Future Procurement Capabilities: Supply Managers Need to Think like CFO's

In this first of a series of blogs, I will be exploring many of the key themes that emerged in the recent Future of Procurement study I co-authored with KPMG’s Procurement Advisory Council.

The first of the themes we will explore is the procurement manager’s role as a support to the Chief Financial Officer.  A common theme among CPO’s we interviewed in the was the need for transactional and financial excellence as a foundation for building credibility in the enterprise. Establishing a robust procure–to–pay–(P2P) system is a key part of this, as it establishes a solid spend analysis, an understanding of consumption patterns and forecasted needs, identification of aberrations in spending patterns, fundamental strategies such as demand management, and throttling of excessive overpayment for products and services.

Yet, a solid P2P system is just one facet of financial excellence; FUTUREBUY executives themselves must become financial experts. Said one of the interviewees, “If you take a macroeconomic view and look 10 years out, then project our current monetary policy forward and look at the increase in the money supply in the U.S., you can only come to one conclusion; interest rates are going to have to go up to reflect the value of money. So for procurement, the value of an off-balance float and the total cost of ownership given higher interest rates suddenly become more important. Procurement people don’t currently think like financial people, but it seems to me that we will need to become financial experts before long.”

Indirect sourcing is a particular area in which procurement falls short of its financial charter, as many groups fail to apply rigorous management to tactical buying of indirect spend items.  All too often, organizations apply a rote model for leveraging volume and driving standardized solutions across the enterprise, overlooking the tremendous value to be gained by a strategic, well–executed procurement process for non-strategic purchases. While FUTUREBUY procurement organizations will still utilize volume leverage as one of the tools in their arsenal, creative forms of how to achieve that leverage are emerging.

For example, one enterprise with which we spoke has moved to a dynamic bidding process wherein contracts only go out 180 days, and multiple, highly vetted, competing suppliers are given the opportunity to bid, partner and bundle groups of commodities among themselves to optimize costs through collaboration.

These types of innovative financial instruments will become more important as procurement becomes increasingly able to speak the language of P&L and balance sheet impacts of their decisions on the bottom line.

To build financial capability, organizations will need to recruit strong talent from the financial community, and build solid Procure to pay systems that constitute a robust and dependable source of analytical data that can be trusted.  The ability to provide financial predictive modeling capabilities is built on a solid basis of reliable data.   And as we saw in the last SCRC meeting, this is no easy task.  Procurement will always be questioned about their data, but to begin building the role of a “trust advisor”, they will need to establish and validate reliable sources of data that will feed into financial statements and decisions.