Building superior capabilities for strategic sourcing
Steffen Fuchs, Gillian Pais, and Jeff Shulman
Purchased materials and services often make up 60 to 80 percent of a product’s cost. Companies that don’t invest in the purchasing team’s capabilities are throwing away value.
Jack Welch once notoriously said that “engineers who can’t add, operators who can’t run their equipment, and accountants who can’t foot numbers become purchasing professionals.” Hyperbole aside, General Electric’s legendary boss was reflecting a common perception: the purchasing function is little more than a necessary evil in business. No surprise, then, that many companies underinvest in the purchasing team’s capabilities and leave sourcing out of strategic decisionmaking processes in favor of functions, such as manufacturing and sales, that drive revenue. Over time, of course, a negative compounding effect sets in: up-and-coming talent flows to the higher-status functions, often exacerbating the capabilities mismatch when difficult sourcing negotiations come up. If a supplier’s heavily supported sales team squares off against an underdeveloped purchasing team, the result, like that of a football match between Fiji and Brazil, is fairly predictable. Yet purchased materials and services make up 60 to 80 percent of a product’s total cost in many industries. As a result, companies that do not invest appropriately in the purchasing team’s capabilities and culture are throwing away more value than they realize. Organizations that employ leading-edge purchasing practices achieve almost double the margins of companies with below-average purchasing departments (20.2 percent versus 10.9 percent, respectively).1 Among the dimensions that affect purchasing’s success, capabilities and culture were correlated 1.5 to 2.2 times more strongly with a company’s financial performance than the others we studied (exhibit). We have developed an approach that emphasizes speed and scale to build and institutionalize capabilities, so that performance improves rapidly and continues to get better over the long term. When applied to purchasing, the approach helps to raise the function’s profile and to give highperforming procurement professionals more leadership-development opportunities and exposure
These figures are derived from McKinsey’s proprietary Global Purchasing Excellence surveys and research on more than 500 companies around the world.
Web 2013 I&P Purchasing Exhibit 1 of 2 Exhibit
Capabilities and culture are key to purchasing success.
Correlation1 of dimensions to overall purchasing performance Higher relative importance of capabilities and culture Strategic alignment and posture Structure and systems Category management and execution Capabilities and culture 0.46 2.2x
Normalized; analysis based on a multiple regression using partial-least-squares optimization to solve multicollinearity.
to senior management. In our experience, companies that employ this program in purchasing are able to attract and retain better purchasing talent and capture the financial impact more quickly and sustainably. This article will discuss how the approach has improved the performance of purchasing organizations and helped several of them realize their goals.
Identifying and building capabilities
To turn the purchasing function into a high-functioning strategic asset, an organization must first identify the specific capabilities that will create the most value. They vary by company but may include technical skills such as the ability to reverse-engineer a supplier’s cost structure accurately or to conduct a thorough supply-market analysis that produces insights leading to a competitive advantage. Leadership capabilities—such as the ability to navigate complex crossfunctional interests, to manage the trade-offs required to meet competing needs, and to identify alternatives with perspicacity and tact—may...
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