Uniting manufacturing CFOs and procurement for margin expansion

09/05/2023 By Edmund Zagorin, Founder, Arkestro

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_{This content does not express the views or opinions of Spend Matters.}

As the economy teeters between a so-called ‘soft landing’ and all-out recession, an emerging consensus across C-suites has taken shape: the time to cut costs is now. Once again, all eyes are on procurement. A recent study from CreditSafe showed an eye-popping 95% of North American manufacturers plan to push for cost reductions with their suppliers in the next 6 to 12 months. In this short post, we outline common obstacles to transformative cost savings and playbooks for using funnels to create alignment and enable finance and procurement to act as a true ‘power couple.’

The importance of acknowledging the obstacles that Procurement faces to deliver Dramatic Cost Impact

These obstacles are real and daunting. As a procurement leader, you can build immense credibility with your team by being authentic in acknowledging these challenges upfront. For CFOs and procurement to truly partner on accelerating cost reduction, there must be a shared willingness to acknowledge obstacles. Common ones include:

Purchasing is done at multiple plant locations with lots of autonomy, and stakeholders are extremely brand-loyal or supplier-loyal and thus resistant to change.
There are too few suppliers that produce a highly engineered part or machine, and therefore, there appears to be limited opportunity for leverage on cost.
Data quality issues for item-level data hamstring the ability to baseline or ‘what if’ historical demand, and therefore, it is difficult to set targets and track cost improvements.
There’s low adoption of existing digital processes, and the data lives in disparate systems.
‘No PO, no pay’ compliance is achieved by the use of Blanket Purchase Orders with limited item-level data, and ‘approvals’ receive a rubber stamp after invoicing.

While these challenges are substantial, they are nothing new. The truth is most procurement teams experience some amount of stakeholder resistance, lack of competitive leverage, data quality issues, low adoption of tech and non-compliance with approvals. Despite these obstacles, procurement teams somehow consistently still manage to deliver impact, create win-win outcomes with key suppliers and delight operational and plant manager stakeholders on their way to handing the CFO a winning outcome. How is it possible?

The answer lies in having a great relationship between Procurement and the CFO, and it’s also why having a procurement function that is perceived as a trusted advisor and enabler for internal stakeholders is so important. Procurement leaders build credibility by acknowledging these obstacles and asking for feedback to align on a performance management framework that positions procurement as an enabler for business stakeholders rather than a process manager, hall monitor or gatekeeper. Once stakeholders and suppliers view procurement as a trusted advisor, they will bring new projects, cost reduction opportunities and strategic negotiations to procurement early and often, creating a virtuous cycle of collaboration that builds trust and reinforces procurement’s value over time.

Using conversion funnels to turn skeptics into raving procurement enthusiasts

“Can you give me feedback on this approach? My team would really love your input so that we can target the most relevant cost reduction opportunities faster.” This is the beginning of a great conversation between procurement and a CFO, but we all know the conversation doesn’t always go this way.

Unfortunately, finance teams can bring negative energy and mistrust to the conversation by questioning the validity of savings numbers, doubting procurement’s historical baselining methodology and always challenging procurement to push harder with suppliers (even over objections from internal stakeholders). This puts procurement in a tough spot that encourages a myopic focus on reducing cost instead of creating value and building a long-term ‘trusted advisor’ relationship with stakeholders. This short-term thinking erodes procurement’s credibility with stakeholders and can interrupt the formation of a virtuous cycle based on trust and collaboration for cost reductions. Enter the procurement conversion funnel: a framework for helping these CFOs, procurement and stakeholders reach a common understanding about the best way to keep score on procurement’s impact enabling stakeholder-endorsed outcomes.

Example: Procurement conversion funnel

Possibilities	Opportunities	Cost impact	Equivalent sales needed to attain same EBITDA impact
Corrugated renewal – $2.5M 3PL rate reduction RFQ – $18.3M Machine parts RFP – $650K	3PL rate reduction RFQ – $8.3M Machine parts RFP – $650K	3PL rate reduction RFQ – $17.1M	$171M in Sales at 10% Profit Margin

Conversion funnel metrics and KPIs have been used for years to create alignment between sales and marketing teams. Procurement can use these conversion funnels to deliver predictable impact in every category of spend and create roll-up forecasts that can give CFOs visibility into procurement’s workload and prioritization.

Using conversion funnels will also increase trust through transparent and accountable workstreams and ensure that procurement gets credit for strong and hard-won results. The key to this is baselining your historical conversion percentages from one stage in your funnel to the next. For example, in an environment where inflation is coming down and cost reduction opportunities are abundant, does $1 billion in addressable spend yield $800 million in savings possibilities that translates into $600 million in savings opportunities that drives $350 million in hard dollar margin expansion? The 35% bottom-line conversion rate on $1 billion in spend allows CFOs to gain insight into whether or not procurement is ‘on track’ to deliver on a top-level cost reduction goal by assessing how much savings possibility and opportunity are in the top and middle of the funnel.

Leading Chief Procurement Officers create visibility into procurement funnel conversion rates, since these rates can be used to create forecasts and predictive models for both spend and cost reductions, forecasts that help teams reverse-engineer the process steps to deliver the most desired outcome. Understanding and communicating these conversion metrics and getting feedback on them from finance and operations stakeholders early and often will empower procurement to keep score in ways that authentically reflect the both procurement’s impact.

To learn more join us on September 7 for a live webinar, “The Power Couple: Uniting Manufacturing CFOs and Procurement for Margin Expansion” at 11 am PST/1pm CDT.
Register here.