Not all that long ago, the job of what was then referred to as the Purchasing Department was to buy whatever items a company’s operating department asked for, and to do it as cheaply as possible, of course within certain ethical guidelines. It was an important job, but clearly a support function, and its status in the corporate org chart was accordingly modest. That was then.
The responsibilities of today’s Procurement Departments have grown much larger and are now far more strategically important to the organization’s success. For example, the actions of Chief Procurement Officers and their teams have a tremendous impact on such key issues as the company’s overall cash position, its compliance with policies and regulations, its ability to secure strategic supplies, its sustainability credentials and consumer reputation, as well as assuring business continuity. CPOs now have major responsibility for time-to-market, innovation, risk management and overall company profitability. And to help accomplish those objectives, CPOs have witnessed a significant expansion of specialized procurement technology along with the professional skills and tools enabling effective operation in a complex global marketplace.
Today, a lot of what the CPO is responsible for touches on what the organization’s Chief Financial Officer has historically been responsible for. And while the two entities depend heavily on one another, they haven’t always been seen eye to eye. The main issue, according to an analysis in Financial Director, are difficulties agreeing on Procurement’s performance measurement. Cost savings—which remains a central goal of the CPO—is often accounted for differently by the CFO. Essentially, the savings a CPO negotiates, and the savings that the company actually realizes, are likely to be two different numbers with distinctly separate impacts on the organization’s Profit & Loss statement. Contracted savings are theoretical until or unless they are fulfilled, and fulfillment doesn’t always happen, or doesn’t happen according to the contractual terms.
But the fact is that external spending on suppliers and contractors, both contracted and realized, has become a tremendously important determinant of a company’s performance. A typical manufacturer spends more than 70 percent of its total revenue on external sources. That’s a huge share of the company’s assets being handled by the Procurement team and, by extension, an essential reason for managing that spend well. Beyond that, through its relations with the supplier community, Procurement also has a major impact on a company’s ability to innovate, because an increasing share of innovation is derived from the supply chain. Procurement also has an important effect on the company’s ability to manage risk—whether from faulty materials or from shortages. So, notwithstanding any accounting differences, CPOs and CFOs have good reason to be allies and partners.
One of the most important areas for their collaboration is in the area of transparency, both within the corporation and externally involving the company’s supply chain. Enhanced reporting and more detailed analytics are among the ways to increase internal visibility. But recent incidents involving external suppliers, whether affecting airbags, chicken parts, microchips or taco chips, are an increasingly frequent source of corporate embarrassment and financial loss. Sharing insight into trends and incidents affecting those suppliers, particularly at a time when the pandemic has wreaked havoc on markets around the world, is not just a nice-to-have, it’s an essential survival tactic.
Thankfully, there is no shortage of good ideas for narrowing gaps between the offices of CFO and CPO. I am particularly fond of the recommendations by the author of an Industry Today story—recommendations that affect both sides. Initiatives from the CFO side include integrating the CPO into the company’s strategic planning process, setting a regular schedule of financial reviews and investing in appropriate technology solutions. From the CPO side, recommendations include engaging earlier with the finance team on goal setting, showcasing the alignment of Procurement with business strategy, providing relevant market and supplier insights, looking for creative solutions, forecasting spend outcomes and clarifying any differences in savings measures between the two units
Finding better ways to effectively accommodate Procurement’s evolving role in a company’s success is within the reach of most organizations, and recent events have made this an excellent time to find your own.