This is Part 7 in our "CPO job description" series, which takes an in-depth look at the role of a chief procurement officer. You can check out our previous installment here, which discussed the importance of cross-functional teaming and leadership for a CPO to align with other internal stakeholders.
Today, we talk about how procurement can help stakeholders gain more value from their supplier spending by being involved in the closed-loop process for managing spend. This includes planning the spend, monitoring the spend, reducing the spend (or potentially increasing it if needed) and ensuring the supplier performance for the goods and services received from that spend. For indirect spending, this process is basically controlled by the budgeting process, which is itself part of a broader financial planning and analysis (FP&A) process governed by the finance function.
Consider this element of the CPO job description:
Budget management for [spend] categories under management – and for procurement itself
What it means, is that procurement must be aligned and empowered by finance (or have such empowerment coming from the CEO) to be involved:
- When budgets are being set. This allows procurement to gain early involvement, especially when there are high-ticket purchases, such as capital expenditures, being planned. It is a time for the CPO to work with stakeholders to understand their business objectives from that spending, the portion of it that is planned to go to suppliers (which should be optimized), the timing of the projects and how procurement can help support that process (and how the CPO can commit and plan resources). More progressive CPO's will make sure their spend analyses can support this process.
- As budgets are being consumed. The CPO must work with finance and the business units to set up an approval process that separates the authority to spend (against budget) and the authority to contract (against procurement involvement financial thresholds and other business rules). Procurement should work with IT to make sure the procurement systems are giving the budget owners visibility into their budget consumption so that there is not an end-of-period scramble to use up the budget (i.e., the dysfunctional use-it-or-lose-it spending process).
- As budgets are being reduced (or increased). Procurement must work with the business units and finance to ensure cost savings and other value contributions made by procurement-led activities are getting reflected in the financial statements – and most notably in the budgets. This is a capability that is built over time, but the CPO must ensure that at least a process exists to identify negotiated savings. The CPO then must ensure the portion that is being shared directly back with shareholders (or invested elsewhere outside that budget) is being taken out of the budget and also that spend compliance (i.e., contract compliance, supplier compliance, etc.) is being monitored. The negotiation of how much is shared with shareholders is between the budget holders and finance – not procurement – but the process must be made explicit and functional by the CPO and procurement staff such as category managers and internal business partner roles (which can be done by category managers or not).
There are many more sophisticated “spend planning” techniques that CPOs can employ, such as cost-driver analysis and forecasting, but that is beyond the scope of this series. Ten techniques are covered in detail here. Also, for investigating this closed-loop process in direct materials, please see here.
As a final note, budgeting is “merely” the financial planning aspect of spend/supply management, and a CPO must help the business develop a much broader set of balanced scorecards of supply performance for stakeholders on the demand side and suppliers on the supply side. Improvements to such supply performance that are led by procurement is the core of procurement contribution. But, procurement must also be measured by how effectively it engages with spend owners to help them (i.e., procurement is a service business just like any other set of internal business services) and by how efficiently it does this.
This efficiency is really reflected in procurement’s own budget and the extent that it can help the enterprise see procurement as a massively profitable profit center with procurement operating expenses proving to be a true investment rather than just another cost center. Still, unless procurement is going to truly set itself up as an external entity as some firms have (e.g. trading firms in CPG, automotive, telecom, high tech, etc.), it needs to manage its budget like any other cost center in the business and hopefully increase it as the procurement ROI becomes increasingly clear to the business.