Search for synergy
From the December 2019 print edition
The procurement department is by no means a limited operation. Rather, it’s an enterprise enabler that’s fast becoming a revenue generator. Yet there’s often disparity among business units as to who internal clients are. To deal with this, best-in-class practice demands forming a working capital steering committee with one point of contact between procurement and finance/AP to enable target value within an organization.
The big picture concept is to enable excellent working cash flow. This can help to unlock a key driver of organizational health and operating efficiencies while eliminating or minimizing risk to the supply base or damage to relationships with vendors and suppliers.Adopting payment terms could be an effective strategic approach to unlocking the capabilities of diverse supply base.
The synergy between procurement and other business units plays a vital role in enabling efficiency. The traditional role of procurement in firms retools the unconventional channel of managing operational support because some business requirements come in different forms, making it difficult to create value applying the same strategy across the board. An example could be regular testing of the market to understand the nature of changes, which could help purchasing develop a strategy of enacting an extended contract with suppliers or vendors as a result of executed contracts to stabilize the supplier base. Mature procurement organizations are in the race to develop a structured sourcing methodology to create value across the enterprise. The involves eliminating contact between business units and vendors, thereby leveraging multiple services or product supplies across business units. Sourcing strategy is a viable method of driving agile procurement systems through feedback engagement and knowledge sharing with vendors or suppliers to increase performance. Consolidating purchasing of different products or supplies could enact some form of discount pricing as cost avoidance. The combination of cost-saving through pricing negotiation with vendors/suppliers and cost avoidance through testing the market could enable procurement operations as a revenue generator.
A finance department’s ability to maintain a disciplined process in executing accurate cost management creates an efficient platform for an organization. This can translate into good predictive business operations. The standard payment terms of Net30 could help to unlock procurement cost savings, especially when dealing with a vendor or supplier with a tight cash flow. Suggesting variable payment terms will create value on two fronts, like Net15 -three percent of the total sum will translate into savings of three percent of the total sum if properly implented. For vendors or suppliers with a large cash flow, firms can propose Net45-90, giving the procurement operations deep pockets, especially if they have a good credit account with that vendor.
Procurement activities can establish a good interface to review multiple price lists from different suppliers to validate best pricing, stock level and to capture lead times. A procurement operations review can check if there is an existing agreement to EOQ/volume pricing. The framework of economic order of quantity is based on the premise that more quantity translates to a price reduction. The execution of this process usually occurs in the procure-to-pay strategy.
Front-end planning is needed to create synergy with the deliverables to achieve value for an organization. Due to the rising complexities of business operations, the current trend is to outsource procurement and focus on their core competency.
Procurement must be harmonized to enable value. That integration can create an agile collaborative platform that translates into financial value. Technology is the driver of information integration among stakeholders. This creates value, and firms are implementing enterprise resource planning tools so business units can enable procurement authorization requests in real-time by factoring all requirement aggregate.
Effective deployment of procurement operations can be a revenue generator if all the business operations and requirements are tied to a strategic goal when implementing a system. The chief financial officer and other management team members must champion such a program in order to drive cost savings so that the procurement framework can help to deliver financial value.