Perhaps it is because they think that the Chief Operating Officer has it covered, but procurement is the most important function Chief Financial Officers neglect. Maybe they think that the Chief Supply Chain Officer (or anyone else) is on the case. Too many CFOs let procurement fall between the cracks. It doesn’t get the attention it requires (and deserves). Consequently, there is no real interest from the Board or the broader C-Suite.
How many annual surveys do we have to read from leading consulting firms trumpeting that “this is the year” procurement will become a strategic function?
It seems that every year will be the year in which companies recognize the enterprise import of sourcing.
Do people in the C-Suite even know what procurement does?
Here is CIPS:
“Procurement is not viewed as a strategic function by the C-Suite, with only 29% of C-Suite leaders saying ‘shaping organization-wide strategy’ falls within its remit, said the report …
“’Those in the C-Suite are unlikely to think that allocating more resources to procurement will support the sustainability agenda or make an impact on the success of the business as a whole,’ the report said. …
“The report further found only half (50%) of C-Suite leaders considered negotiating and executing external contracts and delivering cost savings to be as part of procurement’s role, compared to 72% of CPOs.”
No, the C-Suite doesn’t know what procurement does. And, no, they don’t see it as strategic. Presumably, they see it as clerical.
Yet, CFOs report that supply chain risk is a key risk. If supply chain risk is critical, then so is procurement. Supply chain disruptions are caused by suppliers that procurement source under contracts that procurement negotiates. Supply chain disruptions mean missed revenue. Missed revenue means missed earnings. Procurement problems mean missed revenue. Procurement problems mean missed earnings.
Even as they have a generalized sense of the risks of the supply chain, this US Bank survey shows that fewer than four in ten do anything about three key procurement issues including sole sourcing, poor visibility into their suppliers’ suppliers, and inadequate use of digital technology.
What would an ideal setup look like (or at least an improved one, from the perspective of the CFO)?
Immediately Enhanced Procurement Execution
She would want a digital tool that helped her source more efficiently. What does efficiency mean? It means faster cycles and lower transactions costs. Efficiency means improved execution.
Given the complexity of digital transformation and the difficulty of making this happen on an enterprise-wide basis, this tool should complement existing systems, require little implementation and training, and transform the business process only incrementally.
Flexible Business Model
It would have to be inexpensive. She can’t justify paying high fixed costs, especially for a tool that she and her team use opportunistically, not continuously. It would employ a freemium model, with some baseline access for free. The ideal set up would permit scaling up usage and features as necessary and the parallel ability to back down utilization when dormant. She would only pay for the features she used, when she used them, akin to the elastic computing model she has adopted for cloud computing.
Improved Competition on Price and Solution
The tool would need to attract more competition from suppliers on price and solution than what she sees now. Cost-cutting is still a key dimension of the procurement function. But she recognizes that it’s not just about transactions costs. She also needs to lower opportunity costs. This means seeing a broader array of options when selecting something to purchase.
Real Supply Chain Visibility
She needs visibility into the supply chain. It’s not enough to know who her suppliers are. She needs to know who their suppliers are, and so on, and so on. Chances are any disruption will not come from the supplier she purchases from; it will come from someone in the chain.
Having insight into the supply chains, starting with the most critical ones, will enable the CFO to assess the sensitivity of revenue and earnings to supply chain disruptions in a variety of scenarios.
What’s the point of discussing the supply chain if you only consider the supply point, i.e., the intersection of the supply chain with the end buyer?
The CFO Is the One to Make This Happen
Procurement needs to be strategic in the sense of being something that spans the enterprise. The CFO is the one with cross-functional expertise. She touches each department. The Chief Supply Chain Officer likely does not. The CFO is the only person who can make this happen.
When enterprise planners do not take into account procurement’s deep insights into cost and risk, this leads to higher cost of goods sold and higher operating expenses. She’s paying for this intelligence. She should use it.
This is what we’ve built at EdgeworthBox. We call it elastic procurement™. Buyer and supplier organizations can join for free with baseline access to a set of tools, structured data, community, and market intelligence. When buyers are ready to execute a reverse auction like an RFP or RFQ, they pay us a fee to make that happen, like one would pay for executing a trade on an exchange. We help recruit and engage suppliers.
We have also built in features for internal collaboration to promote rapid internal stakeholder consensus, as well cooperation across buyer organizations for multi-buyer transactions.
We’d love to hear from you. Give us a shout.