Spend Matters welcomes this guest post by Joel Johnson of GEP.
The reporting hierarchy of a procurement department has the potential to substantially impact how the organization is staffed, financed and perceived. There is a surprising lack of consensus as it relates to the reporting channels even amongst Fortune 500 organizations in similar industries. Procurement’s reach extends across the lines of finance and operations, thus creating disparaging theories as to where the department falls in the overall organizational hierarchy. A brief exploration into historical and current-state models reveals the benefits and drawbacks of the various reporting structures.
Through the mid-20th century, procurement remained a function characterized more by transactional than strategic activities. Purchase order processing time and piece price reduction were primary metrics on which the organization was evaluated. Under these circumstances, procurement commonly reported to lower-level functional managers within production or manufacturing. As companies came to embrace the value added role of procurement, the department’s place in an organization began to evolve. The purchasing function was consolidated under the leadership of a CPO, and that CPO often had a direct line of report to a top-level executive, which could include the head of supply chain, the CFO, COO or CEO.
The most common CPO reporting structure in Fortune 500 organizations is now directly to the CEO. This speaks volumes to the proven benefits that procurement can bring when provided with enterprise-wide visibility along with the opportunity to support and influence business strategy. Direct reporting relationships to the COO are seen to bring similar benefits to that of the CEO relationship whereas a direct line of report to the CFO is a highly contested topic. The benefits of process efficiencies derived from the integration of end-to-end purchasing activities can be outweighed by an overemphasis on financial metrics that constrain procurement’s overall value proposition to an organization.
Industry is also a determinant of how procurement organizations are positioned, although there remains a surprisingly small amount of consistency even in specific industry groups. Procurement departments in the service industry most commonly report up through the finance organization given the proportionally higher volume of indirect spend and traditionally lower impact on core business operations. In manufacturing companies, it is much more common to have procurement report to leaders within operations or supply chain management. This structure reflects an emphasis on procurement’s role as a partner in supporting operations by managing supply chain risk, ensuring continuity of supply and enabling supplier development.
The high degree of variability in reporting structures demonstrates that there are many factors, both internal and external, than can influence procurement’s position in an organization. The maturity level of an organization and spend under management must be taken into account along with external factors such as industry dynamics. If the past is any indicator, the position of procurement in an organization will continue to evolve as organizations grow and mature.
For more interesting thinking on procurement, visit the GEP Knowledge Bank.