When Accounting Gets in the Way of the Right Total Cost Decision

It's not just procurement and sourcing team members we can knock for making decisions that optimize decisions at the wrong level from a shareholder perspective (e.g., negotiating the best possible price based on unit cost, but not total cost). In recent discussions, I've also learned about various scenarios where procurement organizations have been forced to sub-optimize their total cost decisions because of accounting and finance. In one case, I heard from a procurement executive who suggested that finance and accounting sometimes get in the way of making the best hedging decisions because of quarterly timing.

For example, if a company is buying oil or jet fuel, they must treat any hedge contract under non-hedge accounting rules (and will take an earnings hit if the hedge moves in the wrong direction, even in the short-term). Some companies will put off decisions on these hedges based on where they are in the quarter because of earnings reports (even if it is the right decision from a risk management and a future earnings perspective). But if they are buying a commodity that goes into their own production (e.g., metals, corn, resin) and opt to mitigate commodity risk through a hedging strategy, they can opt to use hedge accounting, which does not require the same level of marking-up or marking-down the "investment" as a hedge on the balance sheet.

What are other areas where finance and other departments can get in the way of an optimal total cost strategy for a given category? Make vs. buy, transfer pricing, on-shore/off-shore mixes and union/non-union labor at a supplier based on internally negotiated union agreements are all open to savings bastardization from non-procurement meddling. Have you got any other examples from your own experience? Post a comment.

Jason Busch

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