Procurement and Procurement Spend. Purchasing. Commodity Management. Category Management.
They are all running their own businesses within their companies, or at least they should be, whether they realize it or not.
Goods and services spend in many companies is the largest, or one of the largest, expenses. And all of this is managed by Procurement personnel.
But do they manage this spend like it is their own business or do they manage it like it is just a functional job with transactional activities to be performed?
In What Exactly is Procurement? And What is Purchasing? we offer the definition of Procurement from PurchasingInsight.com which considers that “Procurement is the overarching function that describes the activities and processes to acquire goods and services”.
That is a very broad, and all-encompassing definition and scope of responsibility.
Now also consider that companies can spend as much as 75% or more of their revenue on the Procurement of goods and services. From raw materials to outsourced services and everything in between Procurement can control the vast majority of spend within a company.
All of that makes the case for Procurement being both a strategic and powerful part of any company.
Yet in many organizations Procurement is not considered strategic. The value of Procurement is often not recognized by those outside of the function and it is not led strategically by those within the function.
Many people consider Procurement as a necessary evil. It is the group that you have to go to in order to get RFQs sent out, to get POs placed or changed, or to deal with performance issues from those pesky suppliers.
And the degree to which Procurement teams allow themselves to be treated this way only propagates this ancient and inaccurate stereotype.
There is no doubt that in Procurement, like ANY function, there are more mundane or repetitive tasks that have to be performed. But that in no way reflects the true value that your Procurement team can, and should, provide.
Now let’s consider the full scope of responsibilities that Procurement has, which include:
- Spend management and control
- Price negotiations, initial and ongoing
- Sourcing strategy
- Supplier Selection and Performance Management
- Cash Flow Management
- Terms and Conditions for goods and service delivery
- Responsible, sustainable sourcing
- Project Management
- Regulatory compliance
- Business controls, auditing, and ethical sourcing
- Relationship development and management
- Cost reduction strategies
- Competitive benchmarking and positioning
- Process development and improvement
- Capability development and innovation
This is an extensive list of responsibilities and activities. And when you consider the list in its entirety it is clear to see that this is such a broad list that Procurement leaders are, or should be, really running their own business within a business.
So What’s the Problem?
Given that enormous scope of responsibility and the critical importance of Procurement for the success of any company why isn’t that value recognized and why isn’t Procurement run as its own business?
The number one reason is a lack of leadership. Any organization is a reflection of their leadership or lack thereof.
If Procurement leaders only view and perform their role as the group that sends out RFQs, closes contracts, and manages POs, then that is how that team will be perceived both from within and outside that organization.
However if Procurement leaders have a much more holistic view of Procurement’s role and how it needs to conduct itself then Procurement will be considered a much more enlightened, impactful and powerful organization.
This requires a vision. That vision must include training and developing Procurement personnel in all of the skills associated with running a business. This includes strategy development, communication, organizational alignment, change leadership, relationship building, cash flow and expense management, innovation, unique capabilities development, and value creation.
Further more enlightened Procurement leaders are able to communicate and project the enormous value that Procurement can, does, and will provide. Which leads us to consider whether the head of Procurement should actually be called the Chief Procurement Officer or the Chief Value Officer?
Run Procurement Like a Business!
Everyone who manages spend within a Procurement team must treat their jobs like a business.
Imagine that the money that you are spending is coming out of your own pocket instead of the company’s coffers.
With that mindset you would want to be sure that you are getting the most value for your money when you are making sourcing decisions. You would make sure that you optimize your cash flow just as any business owner would. And you would make sure that you are spending your money to enable your success.
In my experience the Category Managers in Retail are closest to this mentality. They have their sales and growth objectives for the categories that they are managing. They must curate their portfolio by selecting products and sourcing with suppliers that are going to enable achievement of these sales goals. They must negotiate pricing, terms and conditions, payment terms, and delivery such that they are able to meet their margin expectations and time to market schedules.
And Category Managers monitor the sales performance, inventory levels, fulfillment and replenishment plans, marketing and promotional activities, and pricing and markdown strategies for their products. They do this at the SKU level, across common SKUs, and across their entire portfolio. They are completely and ultimately accountable for the overall performance of their business in all respects: sales, inventory, cash, growth, customer satisfaction and profit margins.
This past and current product performance will then inform future sourcing and product selection decisions. Category Managers will get smarter and smarter with every sales/sourcing cycle and theoretically get better and better with time.
Procurement is a strategic part of any organization whether or not it is acting as such or recognized as such.
Procurement leaders must create and deploy the strategy and vision that makes Procurement more valuable for everyone. At its core that strategy must include Procurement personnel managing their spend as if it were their own business.
Always keep the perspective that the money you are spending is coming out of your own pocket. It will keep your mind sharp and honed on how to extract the greatest overall value for your Procurement dollar.
This will not only create more success for your company overall but it will create a more rewarding working environment for those in this illustrious profession.