McKinsey: Leveraging Data & AI to Reshape Procurement in London

As AI and analytics continue to transform how procurement works, many CPOs say they are not ready for the data-driven transformation. A report from McKinsey has shown how procurement teams can harness the power of new data to reshape procurement into a strategic lever for organisations for value protection and creation.

Despite this, a survey of CPOs shows a feeling remains that there are still areas holding back their digital ambitions, as many procurement functions struggle to transform themselves into data- and technology-driven organisations.

The power of data:

• In today’s uncertain business landscape where price volatility, geopolitical tensions and sustainability targets all converge, the procurement function stands at the forefront of navigating these complexities, acting as a strategic lever for value protection and creation.
• Procurement operates at the confluence of huge quantities of data, flowing from within the organisation — for example, spend, demand patterns and specifications— and from without — suppliers, market insights databases and the wider web.
• As the world becomes more digitised, connected companies must harness the data and create new tools to make faster, better sourcing decisions. By mastering this information, procurement teams can achieve strategic objectives that go far beyond traditional cost, quality and delivery metrics.
• Better data can support activities and decisions across the sourcing life cycle, from the development of category strategies and the assessment of potential suppliers to the execution of negotiations and ongoing supplier performance management. Done well, this can increase the pipeline of value creation initiatives by up to 200%.

Optimising spend and demand:

• AI can automate category management, enhance demand forecasts, and improve sourcing decisions. Tools like generative AI can facilitate autonomous trade decisions and automated contract generation.

Managing external drivers of profitability:

• Combining internal and external data allows for better predictions and strategies around commodity prices and product margins, enhancing profitability and supply resilience.

Managing supplier performance:

• Digital dashboards and AI tools improve supplier performance tracking and negotiation, leading to more informed and effective procurement strategies.

Managing supply risks:

• Digital twins of supply chains offer near-live risk assessments and simulations, enabling faster and more efficient responses to disruptions.

Leading on sustainability:

• Procurement can use data to estimate carbon emissions and support sustainability goals, fostering better supplier relationships and achieving environmental targets.

Data challenges still remain:

• Despite the revolutionary power of this new technology, there is still concern among leaders in the procurement space. Senior leaders know they need to take advantage of more-effective use of data, as it is seen as vital. Many, however, are still struggling to transform themselves into data- and technology-driven organisations.
• In a recent McKinsey survey, CPOs highlighted three key problems that they believe are holding back their digital ambitions: issues with data quality and access, lack of clarity over the business case for new digital or AI applications and difficulty driving adoption of the new tools at scale.

The recipe for success at scale:

• Focus on high-value use cases: Prioritise a few impactful AI solutions that address core business needs and user pain points.
• Develop robust data infrastructure: Create a dedicated procurement data model with a focus on high-priority data needs, ensuring collaboration with IT for best practices.
• User-centric design: Ensure new tools are intuitive, integrated seamlessly with existing systems, and supported by comprehensive training and communication.
• Invest in talent and skills: Increase the number of data-savvy procurement professionals through hiring and reskilling.
• Monitor progress and impact: Establish a transformation office to track implementation and value delivery, allowing for timely course corrections.

Transforming the procurement function is a journey which can take anywhere from six to 18 months. A successful transformation requires vision, ambition and sustained commitment from senior leadership. It also depends upon teamwork, engagement and excitement from across the organisation.

Technology partners are also key. They include the organisation’s internal IT function and external suppliers of data platforms, AI technologies and analytical tools.

Quick wins from the first use cases are critical in building momentum for the transformation. By showing end users and business leaders what data and analytics can deliver, they help foster excitement and drive engagement across the organisation.