This is a question that is often asked by procurement leaders and is usually followed by a statement such as “how can I influence spend when I’m not involved in the strategic decisions?”
WARNING – this post will probably upset some people operating within the procurement world. My view will infuriate some and others will argue vigourously that I “simply don’t know what I’m talking about”. But this is my view and is based upon my experience over the last 15 years.
So, let’s get a few things clear right now.
I don’t think that the majority of procurement leaders deserve a place at the top table!
In my experience, most think tactically and would not be able to add much value at a strategic level.
All too often the primary focus is too narrow and they get caught up in (excuse the vulgarity) ‘willy waving’ antics trying to prove how good they are in, say negotiating.
I told you that you probably wouldn’t like this post!Too many #procurement professionals see their role as ‘reducing costs’ rather than ‘improving value’ Click To Tweet
Too many procurement professionals see their role as ‘reducing costs’ rather than ‘improving value’. This is the one thing that will prevent procurement from being offered that seat and a say in the strategic direction of their company.
So what do I mean by ‘improving value’?
Well, the focus has to be on delivering value to the bottom line and there are really only three ways to do this;
1. Bringing in additional sales revenues
2. Reducing costs
3. Improving efficiencies so in effect getting more for less
Which areas can you, as a procurement professional have an influence on?
In many cases, the response I get to this question is ‘2’ – “my role is to help the organization reduce their cost base”
Until procurement see themselves as being integral in all three, that seat at the top table will always be a distant vision.
I’d prefer to look at the original question in a slightly different way – ‘what will it take for Procurement to be seen as an essential member of the top team?’
As ever, the answer is in understanding the key objectives of the senior team and then positioning the output from the procurement function to support these objectives.
Given that the success of any business is dependent upon the success of their supply chain partners, the procurement function, as one of the key linkages in these relationships, can and should be able to have significant influence on this success.
However, the ‘old world’ view of suppliers is just that – ‘you are a supplier and you should be grateful that we are prepared to work with you.’
How can this be right?
How can we expect to get the best for the business by managing suppliers at arms length?
So, improving your supply chain management approach will help position you as a key value creator!
So, is that it? That’s all I need to do to get a seat at the top table?
If only it was that easy!
What are the other core objectives of the senior team and how can procurement be seen to add value to each area?
Bottom line profit is always a critical focus for the top team – they need to meet the expectations of their shareholders and often their personal remuneration is based upon this bottom line performance.
So, what can you do to help improve profits?
I highlighted earlier that there are really only three ways to increase profits;
1. increase revenues
2. decrease costs
3. improve efficiencies
How can procurement help to increase revenues?
This is the domain of sales and marketing, I hear you shout!
When you start having a different type of conversation with your suppliers though, one focused on delivering value rather than just the price, then often, opportunities present themselves for revenue enhancing activities.
These range from specialist training for your front line team to joint marketing campaigns and many other options. Often, this type of ‘value-add’ activity will deliver significant more value to the bottom line than a simple price reduction would ever do.
Let’s take it that you know how to reduce costs (although I’ll come back to this later), let’s look at what procurement can do to increase efficiencies.
Process inefficiencies are one of the greatest opportunities to deliver significant value to a company’s bottom line – period!
I’m always amazed at how many times, I find the procurement function negotiating hard for an extra couple of percent off the unit price whilst completely ignoring the cost baked into the inefficient process that is in place to order, process and pay for the goods in question.
Just recently, I was working with a client that procured circa 50,000 individual items with an average value of £50. They had spent the last twelve months working with all of the 800+ suppliers to reduce this £50 average value by 5%. It was only when I reviewed their operational processes that they became aware that the processing cost amount to circa £30 per transaction. With a small investment and a little time, we were able to reduce this to just £15, delivering 600% greater value to the company’s bottom line that a simple price reduction would ever deliver!
Another area where Procurement can play an integral role in improving efficiencies is in cash management. An improvement in cash efficiency will reduce cashflow requirements and deliver a significant improvement to both the bottom line and balance sheet performance of the company.
By widening the focus, taking off the blinkers, Procurement can play an active part in delivering value across all three areas. By doing so, the function and the players within it will become more influential in the company and it won’t be too long before a seat at the top table becomes available.
One way to speed this up though, is to ensure that your efforts actually deliver to the bottom line!
75% of all procurement activities fail to realise the full anticipated value to the bottom line!
Benefits get diluted through maverick spend, inefficiencies, a lack of governance around change control etc.
Your ability to track benefits and be able to demonstrate those benefits hitting the bottom line will differentiate you in the eyes of the CFO and other members of the Exec team.
The glue that ties all this together and provide you with a platform on which to grab the chance to join the top table is undoubtedly, your ability to manage the change that will ultimately result from the activities that you are undertaking.
Change management is hard!
If you can demonstrate an ability to proactively manage change, you will become a much more valuable member of the Exec team.
If you’d like to learn more about my views on this and how Procurement leaders can become an integral member of the top team, sign up for my 3 video training programme on the C.O.S.T. Optimization Formula or download a copy of my book – The C.O.S.T. Optimization Formula.