I was recently asked my opinion (as a former Procurement Director) about the REAL responsibility of the Procurement function in a company.
Without hesitation, my answer was “The SOLE responsibility of Procurement is to help the company sell more goods”. After the initial shock of my interlocutor has faded, I added that this translates into 2 concrete tasks that Procurement must accomplish, so it helps the company sell its goods:
TASK 1: SUPPLY ASSURANCE – this means delivering an uninterrupted supply of the needed goods and services, at the agreed costs and timings. This is by far the most important responsibility, because without having the needed goods and services, the company cannot sell its merchandise! And no cost savings on Earth would be worth anything if the supply chain is broken. I remember an infamous example of a company negotiating extremely good prices for hauling its merchandise (and generating great cost savings), only to realize a few months later, when the demand increased, that no supplier wanted to deliver at those prices anymore. And the company ended up paying almost double…
TASK 2: CREATE VALUE – this means maximizing the value for the money the company spends, through Cost Savings, Cost Avoidances, One-time Financial Benefits, Working Capital Improvements, etc. At the same time, Procurement must ensure that they buy the exact goods or services the company needs and nothing more (no extra features that are not needed, but cost money).
I would like to list here some pre-requisites that a company should put in place to ensure Procurement successfully delivers on both tasks:
1. The Procurement function must be independent. This means Procurement must not report to another department (for example, to Supply Chain) because that would generate a conflict of interest, as the Head of Procurement would have to listen to the orders of the Head of Supply, and the Procurement process could be biased. A solution for multinational companies would be that Procurement reports to Regional Procurement/CPO. If the company is local, Procurement should report to the GM/CEO.
2. Procurement must have a seat at the table in the Board of Directors. This would enable the Head of Procurement to have equal power to the other Department Heads and ensure that the Procurement Procedure is properly implemented and obeyed across the company.
3. The Procurement function must be staffed with high-quality people, ideally with people who have worked on the business side. This ensures that the buyers know exactly what they are buying and cannot be fooled by the suppliers. For example, use ex-Marketing persons to buy the commercial services, ex-Supply persons to buy the raw materials or logistics services, etc. Also, the Procurement function should groom talents and offer them career opportunities (even in other departments). I saw an example of a Commercial Buyer who never worked in Marketing/Trade Marketing, yet he was buying all the goods and the marketing services for these departments. He had no clue what Media is all about, what a GRP or Effective Frequency is. When the Media Agency was presenting, he was like listening to Chinese. He was asked to change assignments and was replaced by an ex-Marketing person, who performed superbly well in the job.
4. The targets of the Procurement department must be correctly set, so they stimulate the “do the right thing” behavior among the buyers. This means that, while the numerical targets mentioned at TASK 2 above are important, TASK 1 takes precedence. And a Buyer must always ensure that he/she doesn’t jeopardise the supply by pushing for the Cost Savings targets. I know a case in which in a company the Sales Director refused to accept a supplier of fuel for the sales cars because that supplier had a significant quality issue a few years earlier, and he did not want to risk the car fleet breaking down for the sake of the numerical savings. But, as this may lead to controversial discussions within the department and with the other departments from the company, it must be very well aligned with the Head of Department.
5. The attitude of the Procurement Buyers vis-a-vis the suppliers must be one of collaboration between equal parties, not a “master-slave” one. Sadly, way too many Buyers behave like they are the “Masters of the Universe” and treat the suppliers very poorly. Let’s not forget that the Buyers NEED suppliers to deliver goods and services, therefore a win-win attitude can only benefit them. I have seen cases of Suppliers refusing to work with companies having abusive Procurement Buyers – and the ones who lost more were not the suppliers!
I hope these thoughts will help executives make the right decisions when setting Procurement departments in their companies. Procurement can be an exceptional asset if it has the right leadership and support from the company!
