Shock waves from the pandemic forced miners to expand the function's mandate to include supply chain resiliency. At the same time, mining companies have stepped up their commitment to environmental, social and governance priorities. For instance, they defined ambitious ESG performance targets to maintain their social license to operate. The two mandates are tightly linked, after all, since what miners buy from vendors and whom they buy from affect their supply chains' environmental footprint.
These shifts are finally transforming procurement's role from execution support to strategic partner. As strategic partner, procurement helps the business to achieve vital competitive advantages.
But will this new role continue in the future? We sought to find out, recently surveying 60-plus procurement professionals and officers at national and global miners across diverse commodities. Our goal? To learn more about how their priorities were changing, and what they anticipated happening in the future.
Survey responses suggest that CPOs are aware that supply chain resilience and ESG are still important. But, they believe that emphasis on these will ease, and that their mandate will revert to traditional priorities (figure 1).
Alarm bells for mining companies
In our view, this is alarming news. Why? Miners that revert to the old procurement mandate could lose important advantages gained recently. These include the ability to respond quickly to subsequent disruptions, thanks to the more stable supply chains they've built.
Losing momentum on supply chain resilience and ESG could put miners directly in the path of new risks in the future. Ongoing uncertainty will make resilience just as important - if not more so - over the next decade at least. And multiple forces will keep ESG in the spotlight. These include stricter emissions regulations aimed at natural resources companies, mining customers' demand for more sustainable operations and mounting pressure from investors to reduce emissions.
Miners that keep ESG as a strategic priority will position themselves to respond effectively to such risks while also capitalising on new opportunities. For instance, BCG analysis and case experience indicate that ESG exemplars in mining can achieve:
- 14% higher valuation premiums
- The ability to win customers willing to pay a 1%-2% price premium
- A 25% cost advantage from carbon-pricing scenarios
- A market-share gain of more than 10 percentage points
We see hints of anticipated reversion to the traditional procurement mandate in our survey responses.
Many CPOs believe that dedicated capabilities for supply chain resiliency should be woven into their company's operating norms and decision-making. But they think that doing so will go against their post-COVID mandate. As one study respondent put it: "I already see signs that leadership [is steering] back towards the old ways--resilience becoming a far second to cost efficiency. People forget the impact of disaster amazingly quickly."
Some CPOs maintain that ESG should play a significant role in their KPIs. But one commenter noted, "[The executive committee] sees the need for ESG but does not fully embrace the role of procurement. They are quick to de-prioritise related efforts if faced with the associated costs."
Some CPOs foresee that vendor development (especially in local communities) will further contribute to their license to operate. Yet according to this participant, "dealing with a diverse, less mature pool of vendors brings substantial complexities; we are not yet sufficiently equipped to handle this".
To surmount the risks and seize the opportunities arising in the future, we believe that miners must keep supply chain resilience and ESG as top strategic priorities. They must also understand that a well-run procurement function can help them meet those priorities while still managing traditional mandates. But this can happen only if C-suite executives empower their CPOs to excel in their expanded role. That means broadening what CPOs are expected and permitted to do, and how their performance is measured. Both sides have a role to play.
Next steps for CEOs and CFOs
Broadening procurement's role starts with seeing the function and its head as a strategic ally, not merely as a helping hand. From there, executives can make it clear that they expect the procurement function to continue safeguarding supply chain resilience and supporting ESG excellence in their purchasing decisions and practices.
CEOs and CFOs can back this move by letting procurement make the trade-offs necessary to fulfill the mandate. For example, adding small, local suppliers to the company's network of vendors can boost resilience while also enhancing the direct socioeconomic benefit. But it may mean paying higher prices to those smaller suppliers. And low-carbon-footprint steel materials may cost more than less environmentally responsible options do.
Executives can also design the right incentives. To illustrate, procurement officers who help the company reduce its carbon footprint through their purchasing practices can be rewarded through commensurate increases in bonuses tied to ESG performance metrics.
Of course, the executive committee provides the CPO with a broader mandate with which to set priorities. But CPOs can still take immediate action to help build a procurement organisation that fully serves their company's future needs. To create the supply chain of the future, CPOs need to ‘manage up' as well as ‘manage down.'
Mining CPOs can explain to the board and executive committee how their function can contribute to the company's strategic imperatives. Keys to this include being given the right mandate. CPOs must also be allowed to make trade-offs required across their mandate's classical dimensions (cost, quality and speed of supply) and new dimensions (resilience and ESG). Those trade-offs should be defined based on how well they contribute to value creation for the company.
CPOs can also point out measurable results garnered by procurement functions in other industries that received such a mandate. Take Toyota, which defined procurement as a strategic function. As part of this shift, executives empowered the function to design a more effective approach to supplier partnerships. The payoff? Manufacturing costs decreased by 25%, vehicle fuel efficiency increased by 24% and vehicle total cost of ownership decreased by 16% over the competition. In some automotive companies, the CPO has even advanced into the CEO role.
CPOs can launch training programmes to strengthen team members' skills in key areas. These range from demand planning, inventory management and sourcing execution to supplier negotiation, use of digital procurement tools and supply chain risk management.
CPOs can also encourage their teams to adopt a new mindset that goes beyond ‘cost only.' To reinforce this mindset, they can adjust their function's operating model to support a more resilient and ESG-focused procurement approach. Advanced ‘intelligent' digital tools can help. For example, they can increase supply chain transparency so miners can ensure that materials are sourced from vendors committed to ESG. Simulation modelling can help managers anticipate and prepare for potential critical system failure risks such as political unrest or natural disasters. And by deploying such tools, procurement professionals can better manage the complexities that come with changes in the company's supplier base, including addition of more local, smaller and less mature vendors.
Agile ways of working - such as creating ad-hoc cross-functional task forces to address specific supply chain issues - also bring important advantages. For example, they can help procurement teams break up organisational silos and build trust with internal customers. These changes, in turn, can enable companies to swiftly adapt their supply chain approach should external disruptions arise unexpectedly.
To achieve such transformations, CPOs may have to tap into a larger pool of top-notch talent - something that remote - work technologies have made easier. In fact, almost 90% of the CPOs in our survey confirmed the success of remote working models during the pandemic. And, more than 80% of them said they planned to sustain such setups. Doing so will enable them to attract talent from anywhere around the globe.
Mining companies that keep resilience and ESG at the top of their priority lists, even as the worst impacts of the pandemic ease up, will be best positioned for enduring success in the future. Those that equip their procurement function with the right mandate will gain a powerful strategic partner in this effort.
*Tycho Möncks (Moencks.email@example.com) is a managing director and partner at Boston Consulting Group, Matías Raby (firstname.lastname@example.org) is a managing director and partner, Marc Schmidt (email@example.com )is a managing director and partner, Alex Dolya (firstname.lastname@example.org ) is a managing director and partner and Sarah Scholl (email@example.com) is a project leader at BCG.