As the new year began, the volatility
and inflation of the previous year showed no There is no space for one-size-fits-all procurement
signs of abating (see sidebar, “Macroeconomic models in 2023. A category-level response is
conditions straining procurement”). Some of the essential. Some categories continue to experience
most important trends may persist well beyond rising prices and supply constraints, requiring a
2023. What’s more, the procurement function itself cross-disciplinary approach to improve the total
continues to face major changes that have made cost of ownership. Other categories are seeing
its traditional operating models obsolete. Front- downward price pressures, creating an imperative
running procurement organizations are increasingly for procurement leaders to rapidly capture
distancing themselves from the rest of the pack, price improvements.

Macroeconomic conditions straining procurement

Several conditions and trends demand decrease from the 2021 peak but early 2023, CEO confidence rose but
a new level of procurement excellence. A as of February 2023 remain more remained below 50 on a scale of 100,
snapshot of US data provides a useful than 50 percent higher than indicating caution.
starting point: prepandemic rates. Similarly, full-
truckload line-haul prices have — Consumer spending signals are
— Inflation remains stubbornly high.
decreased from the early 2022 peak mixed. US consumers have gradually
Headline US inflation—which was
but remain more than 10 percent spent down pandemic savings, with
6.4 percent in January 2023—is
higher than prepandemic rates. debt service as a percentage of
easing modestly, largely as a result of
disposable income returning to 2019
lower energy prices. However, core
— Labor imbalances continue. In January levels. However, in January, US retail
inflation remains elevated, and as
2023, the nonfarm payroll increase sales increased at the fastest pace in
of the end of 2022, 88 percent of
exceeded estimates. That month’s two years.
consumer spending categories were
unemployment rate of 3.4 percent was
experiencing pricing pressures.
the lowest in more than 50 years. — Geopolitical tensions are heightened.
There is continued uncertainty around
— The Fed continues raising rates. The
— Commodity prices are coming off global trade policy, including additional
Fed hiked policy rates by 25 basis
their highs. Many commodity prices regulations and sanctions if existing
points in January 2023 and indicated
have decreased from their highs in conflicts worsen or new conflicts start.
an intention to continue doing so until
May 2022, but some remain above
price stability is restored.
prepandemic prices. Natural-gas Inflation, volatility, and scarcity are not
prices have been particularly volatile. procurement leaders’ only concerns. When
— Supply chain woes are easing but
we ask procurement leaders what they
persist. Congestion at US ports
— Consumer and CEO sentiment are most worried about, they increasingly
started to dissipate in mid-2022, but
remain low. Inflation expectations cite rising organizational stress and talent
active sailing capacity is persistently
have stabilized, but US consumers’ shortages among their top challenges
low, as liners idle ships in response
assessment of the current economic for 2023.
to faltering demand and prices.
conditions remains at low levels. In
Container spot rates continue to

2 Procurement 2023: Ten CPO actions to defy the toughest challenges

Understandably, the aggregate effect of these A resilience toolbox: Ten core actions
challenges has overwhelmed many procurement Procurement leaders can combat volatility, inflation,
functions. Procurement can play a critical role in and shortages and build resilience by taking ten
solving today’s most pressing business problems, core actions (Exhibit 1). They should start by gaining
but it cannot do so on its own. Winning now requires transparency into the pressures they face. Then
an entirely new level of resilience improvement they can apply this visibility to create value across
and value creation built through a coordinated the supply base. This requires mobilizing other parts
enterprise-wide effort. of the business across supply chain, operations, and
commercial capabilities. These efforts should be
Accordingly, success in protecting margins, supported by a central nerve center, a control tower,
containing cost escalation, and dynamically and new capabilities. Building an agile procurement
capturing opportunities requires an expanded function with stronger links to internal and external
mission for the procurement function. CEOs should partners is the key to success.
consider positioning their procurement leaders at
the center of the company’s response to the current Create transparency to enable action
context, tasked with a clear mandate to protect The transparency necessary to enable action includes
margins. CPOs can then mobilize executives for a 360-degree view of vulnerabilities and real-time
cross-functional impact and escalate investments information delivered to a “resilience cockpit.”
in the talent and systems required to achieve and
sustain outperformance. Action one: Identify vulnerabilities with a
360-degree risk assessment. To decide on the right

Web <2023>
<Procurement>
Exhibit 1
Exhibit <1> of <3>

A resilience toolbox provides ten core actions for procurement leaders to

counter price volatility, inflation risks, and shortages.

End-to-end value chain toolbox

Create transparency Partner across Partner across Partner across
to enable action supply chain operations commercial Leverage enablers

1 3 5 7 9
Identify Refresh category Optimize Coordinate Coordinate a holistic
vulnerabilities strategies and operations from responses for response through a
with a 360° risk counter inflation end to end integrated margin central nerve center
assessment push management or control tower

2 4 6 8 10
Gain real-time Enhance risk Optimize energy Redefine portfolio Build new
visibility through a operating consumption– and product capabilities for
“resilience cockpit” model short, mid, and design resilience
long terms

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Procurement 2023: Ten CPO actions to defy the toughest challenges 3

 For active management of costs and
risks, such as those relating to labor
and logistics, procurement needs to
apply market feedback quickly to
capture emerging opportunities.

actions, CPOs need transparency about three types data with market data. The information is always
of risks: accessible to CPOs and other company leaders.

— Supply. How are events affecting the end-to- An automotive OEM created a digital twin of its
end value chain? Which categories may be hard value chain and automated data flows using third-
to secure in the foreseeable future? party databases, transport declarations, and
news sites. The resulting cockpit monitored more
— Suppliers. What vulnerabilities—including than 1,000 components and 100 raw materials
financial, fulfillment, reputational, and and integrated 60 data feeds across regions and
environmental—do suppliers face? specifications. It enabled sensitivity analyses of
different sources of volatility, such as foreign-
— Cost. How are suppliers’ costs of goods sold exchange risk and individual site operations.
(COGS) trending? Can we quantify the inflation
or deflation they face? What do the results mean Partner across the supply chain
for our company’s P&L? In partnership with the supply chain, procurement
leaders should refresh their category strategies and
To manage these risks, companies need to enhance their risk operating model.
understand their tier-n upstream value chain. A
digital twin can provide the insights required for Action three: Refresh category strategies to drive
scenario planning. efficiency and resilience. For active management
of costs and risks, such as those relating to labor
A European utility implemented a digital solution and logistics, procurement needs to apply market
that continuously identifies and updates risks feedback quickly to capture emerging opportunities
related to critical materials, key suppliers, and and work differently with suppliers. New
exposure to inflation. The solution is linked to relationships need to focus on developing innovative
external data sources, such as supplier intelligence specifications, improving sustainability, reducing
and core indexes, and models inflation exposure. It emissions and waste, and building capabilities.
notifies the company’s decision makers when any
new risks emerge. A specialty chemicals manufacturer partnered with
top suppliers of inflating commodities to radically
Action two: Gain real-time visibility. Leading improve the total cost of ownership and reduce
companies have set up a resilience cockpit that risk. This program was convened by procurement
provides real-time insights on customer demand, and included team members from R&D, operations,
inventory, market pricing, and supply disruptions. and finance. The internal participants worked with
The cockpit automatically enriches internal the supplier to rapidly qualify a lower-cost, lower-

4 Procurement 2023: Ten CPO actions to defy the toughest challenges

emission set of specifications that allowed — Supplier transparency. This analysis identifies
the manufacturer to mitigate a double-digit suppliers and maps dependencies to assess
cost increase. network resilience and vulnerabilities (Exhibit 2).

Action four: Enhance the risk operating model. — Supply and demand prediction. Advanced
To thrive in the current context, companies must solutions can predict future capacity shortages
fundamentally upgrade their risk operating and situations requiring excessive lead time, so
models. Priority enhancements can include the the company can prestock inventory.
following systems:
— Modeling of measures’ impact. Models can
— Sales-at-risk dashboards. These dashboards predict how well resilience measures are likely
present data from weekly monitoring of risks to achieve a defined set of objectives, such as
that affect sales and profits. those relating to volume and cost.

Web <2023>
<Procurement>
Exhibit 2
Exhibit <2> of <3>

Analyzing the entire supply chain and subtier structure reveals hidden
vulnerabilities—and potential solutions.

Supply-chain-network dashboard, illustrative

Supplier identification and network-tier-dependency mapping
Manufacturing network map Most connected suppliers
Software Chemicals and materials Type A Type B
Supplier 01 Supplier 01
Supplier 02 Supplier 02
Supplier 03 Supplier 03
Supplier 04 Supplier 04
Supplier 05 Supplier 05
Supplier 06 Supplier 06
Supplier 07 Supplier 07
Supplier 08 Supplier 08
Semiconductors Electronic Supplier 09 Supplier 09
components Supplier 10 Supplier 10
OEMs

Network resilience and vulnerability benchmarking

Geographic distribution Network structure and shape benchmarks
Country A Country C Country E Country G Vulnerable Resilient
Country B Country D Country F Country H Concentration

Interconnectivity
Company
Depth
Peer 1
Dependency

Peer 2 Substitutability

Visibility
Peer 3

McKinsey & Company

Procurement 2023: Ten CPO actions to defy the toughest challenges 5

 Partner across operations strategy. The team analyzed the producer’s
Procurement leaders can optimize operations energy mix under different market scenarios,
from end to end as well as optimize the company’s evaluating the impact of different energy strategies
energy consumption. on costs, emissions, and portfolio risks. The
company has established a road map to revamp
Action five: Optimize operations from end to its energy sourcing over the next three years.
end. The upward pressure on input prices has The plan decreases exposure to fossil fuels
increased the importance of partnering with cross- while reducing CO 2 emissions by more than
functional peers to address end-to-end levers, 30 percent and costs by 20 percent relative to the
such as reviewing specifications, challenging base-case scenarios.
demand, and streamlining internal processes.
Procurement leaders have strengthened their Partner across commercial
teams’ abilities to design to value, collaborate with In partnership with commercial capabilities,
suppliers, and reduce complexity. These initiatives procurement can address integrated margin
generate value regardless of market context, help management and the company’s portfolio and
relieve upward price pressure, and can generate product design.
a sustainable competitive advantage when the
market stabilizes. Action seven: Coordinate responses for integrated
margin management. Enabling effective pricing
The benefits are especially valuable in energy and contracting strategies for the business
procurement, where the category manager’s role requires tight integration of COGS and pricing.
has dramatically changed. To gain transparency Beyond providing real-time information on costs,
on the risks and opportunities arising from the procurement can feed insights about the market
rapidly changing energy cost curve, procurement and competitors to sales teams to bolster their
can pursue multiple partnerships. With the finance efficacy in customer price negotiations.
and risk functions, the partners can update risk–
reward profiles and enhance hedging strategies. A packaged-foods manufacturer used a
Procurement, manufacturing, and related functions coordinated, cross-functional approach to offset
can collaborate to better understand the deeper inflation’s effects on its business portfolio. First, it
forces shaping demand and response management. secured alternative sources of supply and increased
Sales and marketing can help procurement its internal inventory of constrained raw materials.
continuously track and update the company’s cost Then it leveraged derivatives to manage price risks
position versus that of competitors. for principal ingredients and energy costs, and it
reinvested approximately 4 percent of COGS into
Action six: Optimize energy consumption in the value-creating opportunities. Taking these steps
short, mid, and long terms. Most companies are enabled the company to create new offerings that
taking short-term actions to optimize energy met customer needs while controlling costs and
demand in response to market disruptions. This protecting revenues. It also helped the company
context also offers an excellent opportunity to improve service in seven of its top ten categories
optimize the future energy mix—for example, and reduce lost sales resulting from stockouts by
introducing new technologies, entering into 20 percent compared with competitors.
power purchase agreements, or implementing
self-generation capabilities. Such efforts allow Action eight: Redefine portfolio and product
companies to pursue sustainability and cost design. Companies should scrutinize their product
targets simultaneously. designs to identify those that rely heavily on scarce
materials and a few suppliers. They can then take
One global materials producer conducted a steps to reduce dependencies wherever possible
360-degree assessment of its energy-sourcing and push for rapid qualification.

6 Procurement 2023: Ten CPO actions to defy the toughest challenges

A consumer-packaged-goods manufacturer negotiations. Some nerve centers report daily to the
reviewed its product designs to identify ways to CEO to enable rapid decision making.
avoid stockouts and offset price increases. It used
advanced analytics to assess design changes Anticipating a recession, one global materials
in relation to consumer tolerances. This made it producer set up a process and team to rapidly
possible to equip sourcing and R&D teams with track commodity markets and the implications for
alternative specifications and formulations that the company’s purchasing portfolio. The company
had little or no impact on consumer perception equipped the team with an automated price
or acceptance. analytics dashboard to track and interpret market
updates. With information from the dashboard, the
Leverage enablers company could move faster than competitors to get
Two additional actions can serve as enablers for price concessions from suppliers looking to secure
countering inflationary pressure. their volumes amid uncertainty.

Action nine: Coordinate a holistic response through Action ten: Build new capabilities for resilience.
a central nerve center or control tower. Companies Procurement’s chief asset is its talent. More than
should establish an agile team composed of ever, procurement leaders need to build a team with
representatives of various functions with a mandate the advanced skills required to compete in today’s
to take action to protect margin. The team would volatile environment. These skills include enhanced
create transparency, monitor markets, and identify use of analytical tools and capabilities—for example,
risks. It would also provide additional capacity for value-at-risk assessment, should-cost analysis,
rapidly staffing projects or supporting supplier and input-cost monitoring (Exhibit 3). Companies
must also attract people for new roles, such as data

Web <2023>
<Procurement>
Exhibit 3
Exhibit <3> of <3>

To boost resilience, procurement leaders can use the power of digital tools and
advanced analytics.
Selected use cases implemented by procurement leaders
Build transparency Enable action

Spending and Supply chain Digital sales and Digital supplier

1
carbon transparency digital twins and operations planning ecosystems and
scenario modeling processes and collaboration
demand forecasting

2
Digital control tower Market analytics, Digital product Digital point
(eg, spend and trend forecasting, design and solutions and
inventory) and and input-cost analytics-to-value advanced analytics
nerve center monitoring strategy use cases across
end-to-end
procurement journey

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Procurement 2023: Ten CPO actions to defy the toughest challenges 7

 scientists, data translators, and scrum masters, so resolve. This makes transformative action the only
Find more content like this on the
they can win through insights. option for addressing volatility and disruptions.
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However, there is a silver lining: the resulting
However, CPOs note that attracting and retaining improvements to practices and ways of working
top talent is a chronic challenge. Companies are will permanently upgrade operating models. The
therefore developing exciting career paths for current context is a career-defining moment for
procurement leaders and positioning procurement CPOs. Procurement leaders who demonstrate
as a function where high performers come to value to the enterprise can become full-fledged
sharpen their leadership skills and executives strategic partners to CEOs, CFOs, and COOs.
sponsor the trajectory of emerging talent. No longer should CPOs be merely guardians of
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a portion of enterprise costs. Now is the time for
procurement leaders to step into a new horizon of
An opportunity for procurement value creation.
to lead
The challenges we see across supply chains are,
in many cases, structural and may take years to

Roman Belotserkovskiy is a partner in McKinsey’s Austin office, Carolina Mazuera is an associate partner in the Miami office,
Marta Mussacaleca is a partner in the Toronto office, Marc Sommerer is a partner in the Munich office, and Jan Vandaele is
an associate partner in the Brussels office.

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8 Procurement 2023: Ten CPO actions to defy the toughest challenges