Organizations are typically structured around separate functional units with their own objectives and operations. This is particularly the case for procurement and finance, which often coexist as separate entities with dysfunctional integration points despite playing key roles in the procure to pay (P2P) process. Leading enterprises are aligning their procurement and finance activities to deliver business impact that extends far beyond cost reduction.
Organizations that run procurement and finance as non-collaborating units are leaving themselves open to costly inefficiencies in several areas. While procurement can focus on driving more for less from suppliers, finance is concerned with profitability and working capital management. Aligning operational processes with business outcomes across sourcing, procurement, and payables creates the potential to deliver savings and generate sustainable business value.
If an organization needs slightly better chance of succeeding at its business goals and mission, here are some good reasons why finance is amongst key collaborators to the procurement function;
1. Impact on the bottom line: Procurement & Supply chain professionals are always involved in cost reduction, inventory management, sales forecasting, supply management and many other activities which impact companies’ bottom line. Good relationship with the finance function can help present the right numbers in user friendly way, savings (gains) made the organization would be highlighted. The impact of such savings on the bottom line would be made clear couple with solid audit trail.
2. Inventory Management: In driving any inventory reduction initiative, finance can help create provisions for dead inventory, identify cost elements (SKUs) which impact most, stock accuracy couple with planning to ensure stock out situations are avoided.
3. Operational Efficiency: The finance function can help the process and provide right guidance on how tasks are organized through the input data, how one can sanity check output and give comparatives to validate data, reporting formats, among others. For example, entries like direct labor in warehouse, employee salaries, office suppliers, training and travelling budgets, Inventory budget, capital expenditure are typical items you must deal with when one is asked to put annual budget (and other forecasts) together.
4. Collaboration with the finance function can help procurement and supply chain professionals fit well with business culture: New employees in the company (or newly assigned roles) with in the procurement and supply chain function stand a good chance of understanding the organizational culture and needs better when there is a collaboration with the finance function, this will help them to fit well into the organization. Considering supply chain and procurement function is mostly viewed as cost center, (although significant value is influenced) year-on-year saving will diminish which will force supply chain and procurement to critically understand the wider business. The finance function can help to understand the wider business and culture to learn for better organizational performance.
5. You can make them look good! Yes, Procurement & Supply chain folks can also make finance guys look good. Not just our friends, in sales, customer service or marketing. For example. if one is running a well-oiled Sales & Operations Planning process you can provide sales forecast date for next 12-18 months which can be the most reliable input to operational planning (key to profitability). Furthermore, in most businesses, finance folks are in the lead in providing forecast of inventory, cash flow, profit and loss of all these financial aspects with Procurement Supply Chain Professionals making massive impact with volumes forecast. If we can provide reliable data which help them forecast this financial schedule with increased reliability and in turn, we can make them look good. What is in it for us as supply chain team? As they say in English… “You scratch my back and I’ll scratch yours”, this highlights the need for good performance measurement system by management which should be basis for supply chain and procurement practitioners’ incentives.
6. Finance can help prioritize strategically: In my experience most Procurement and Supply Chain jobs are very operational and tactical in nature. Someone makes mistake somewhere every day. When something is not wrong, it is either on Christmas Eve, Christmas Day or New Year’s Day! This makes Procurement and Supply chain job very ‘reactive’ and ‘tactical’.It must not always be about avoid price increase, increased performance, service levels, implications of risk. We ought to be responsible for giving input to the organization’s strategic direction. Being in the midst of the day to day chaos, a day with finance guys off site just to discuss strategic objectives and align on direction can do wonders for the business!
Procurement and Supply Chain professionals should always be promoting integration with other functions and ingrain themselves into stakeholder communities, acting as advisors and internal consultants, and generate outside the box ideas.
Procurement & Supply chain has a strategic role to play in helping deliver realized savings, driving bottom line financial impact and supporting the strategic goals of the business. With proper alignment between Finance and Procurement, organizations can increase the reliability of savings achieved and delivered to the bottom line, rather than seeing expected savings erode after sourcing and negotiation.
Essentially, Procurement & Supply Chain (impacts between 60% to 80% of the P&L) can directly impact the P&L of a company by reducing cost year by year. Also, any initiative that reduces the cost of doing business compared to the previous financial year will impact P&L. All such savings should be presented to organizational leadership, and the impact on performance should be highlighted effectively in collaboration with the finance function. Management must not forget about performance incentives for procurement and supply chain practitioner, individual bottom line drives organizational bottom line too.
Management Lessons (Takeaways):
- Collaborations among functional units must be deliberate effort and factored in organizational structure design; performance sensitive organizations have enforced this with creation of business controllers’ (Finance business partners) role.
- Supply Chain and Procurement professionals’ role are critical to organizational performance, and survival hence need to have strategic level representation.
- The need to have performance measurement systems that regulate individual employees’ incentives (rewards and penalties).
Written by ERIC EKOW T. GHANSAH (PhD., CMILT., MGIPS., CPMC., MCIPS., MGIPS)
ABOUT THE WRITER
An enthusiastic, Passionate and Award-winning Certified Procurement & Supply Chain Management Leader and speaker with strong desire for excellence and continuous improvement. He is currently the Regional Procurement Manager of Maxam Corp International (Maxam Ghana Ltd) and Adjunct Lecturer of GIMPA Business School-Takoradi Satellite Campus.