Is cost redundant as a measure for CPOs in 2024?

Geopolitical shocks, stubborn inflation and regulatory scrutiny continue to weigh on businesses worldwide. This has meant that procurement functions remain in the foreground, but how they measure their success in the market is drastically shifting.

Before the pandemic rocked supply chains in 2020, CPOs and their teams worked in a low-inflation environment with little disruption. Price was often the primary lever and measure of success and the determinant of the value procurement brought to the business. Whilst the going was sometimes tough, outcomes were often predictable, making it easier to evaluate performance in comparison with peers.

When the pandemic arrived, procurement teams were tasked with keeping the lights on. Third-party supplier costs often took a back seat, and savings were deprioritized as procurement scrambled to keep businesses afloat and navigate snarled supply chains. While the biggest operational impacts of the pandemic have been unwound, long-term effects are still being felt in supply chains.

The main long-term effect is persistent inflation. CPOs are now trying to calibrate performance in an inflationary market. This is a complex challenge, as inflation isn’t linear across goods and services. For example, whilst the price of many items has risen, shipping container rates have been hit with deflation and are now hovering below pre-covid levels. Businesses might hope deflation would translate into lower costs, but some costs, such as in the labor, raw materials, and energy markets, have been skyrocketing.

Credit: drewry.co.uk

The inflation CPOs are now facing is such that some goods are running at 20% and others at 2%. This fluctuating environment has led to an overall sense of uncertainty, and procurement leaders have been forced to tear up their “one size fits all” approach. It’s becoming increasingly difficult for procurement leaders to understand what “good” performance is when considering cost alone.

The complex economic environment brings with it not only operational challenges but also a talent conundrum. CPOs are leading teams containing many that have never worked in an inflationary market, in which you have to work harder within the business and smarter with suppliers.

The procurement teams of today need to be made up of professionals with a diverse range of skills and attributes to help ensure that the right decisions are being made as we enter 2024 in a market that will continue to twist and turn. Agility will be key for procurement leaders and their teams, with sustainability commitments becoming increasingly tailored to companies and the much talked about “deglobalization” potentially rewiring supply chains. All of this combines to broaden the considerations that inform procurement decision-making.

As we look to the new year, volatility is showing no signs of abating. The world economy has been hammered by one shock to another, and 2024 is set to be the biggest election year in history. Voters in countries representing 41% of the world’s population and 42% of its gross domestic product will have the chance to elect new leaders next year.

Uncertainty is not going away, and procurement teams’ strategies demand a multifaceted approach beyond cost. Adaptability, sustainability, and strategic alignment will be key for long-term success.