Both Finance and Procurement touch upon the workings of all functions throughout the organisation. They both have entangled financial responsibilities and therefore should speak each other’s language and understand and respect their complementary role. Given the cascading down of a company’s financial objectives, the Procurement strategy should be aligned with the CFO’s long-term plan.
Now, we do not always encounter this ideal situation when entering a cost management mission with new clients, especially for non-strategic or Indirect Costs. Future expenses are often only extrapolated during the budgeting process, along with the forecasted sales numbers.
Actual spend (let alone actual cost savings) is often poorly monitored and analysed, if at all. To make things worse, there is just a lack of fundamental spend visibility in many companies, implying that the true level and nature of operating expenses is simply not available. Multiply this with the number of influencers and decision-makers on Indirect Costs (HR, IT, Manufacturing, Health & Safety…) in any type of organisation and the case for strategic integration is clear.
In recent years, achieving a company’s overall financial objectives has dramatically improved by the emergence of sophisticated IT solutions, including in the purchasing domain. Once these systems are integrated and their use and added value are recognised by Finance and Procurement alike, we have at least established a good starting point for further alignment.
Everyone knows that Operating Costs are incurred by all departments on a daily basis and are therefore often considered as ‘political’ (In our practice, we have even seen Trade Union representatives interfering with a board decision to limit the online office supplies catalogue). When ‘left alone’ for the sake of avoiding awkward discussions and conflicts, indirect expenses will remain opaque and a ‘permanent opportunity for improvement’.
But there is another approach. All expenses in the Non-Strategic domain present both quantitative and qualitative aspects. This split helps determine roles and responsibilities for the many stakeholders involved. The interests of Finance executives are purely focused on total cost levels, from where obviously working capital ratios, margin improvements and other variables are derived.
On the other “qualitative” side, Procurement as a supportive entity must then translate (and also challenge) the practical needs of the end users. For instance, Human Resources should set standards on the quality and value of the total Travel experience for their employees. But the selection of specific airlines or travel agencies is not part of that. In another example, Production Management can set specifications for tools. However, historical claims on cooperation with certain wholesalers should not be allowed to play a decisive role here.
The specific ‘art’ of procurement lies in balancing financial targets and qualitative needs.
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