Supply Chain

The Rise and Rise of Procurement

Like CFOs of yore, procurement executives are shedding their roles as stewards and becoming what their companies need them to be: strategic thinkers.
Josh HyattMay 15, 2012

Look how much you’ve grown!

Finance executives don’t actually say that, of course, but when they talk about their colleagues in procurement they sometimes sound as if they are surprised at themselves for taking the function so seriously. It wasn’t long ago, after all, that finance executives tended to think of procurement’s role as strictly transactional: acquire goods and services at the cheapest possible price (locking it in, where possible) and on the most favorable terms. The department’s progress would be measured solely by its ability to cut costs.

But a recent study conducted by CFO Research Services, in collaboration with Ariba, a maker of collaborative business software, found that finance executives are well aware that the procurement function has matured into making an increasingly higher-value contribution. In the survey of 263 senior finance executives in North America, Europe, and Asia, nearly 75% of respondents said that the procurement function at their company had become more “strategic minded,” rather than purely tactical or transaction-focused, as compared with three years ago (see “Getting Serious about Procurement” at the end of this article).

Why has procurement begun to take — to borrow the phrase of one of the seven senior finance executives we interviewed — “a more globalized perspective”? The reason isn’t much different from why other corporate functions, like the CFO, have earned a higher corporate profile in an increasingly complex economic environment. “As business gets more complicated and more global, it has added another facet to the whole issue of procurement,” says Paul Janicki, CFO of Roquette America, a producer of carbohydrate-based products used in food ingredients, pharmaceuticals, and other industrial applications. “That’s why procurement has become more strategic; it’s now no longer just the means to do business, but also an area of optimization.”

As much as procurement’s effectiveness — especially in a slow-growing economy — depends on understanding and focusing on shared companywide goals, the function isn’t abandoning its duties as a fierce cost-cutting function that has a direct impact on the bottom line. About three-quarters of the finance executives we surveyed say that procurement is “very involved” in finding opportunities for cost savings.

When asked where they saw opportunity for procurement, about the same proportion of respondents saw cost-cutting as the function’s continuing focus.

In a postdownturn economy, reining in costs becomes more complex; the chopping block has already been rolled out one too many times. Procurement executives need to figure out how to leverage limited resources and restructure activities to add capabilities without adding cost. “Procurement works more with suppliers understanding when we need them, where we need them, and which are the economies of scale that we can take advantage of, either by volume or by other synergies with the suppliers,” says Bill Velasco, division controller at Flowserve, a $4 billion supplier of industrial equipment.

Beyond working more closely with suppliers, the new model of procurement lifts the function above executing purchase orders and into the lofty realm of strategic planning, getting closer to operations, sales, and technology. By becoming better aligned with the business, procurement executives gain a fuller understanding of the company’s future sourcing needs: What are the core technologies? Who are the key competitors? Which geographies best serve the company’s long-term goals?

Rather than staying rigidly focused on writing contracts, procurement executives can grow more attuned to helping generate competitive advantage for the company. Answering an open-ended survey question, one finance executive wrote that he envisions “working closely with procurement to set shared objectives, track mutually beneficial metrics, and align overall management styles.”

Nobody expects the transformation to happen overnight. But there are signs of progress. Five years ago, when CFO Research conducted a similar survey, 15% of respondents rated their procurement function’s ability to perform its core functions as “excellent.” In this year’s survey, that figure rose to 25%. Larger forces — ranging from the global credit squeeze in 2008 to last year’s devastating floods in Thailand — have prodded procurement executives to spend more time weighing risks and trying to ensure continuity of supply.

In the survey, finance executives identified some knowledge gaps that procurement will have to fill to cross over into upper management. Fewer than half of respondents agree to any extent that their company’s procurement group has “excellent analytical and business problem-solving skills,” while another 25% were neutral in assessing those skills. In terms of specific abilities that need improvement, more than one-third of respondents chose each of these areas: detect and mitigate supply risk, strengthen procurement’s working relationship with finance, and strengthen its working relationship with operations (see “Room for Improvement” at the end of this article).

Developing capabilities in so many areas (while gaining increased mastery over its traditional domain) may sound daunting, but procurement as a function has already come a fair distance. A decade ago, recalls one bottling-company CFO, procurement “consisted of people who were not high up in the hierarchy.” Back then, he adds, a procurement worker’s job was “to look for three estimates . . . and the one that won was the one that always won, so as not to cause any problems.”

And now? “Today, if you are doing it right, procurement is much more of a strategic tool,” says Paul Lehmann, CFO of manufacturer Overhead Door Corp. And, he might have added, the sharper that tool gets, the more effective it can be.