This week’s featured webinar was presented by ISM, Ariba, and CFO Research Services. It was based on a recent study of 263 finance executives from North America, Europe and Asia about their perceptions of procurement. The study was originally conducted in 2007, so this can also be considered a five-year revisit. If you are interested in reading the full report, you can download it for free (without registration) from CFO.com.
Although ISM played a minimal part in presenting the event, the subject and timing are interesting for them as this week they announced their choice for a new CEO when long executive leader Paul Novak retires this summer. The new choice, Thomas W. Derry, is not only an ISM ‘outsider’ but he has a background in finance rather than procurement. If anyone in procurement has somehow missed the growing importance of the relationship between procurement and finance, ISM’s choice should get the message across loud and clear. If you would like to read more about the transition and Derry’s background, it is available on ISM’s site.
Procurement Value Creation
One reassuring message that comes back to us through the survey participants is that finance knows procurement is not just about negotiating lowest cost pricing. They recognize a number of value add activities as within our scope of responsibility. It is in those value add areas where they believe we have the greatest room for improvement. Specific areas mentioned include vendor relationships, risk analysis, and cash flow/working capital management.
It is important for both sides that the procurement/finance relationship become more collaborative and less siloed. They are looking for procurement to come up with (and I would add effectively communicate) good ideas for improving overall business performance. In general, they are looking for more analytical, information intensive input.
My own reaction to this feedback is that many of our suggestions for improvement are getting bogged down in the sourcing process. As frustrating as that is, it is up to us to make sure our ideas are directed through the proper channels, to the right people within the organization. Whether the ideas are carried out or not, I have experienced far too many projects where creative, even revolutionary ideas are brought o the table by procurement, only to be shot down by stakeholders more comfortable with the status quo, who have no vested interest in making sure procurement gets credit for new ideas.
The Supplier’s Cost of Doing Business
Supplier relationships are equal to buyer opportunities. When we look at the way we are asking our suppliers to do business with us – particularly in terms of the number of personal or systems contact points – we are overlooking a major source of cost in the supply chain. Most suppliers are willing to deal with buying complexity, but if there is a cost associated with that complexity it is likely hidden from view from a purchasing perspective.
When looking at opportunities to take costs out of the purchasing process, it is important to make sure you have the infrastructure in place to manage the terms you agree to. For example, when looking at the tradeoff between lower item pricing and more beneficial contract terms, don’t sign your company up for terms that you can’t reliably meet. Measure the time required to pay an invoice all the way through accounts payable and know whether you currently pay your suppliers 30/60/90 days from invoice to strategically manage cash flows or if the process is just ‘broken’ and takes that long.
A Big Picture Mindset
As valuable as sourcing processes and category management are, it is important to keep an eye on the larger picture when managing spend. Improved efficiency and business operations can only be accomplished when buying and supplying organizations are looked at globally.
Many times, descriptions of a ‘networked economy’ oversimplify the phrase by implying that any business conducted electronically it ‘networked’. The real objective is to better integrate suppliers with all points of purchase in your company.
Generally speaking, the feedback from finance executives showed a willingness to support procurement’s growth as a partner in the organization. We should think more strategically, bigger picture, and in terms that integrate our work more tightly with their own efforts to maximize the profitability of the company.