Companies who achieve best practice in procurement all share one thing in common. But what’s the tactical secret and how can it deliver visible results to your company’s bottom line?
Back in 2007, the Aberdeen Group published the results of a survey of finance executives that would not have made very good reading for anybody working in corporate procurement. Very few CFOs, the survey found, felt that the procurement department delivered much tangible value to the organisation.
The extent to which sentiment has changed in the past seven years. Chief Procurement Officers (CPOs), much like treasurers, are beginning to find their voice. Where in the past, the function was thought of externally as little more than a back-office department of negotiators and contract specialists, the department is beginning now to attract recognition for what it can contribute to the business strategically.
But the fact of the matter is that most corporate procurement departments are only scratching the surface of what they can deliver. Bigger improvements can be secured down the line, but if that is to happen, experts say that the department will need to develop closer working relationships with other areas of the company, including treasury.
Collaboration of that nature is absolutely essential when it comes to developing new polices such as a Supplier Relationship Management (SRM) programme. When companies bring in experts, like the procurement consultancy Xoomworks, to offer advice around the implementation of such programmes, they often encounter the same problem.
“Quite often we go into a room and we ask three different people from different areas of the organisation – finance, treasury, and procurement, for example – what their objectives are and we will get three different answers,” says Ian Dagg, Director of Procurement Consulting, at Xoomworks.
But Dagg says this is beginning to change and, in the coming years, the more astute companies will be expecting treasury and procurement to develop a much closer understanding. Here he provides three reasons why he thinks this is the case:
Managing risk in uncertain times.
It may be the case that most economies in the West, if not in full recovery, can at least say that the worst of the recession is behind them. However, the financial crisis should have hammered home to all businesses the importance of managing supplier risk, given that so many firms found out the hard way that their due diligence of suppliers to be lacking when the crisis was at its height. This is a key area, where, in future, the procurement department might benefit from closer communication with treasury, helping them understand the importance of supplier stability.
The rise of supplier finance.
The collective realisation amongst corporates that they need to do more to foster stability in their supplier base, those deemed to be strategically important particularly, is one of the key reasons for the recent explosion in supplier finance schemes. When it comes to the issue of supplier finance, it goes without saying that treasurers should feel comfortable reaching out to the company CPO, who as negotiators of contracts are ideally placed to gauge who it might be appropriate to bring into a scheme.
The need to improve working capital.
According to REL, a division of the Hackett Group, European companies have somewhere in the region of €762 billion in excess working capital. Treasurers under pressure to improve working capital metrics should look to join forces with their colleagues in procurement and establish some common goals. One issue is that the objectives of the department are sometimes different and even conflicting. For example, a less mature procurement function may prioritise lower costs through buying in larger volumes to get the cost down. Taking that approach, however, could lead to a burgeoning inventory and hence poorer working capital metrics. A more sophisticated organisation will look at Total Cost of Ownership (TCO), and this should include both treasury and procurement considerations. Clearly for this to happen, both parties need to be singing from the same hymn sheet.
“There are several reasons why the two departments should work more closely together,” says Dagg. “Treasury can advise procurement in terms of understanding and looking for supplier stability and, on a more transactional level, treasury are likely to be putting in place policies regarding what the company might do around early payment discounts and SCF,” he adds.
“So there is a good opportunity there to sit down and work out what the strategy should be and for procurement to build more of that up front into contract negotiation.”