Any time we hear about procurement and finance collaboration, the topic somehow involves purchase-to-pay (P2P) technology. Granted, budgeting, planning and savings implementation are also common joint procurement/finance collaboration memes that crop up, but in general, the most frequent intersection points that touch both organizations somehow involve demand management, transactional buying, payment approvals, working capital management, discounting/early payment, etc. Yet there are far more potential touch points between the functions. And in a recent Business Finance byline by Emptoris' Craig Doud, we begin to get to the bottom of what some of these additional points of non-P2P collaboration should be.
As an example, Craig suggests that the management of total cost (vs. unit cost) should be a joint area of focus. He says that hidden costs in manufacturing can include fees such as "delivery, storage and packaging" and on the indirect and CAPEX side can include "installation, maintenance and adding new workforce skills." But costs such as these often get lost in the identified vs. implemented savings gap. The big challenge, as Craig points out, is "because companies typically track and assign these types of costs by department (e.g., installation may appear on one budget and item cost on another), they often miss the opportunity to view the comprehensive organizational impact".
One of the ways to overcome this hurdle, Craig suggests, is to collectively build total cost models with finance and procurement's involvement, "map[ing] these types of costs back to their supplier base for making more informed supplier decisions." But Excel alone is not enough to create a living, breathing cost model. Organizations must "establish an integration framework to capture and normalize data from internal ERP, budgeting, logistics, sourcing and vendor data systems," and then tie these figures back into everyday sourcing toolsets (e.g., e-sourcing, spend analysis) to ensure that unit cost and total cost are both accounted for as a regular course of business and decision support, making sure the right contracts are established in the first place vs. just monitored after the fact.
Stay tuned as we continue to examine additional areas of procurement/finance collaboration.