What The CFO Needs To Know About Procurement

Table of Contents

Introduction

Over the last decade, all industries have witnessed disruptive changes in their operating model. Factors such as continuous changes in technology, regulation and global events have put the industry under tremendous pressure. Additionally, new-age startups are eating away market share which has further heightened pressure on margins. In such times, when companies are struggling to create shareholder value on thin margins, CFOs often find themselves in a tough spot. This has led CFOs of companies to explore all avenues to contain costs.

In these testing times, procurement can be the answer to a CFO’s worries. The impact Procurement can have on a company’s EBIDTA and bottom line is too significant to ignore. At the same time, it should also be understood that delivering saving is not all procurement can do. Of course, there are times when simple price negotiations on existing contracts are done to realize those “quick-wins”, but the true potential of procurement can only be unlocked if procurement is systematically identified and leveraged as a key enabler of corporate strategy. The journey from a transactional to a strategic procurement function calls for the CFO to be the change agent in the organization and lead by example. But first, the CFO needs to get onboard with the idea of having a strategic procurement office, and to do that, they must realize the following:

Procurement can help Maximize the Value of Every Dollar Spent with Third Parties

By adopting a comprehensive, structured and collaborative strategic sourcing process Procurement can help reduce third-party spend and achieve double-digit savings year over year. The process typically includes detailed data collection, benchmarking & supply market analysis, RFP and strategy development, vendor screening and evaluation, online and offline negotiations and operational support. A systematic and structured procurement process ensures your organization gets industry leading products and services as per desired specifications at the best prices. This maximizes the ROI of each dollar your business spends with third parties.

“Strategic Procurement can help financial services companies save up to 15% on their third party spend”

Procurement has More to Offer Beyond Cost Savings

The benefits of a streamlined procurement function often transcend beyond cost savings. This is especially true for companies who can outsource up to 80% of operational activities to third parties, rendering these relationships critical for business growth. Many of these third parties provide customer facing or technological support/services which are critical to the business and it is important to maintain a symbiotic relationship with These suppliers.

This ensures that suppliers are willing to partner on their latest offerings and help your company stay ahead of the curve. Procurement can establish a supplier relationship management process to create customized engagement plans for suppliers based on size and criticality, amongst other factors. A strategic procurement function can also keep the organization protected by negotiating favorable terms in vendor contracts and mitigate third party risks by thoroughly vetting suppliers during onboarding.

Benefits Beyond Cost Savings

Increased Customer Satisfaction
Supplier Relationship Management
Reduced Third Party Risks

Business Alignment is Key to Procurement’s Success

Procurement objectives need to be always aligned with a company’s overall business goals. In procurement’s view, the primary goal is to maximize value from third parties and repurpose the savings to activities that drive business goals and improve business performance. This high-level alignment should be reflected down to the stakeholder level so that procurement is able to collaborate with the business in the early phases of the sourcing process where it can have significant impact on the overall decision-making process. This fundamental change is key to procurement’s success and should be led by the C-Suite. The CFO should be the flag bearer in driving these procedural changes to all business units.

Finance & Procurement Share Inherent Comradery

Getting business unit stakeholders to involve procurement in each purchase is invariably a challenging task. This challenge is even more profound in a high growth environment where the business wants to try out new ideas and speed often takes precedence over costs. In such situations, Finance can introduce smart budget constraints after consulting with Procurement to keep business spending in check. Such budget constraints can encourage the business to seek Procurement’s expertise and engage them on projects. This coordination between Finance & Procurement can go a long way in improving business performance and freeing up significant dollars to spend on other business critical activities.

Finance & Procurement Work for the Same Strategic Goals

Invest More in Procurement to Maximize Benefits

To get the maximum benefit of having a strategic procurement function, it is important to invest in capability building activities encompassing people, process and tools. A procurement team must be adequately staffed with skilled personnel. Best-in-class procurement processes must be set up to reduce savings leakage and maximize benefits. Also, it is important to empower procurement with the latest tools and technologies to help them focus on the most strategic activities. We are experienced in procurement consulting and can help your company optimize your costs and efforts as you decide to embark on this journey to establish a best-in-class procurement function. Partnering with an external party can significantly increase the success rate of such initiatives.

Strategic Investments Across People, Process & Tools can Transform Procurement

Conclusion

As CFOs continue to look for innovative ideas to improve their company’s operating performance, it is important they understand the full potential of procurement. Procurement can have a far-reaching role in the organization and the CFO must realize this early on and invest in setting up a sophisticated procurement function, that is empowered to deliver strategic value. Along with an awareness of procurement’s value, it is also equally important to get the function involved early in the planning and budgeting process to maximize results and have a positive impact on the bottom line. Afterall, procurement and finance are effectively working towards the same goal of reducing excess costs and identifying more savings opportunities.

Typically, we work with companies to help reduce their supplier spend by 10% -15%, to deliver an ROI of 4X-8X with a payback period of less than 6 months. The program not only enables companies to drive savings year over year, but also paves the way for establishing a strategic procurement function in the organization which can unlock a multitude of benefits.

Author

Manufacturing Advisory Consultant (IN)

Subhro Sengupta is an accomplished manufacturing leader with more than 22 years of experience in spearheading complex manufacturing operations, process transformations, automation, supply chain, engineering & projects across large Indian & Global firms like ITC.
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