Is your procurement division a purchasing or a procurement function? More importantly, into which category does your CEO and other key executives place your function? Shiraz Sarang, CPO at Nedbank discusses how procurement professionals can elevate the importance of the procurement function within an organisation, in this month’s SmartProcurement.
Procurement in the eyes of the CEO (we’re tackling this in more detail Smart Procurement World KwaZulu-Natal)
The first and most important expectation of any Chief Executive Officer (CEO) is for the Chief Procurement Officer (CPO) to understand clearly what the organisation strategy is. This includes the mission, vision, long-term and short-term objectives of the organisation.
CPOs must be in touch with both the micro- and macro-economic and political climate domestically and globally at all times. The impact of changes in these environments must be clearly understood and acted upon.
The ideal situation is for the CPO to be part of the organisation’s executive committee and, therefore, be involved in and contribute to the setting and monitoring the organisation strategy. Unfortunately less than a third of the top companies globally have their CPOs sitting on their executive committees…
1. Procurement strategy must align with the organisation strategy
Pivotal to achieving organisational success is aligning the procurement function’s strategy with the organisation’s strategy.
It is vital that the procurement team fully understands the organisation strategy and how the various roles and activities within the procurement function contribute to this strategy. The procurement team must be able to relate the procurement strategy to the organisation strategy.
This sits squarely on the shoulders of the CPO.
The role of CPO has evolved substantially over the past few years and the contemporary CPO’s armoury must now include being a visionary leader, who inspires commitment and drives the procurement team and stakeholders towards the organisation’s goals. The CPO must be the change leader or catalyst – skilful at creating, implementing and executing plans that advance and support organisation strategy.
Armed with strategic and commercial expertise, the CPO contributes to the bottom line through effective cost-reduction programmes, efficient purchasing of organisation assets, and by identifying opportunities for world-class best practice, innovation and technological improvements.
Importantly, the above are achieved jointly with business and supply chain partners – a collaboration which supports improved competitive advantage, achieved through better market industry knowledge, high-performing benchmarking (utilising best-practice procurement fulfilment), and strategic alliances with suppliers.
But, collaboration across the organisation is required at all levels within the organisation, beginning with completely understanding business requirements and ensuring that the procurement function fulfils those requirements, and extending to external stakeholders as well. These may include the regulator, suppliers, industry bodies and peers.
2. Executing the procurement strategy
Procurement strategy generally seeks to optimise cost and the supplier base. This requires an efficient and effective governance framework that manages both financial and reputational risk.
The governance framework is supported by best-in-class operating models and best-practice processes. The procurement structure and team is then put in place to deliver against these systems and processes. It is of key importance to determine and implement an operating model designed according to the objectives of the organisation strategy.
One of the often-overlooked imperatives is managing change within the organisation. The CEO expects the procurement function to drive this change in collaboration with the organisational transformation unit and executives within the various business divisions.
During the execution of the procurement strategy, it is often a lack of managed change that derails even the most exceptional strategies, causing adoption rates to vary considerably within the organisation and the supplier base. Poor change management results in poor strategy implementation and can have catastrophic consequences for the organisation, from cost and reputational perspectives. Staff morale is also negatively affected by a poor change management strategy. Ultimately, the customer experience is affected negatively and may have serious implications for the brand.
Furthermore, change must be driven – in the form of procurement training and development that includes commerciality as a key output from programmes, courses, coaching and mentorships. Procurement teams must adopt a commercial mind set. This is becoming more important given the current economic conditions domestically and globally.
Similarly, the CPO needs to foster a culture of continuous improvement within the procurement function. Innovation needs to be constantly encouraged and recognised formally and informally.
All of the above are underpinned by an aligned culture and shared values.
3. Monitoring the execution of the procurement strategy
So, the key performance indicators (KPIs) are aligned to the group and procurement strategies. The CEO is kept informed through simple, unambiguous and comprehensive dashboards that are designed to determine if the execution of the strategy is on track and where improvements are required.
Consequently, procurement in the eyes of the CEO may be summarised in the illustration alongside.
Procurement functions that deliver value into and contribute positively to the brand of the organisation will certainly elevate the importance of the function.
In closing, a purchasing function is a tactical unit, driven mainly by transactional interactions, whilst a true procurement function is a strategic division, striving to what I fondly refer to as the acronym TRACT:
T – Transformation of the people, systems and processes.
R – Risk management of the organisation in terms of reputational, regulatory and financial risks.
A – Accountability for the function in its entirety.
C – Compliance to policy and procedures gained through fostering commitment in the organisation.
T – Total cost of ownership reduction results from all of the above, making the organisation more competitive and efficient, thereby driving shareholder and other stakeholder value.