Even though the Procurement function is becoming critical to business success, it all too often remains seen as driving cost savings rather than being worthy of a seat at the Board table in determining and helping to drive broad corporate value.
However, working on the Board of Greensill Capital, a global supply chain finance specialist company, Bill Crothers, a former UK Government Chief Commercial/Procurement Officer, has seen how Chief Procurement Officers (CPOs) can make a dramatically positive contribution to the balance sheet, work with their Treasury, Finance, and IT colleagues, and be much more Board relevant.
In this month’s SmartProcurement, Crothers writes about how CPOs can build stronger relationships with senior executives and make a dramatic impact on their businesses.
CPOs and the role of Procurement should absolutely be on the mind of the Chief Executive Officer (CEO) and other senior executives, and they should be working to drive business value in much broader ways.
Considering that 60% or more of a typical company’s cost base lies with their third-party suppliers, it is regarded both an opportunity and a challenge for CPOs to demonstrate their relevance and that they can be at the heart of truly adding value.
I believe that the Boardroom beckons for those willing to take up this challenge.
The role of the CPO has evolved beyond assuring supply and managing purchasing costs: CPOs need to handle numerous new challenges, including regulations such as Prompt Payment and the Slavery Act, legislation around fair procurement practices, and the need to manage reputational, ethical and operational risks posed to the business by suppliers.
All, of course, whilst keeping costs down.
Despite its critical role in maintaining relationships with suppliers, procurement is viewed mainly as a means of driving cost savings, rather than as a way of improving working capital and driving benefits to the supply chain.
How can CPOs do more than ‘just’ make cost savings? Supply Chain Finance (SCF) is an example.
SCF programmes involve work across Treasury, Finance and Procurement functions, though it seems that the Treasury team generally takes the lead instead of Procurement.
However, this offers an opportunity for an enlightened CPO to be at the intersection of physical goods and services and the financial supply; an opportunity to broaden their sphere of influence and shape the future of their careers.
However, key to enabling this new potential impact is having a good understanding of what has changed.
Advances in technology, together with more efficient legal processes and the increased availability of a wider range of capital sources mean that newer SCF programmes can have less ‘friction’ than SCF programmes of the past.
Traditional bank-run SCF programmes would typically involve only the largest suppliers, since bringing smaller suppliers on board was time consuming, difficult and often not cost effective.
New advances in invoicing and payment technologies now make it possible for companies to extend these programmes to the ‘long tail’ of the supply chain, for the first time reaching all a company’s suppliers.
As a result, the scale of impact can now be much more dramatic and material to a business, which can be a fundamental improvement in how Procurement can contribute business value – from simply driving costs to helping to improve the balance sheet (as well as perhaps profit and loss), reducing supplier risk and being a good corporate citizen.
Taking all of this together, you can see that there are clear reasons why CPOs should take a leadership role in pursuing trade financing programmes. However, in my experience of SCF so far, it seems that procurement teams tend to have more of ‘a veto’ during SCF decisions and are rarely the people driving the initiative.
CPOs could take the initiative to get smarter on the financial supply chain and collaborate with Treasury on exploring these programmes, as well as understand the business strategy, accounting and operational elements involved. Such expertise and facilities will be invaluable in furthering the potential of the CPO role — and CPOs themselves.
CIOs have faced a similar battle
While some CPOs may feel frustrated by the current state of affairs, they should be heartened to know that the issues they face today are like those faced by Chief Information Officers (CIOs) five or 10 years ago. Back then, many CIOs felt pigeonholed as ‘the IT guy’, rather than as someone with an important role to play in business-critical decisions.
This has changed – a CIO is now one of the most respected, and indeed, in-demand roles on a company’s executive leadership team, with responsibilities ranging from cyber security, analytics and big data as but a few examples.
The advances made by CIOs in recent years suggest that CPOs could follow a similar path in making more of a strategic-level impact and move up to the C-suite.
To do so, however, CPOs need to broaden their results beyond simply reducing the cost of goods sold and Selling, General and Administrative (SGA) expenses.
For those looking to make a difference in their businesses and their own careers, understanding and capitalising on the financial supply chain could bring significant potential benefits.
The Boardroom beckons!