Spend Matters welcomes this guest post from Zelimkhan Suleymanov, CEO of PrECA, a Russian procurement outsourcing and spend optimization company.
I have frequently discussed procurement optimization issues with CEOs and CFOs, typically of Russian or multinational companies with turnovers of between 200-300 million USD, operating within the retail, FMCG or the manufacturing industry. Below, I have put together my top four most common stereotypes held by top-level management in Russia on the procurement function and its role in a company.
1. Indirect is Unimportant
“I believe raw materials, marketing and logistics to be part of strategic procurement and as such they need to be the main focus. All other indirect categories are unimportant and they have hardly any influence on P&L. I don't want to be involved in micro-management.”
According to an indirect procurement study published by AT Kearney in 2010, procurement typically accounts for 60% of third-party spend in non-manufacturing companies, more than 90% in the financial industry and for 50% of spend in manufacturing organizations. So it has big impact on the bottom line in terms of spend, indeed as much so as direct procurement.
There are more savings opportunities in indirect procurement compared to direct due to the following:
- Lack of compliance and attention paid to categories from C-level management
- Spend is spread over more than 30 categories, and therefore, companies often lack visibility on how much is actually spent within each one, and thus leading to the conclusion that indirect spend is insignificant
- The sourcing is mostly done by business functionaries, who do not possess procurement competencies and knowledge, run haphazard sourcing events and spend the maximum of available budget
- When running sourcing events, a company can consolidate the indirect purchase volumes across different departments and business units within the group. All companies have indirect procurement, so some companies combine spend volumes with other non-affiliated and non-competing companies, even from other industries -increasing buying power in negotiations.
For example, you can save an average of 20-25% on office supplies and 35-50% of spend on mobile voice and data services, whereas you can’t get as much off your direct spend.
Indirect savings can be generated in areas other than purchasing spend — for example, labour costs can be reduced by outsourcing certain in-house activities. One client discovered that a third-party company was 7 times more efficient in IT help desk support services than internal personnel, so they outsourced help desk services completely.
Process streamlining can yield additional savings: for example, by reducing the number of suppliers and automating purchasing process you can reduce procurement overheads, requestor and internal client departments by 20%-30% and reduce the source-to-settle process by 30%-40%.
Indirect procurement isn’t just about savings: it influences P&L through impact on sales volumes, production downtimes, working capital and employee loyalty and satisfaction. So, this effect has to be measured and managed.
2. Other Functions Take Precedence
“Procurement is not one of the most important functions in our company; the key areas for me are production, marketing and sales.”
Procurement has a direct impact on production, marketing and sales, and can boost company performance by engaging with stakeholders and acting as a gateway for suppliers. For example, procurement can save millions in production costs by engaging in value engineering projects. Procurement fosters collaboration and leverages the power of the supplier network. The more innovative, skilled suppliers you have, the better, well-structured relationship you have with them, the more beneficial their impact toward your company’s P&L results. For example, McDonald’s runs a series of permanent supplier councils, each focused on new product development in a specific category or area of the business to generate innovations that benefit McDonald’s. By assuming a project manager role, procurement involves suppliers in this value-adding process, encouraging them to provide input. In the project manager capacity, procurement helps new suppliers to integrate into the company.
Procurement gains even more importance as competition grows, technology becomes more advanced and more non-core functions are outsourced to third-party vendors. A large part of end-product value is created outside of your organization. Procurement enables fact-based, well-informed decisions with respect to supplier selection, contracting and supplier development, ensures compliance, and mitigates contractual and supply risks. Find a solution which is beneficial for the whole company, not just a specific business function.
Procurement asks the right questions and sees the full picture. To reach strategic company goals, the CEO needs to involve the procurement function from the beginning - this will challenge and mobilize not only traditional functions but also the suppliers and partners.
Procurement relieves traditional functions from non-core activities and allows them to focus on their core competencies. If procurement does not get enough attention from the CEO, and starts to deteriorate, other functions have to do more procurement work, which brings about an increase in mistakes, and thus, the company will fall short when it comes to both purchasing and other business functions.
Procurement is a “window” to the outside world: it opens the door to opportunity (innovation, best practices, information, resources, service) and ensures nothing is lost (savings opportunities).
3. CEOs Don't Need to be Involved in Procurement
“Procurement optimization/re-engineering is the responsibility of the procurement director (supply chain director / CFO) — a CEO should not be involved in it.”
Procurement is a cross-functional area; without cooperation and active involvement of other functions, the re-engineering will not be possible. This, in turn, can only be achieved with the approval and support of the CEO. Still, procurement should have a leading role in the project.
The CEO is the key sponsor and stakeholder also because procurement performance has a direct impact on company P&L results, for which he or she is held accountable.
During procurement re-organization conflicts are inevitable: internal functions will try to keep categories/areas of which traditionally they were in charge. Without a proper mandate from the CEO, the procurement department will not be able to cover all the categories properly.
The CEO also guarantees the independence of the procurement function, which stimulates alternative views and triggers discussion – this helps to find the right balance between product/service performance and costs.
4. Procurement is a Hindrance
“Procurement holds back business functions; it slows down processes and is simply a hindrance. Procurement is not a function of choice, but rather a necessary evil.”
Procurement often holds a different view to that of the business functions because it is focused on getting the best value for the company, engaging the best suppliers, enabling compliance and creating competitive pressure. A business function has its own goal – for example, to increase servers’ storage space (for IT) or to run a marketing campaign on time (for marketing). Securing the best commercial terms and ensuring compliance in the deal are secondary to them, as long as they have budget to spend. By involving procurement in the sourcing process the company will come out on top in the long run, by securing the best possible deal, although, in the short term the process might take a bit longer.
Procurement can add more value to the business functions by:
- Bringing subject matter expertise in the specific category, for example, helping the business to structure the demand and develop proper technical specifications
- Introducing new suppliers that bring fresh and innovative ideas that boost revenue or improve product performance
- Finding ways to address specific issues for the business, for example, shortages in supply capacity (in transportation) during the high season or reducing the downtime of data communication lines
- Identifying the risks of working with specific suppliers, providing market intelligence, references from other clients
Do you agree with these stereotypes? What other C-level management stereotypes concerning procurement have you come across? Leave a comment!