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Thursday, July 31, 2014

From Back Office to Boardroom — Is Procurement Ready?

This article courtesy of My Purchasing Center.

What do Tim Cook, CEO of Apple; Willie Desee, president of Merck Manufacturing; and Thomas Stallkamp, former president of Chrysler, have in common? They all share backgrounds in procurement. In recent years, a large number of dedicated procurement professionals have climbed the corporate ladder and gained the title of senior vice president (SVP) or chief procurement officer (CPO). Undoubtedly, this is significant progress for the profession.

boardroom featuredDuring the last two decades, procurement has made big strides in moving from a purely transactional activity to a more strategic function. With universities offering degrees in supply management, top performers pursuing careers in procurement, and procurement staff sharpening their skills with training and certifications, the profession has shaken off its clerical persona of paper-pushing and battling with suppliers over price concessions. Today’s procurement leaders and CPOs have become skillful in the way they work with their suppliers to generate cost savings, bring value, and become a competitive advantage for their organization.

Although the procurement/supply management function has been recognized as an important part of the business, and the road to the corner office is no longer a long haul, CPO representation in boardrooms is still few and far between. Why is that? Here’s a take on this predicament:

  • CEOs’/Board Members’ Misconception of Procurement. If one asks CEOs and board members how to improve the profitability of their organizations, their responses would likely be increasing sales and/or cutting costs. If you then ask them how procurement can help improve cash flow, the majority will associate it with cost-cutting initiatives. This misconception can have a major impact on business performance. If the CEO or board members only support procurement initiatives to cut costs, they will only achieve short-term benefits and not reap long-term sustainable results.
  • CPO Reporting Structure. Talking with CPOs or heads of procurement at various organizations, you find out they frequently report to chief financial officers. Often, the reporting lines are more complicated in that the CPO reports to an executive with three or four secondary functions to manage. As a result, developing a close working relationship with the CFO/executive and proving the strategic value of procurement is a challenge for a large number of CPOs.
  • Procurement Credibility in the Boardroom. All too often, board members complain that the benefits from procurement are just not visible. Many CPOs make claims about the savings achieved, risk mitigation they put in place through successful supplier collaborations, and new added-value services but fail to provide the evidence. CPOs with sketchy anecdotal evidence quickly lose credibility. Savings must not only be realized, but measured, reported, and tracked to the income statement, aligning procurement strategies and successes to business outcomes such as working capital, operating profit, and, most important, earnings per share.

So what can CPOs and procurement leaders do to pave the way for having a seat in the boardroom?

  • Educate Members of the Board. Communicate, communicate, communicate! Take advantage of every opportunity to raise awareness, sharing procurement best practices and what you’re doing to get to the next level. Procurement leaders who are restless and speak the language of senior managers get the attention of their executives.
  • Report Cost Savings. This can be the best way to show your value to senior management. However, if not done right, it can also be the fastest way to lose credibility. When reporting savings, avoid showing one big number. Report true cost savings separately from cost avoidances and partially offsetting increases in volume and new expenses through negotiations. Think like a senior manager. Understand how you affect the organization’s income statement. Account for quantity changes and price increases to match your cost savings to the true change in expenses on the income statement.

Building your credibility as a CPO is not only about achieving great results but also communicating those results effectively with the members of the board and with all stakeholders within your organization.

 

Dr. Soheila R. Lunney, president of Lunney Advisory Group, has more than 20 years of supply management, procurement, and business experience, involving both domestic and international activities. She has extensive experience in consulting, coaching, and training in supply management, procurement, sourcing of materials and services, reducing total cost of ownership, and negotiation of complex contracts. Prior, Soheila was vice president of procurement for Education Management Corp. (EDMC) and director/deputy to chief procurement officer at Bayer Corp. for 17 years, holding positions in R&D, logistics, customer services, materials management, and procurement. She can be contacted at soheila@lunneyadvisorygroup.com.

This article was originally published at My Purchasing Center and has been republished with permission. For more stories, visit MyPurchasingCenter.com.

 

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Comments

  1. Great article. I would like to see more on this topic. My experiences with purchasing function value is one of administrative back office function. Further, if you look at Linkedin skills by individuals, almost everyone lists procurement as a skill, even at the exec level. Signaling a ways to go. Further, recording savings year after year without some type of formal auditing process to verify reporting figures and how measured adds to incredibility. I strongly agree with tying to the bottom line. Very very important.

    Harley Ringhand, CPIM
    Global Category Manager

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