Making Procurement Strategic

Alan Radding, Big4.com Guest Blogger

(A book is the best way to build a consulting practice: ask about ghostwriting your book.)

What would be the effect on your company’s relationship with its suppliers if it was able to pay them immediately after receiving goods and services? –Capgemini on the future of procurement.

Few corporate functions have evolved more dramatically than procurement. As recently as the 1980s, it was generally regarded as a clerical, reactive position—a cost center. In a 2011 survey 66% of procurement functions reported delivering 6% or more bottom line savings to their company’s bottom line in the past 12 months, writes Accenture in its Performance through Procurement report.

Still, procurement generally is not considered strategic. Its primary mission is to acquire needed goods at the best price and terms.  It can save money, for sure, and it can secure necessary goods and materials that may be in short supply, which might be considered strategic but in general it provides an operations function, a cost-center to be minimized to whatever extent possible.

But that mindset is changing according to a recent study; Reaching New Heights: Dividends of Collaboration between Finance and Procurement, by CFO Research Services in junction with Ariba. Click here to see the study

Compared to three years ago, the study reports, the procurement function has grown more strategic in the minds of respondents. Nearly 75% see it as becoming more strategic to one degree or another.  Overall, the study results suggest “an opportunity for both finance and procurement to expect more from each other,” said Lamar Chesney, an independent finance and supply chain expert, who posed an interesting question: Should procurement work to advance enterprise goals or prevent retreat?

Chesney’s answer, spoken like a true consultant, was “it depends.” Judging from the survey responses, procurement mainly prevents retreat by ramping up its efficiency. Nearly two-thirds (64%) of the respondents reported that their procurement function is primarily or highly automated.

CFOs apparently applaud this effort and would like to see more of it from procurement. Specifically, they would like to see still more process efficiencies, improved collaboration with the supplier network, improved discount and rebate capture with suppliers, and more efforts to detect and mitigate supply risk. Of course, finance executives would like to see the strengthening of procurement’s working relationships with finance and with operations, but that wasn’t exactly high on their list.

The finance execs went on to applaud procurement’s use of technology at the tactical level, such as invoicing electronically or automating invoice-purchase reconciliation as well as streamlining the approval process. They did not, however, appear to endorse analytics—a hot strategic technology trend—or improving enterprise IT capabilities. And they gave a definite thumbs down to expanding the scope of procurement’s responsibilities.

The lack of technology enthusiasm on the part of finance execs is ironic given that technology-based automation is behind procurement’s increased efficiency and effectiveness.  That same efficiency also frees procurement to broaden its scope of activities and take on value-added roles, but again the finance execs were thinking mainly in terms of better management of inventory levels, working capital, and cash flow; none of which are particularly strategic. The greatest opportunity for procurement to increase its corporate contribution, according to the finance execs, is by finding opportunities to reduce costs.

Despite the finance execs’ decidedly lukewarm enthusiasm for an expanded procurement role beyond what it does well today the report encourages procurement to get more proactive. That includes forging a closer alliance with finance, further automating key processes, and reaching into the cloud to tap digital networks to connect and collaborate with customers, suppliers, and trading partners across the globe. This means reaching beyond the enterprise to a broader extraprise where procurement can interact across the entire value chain by tapping global intelligence networks. In the end, it is not sufficient just to be efficient, to simply prevent retreat, as Chesney noted above.  Instead procurement must advance strategic enterprise goals by becoming connected, informed, and collaborative with all players in the supply value chain.

The way you make procurement more strategic for your clients are through is through collaboration, business intelligence, and analytics, even real-time analytics. The tools, technologies, and methodologies are readily available.