'THE PROCUREMENT FUNCTION MUST BE TRANSFORMED'

Logistics Insight Asia, 1/5/2008

If procurement continues to be focused on reducing costs and negotiating price reductions it is destined to remain an isolated and insignificant component of the business, says JASBIR SINGH.

Five years ago, if you told a CEO or CFO that the head of procurement would become a direct report, you would likely have drawn suspicious glances. But today, that's exactly what's happening. Following some spectacular successes, top executives are realizing the top-line and bottom-line impact of procurement. And as such, procurement is becoming a cornerstone of strategic planning and a key driver for growth, innovation, and marginimprovement.

The procurement organization charter is expanding beyond merely reducing unit costs, managing sources of supply, and effectively processing transactions. It now includes managing compliance, accelerating product innovation, and expanding into new markets. The need for procurement to contribute more strategically is driven by:

• Volatile market conditions that include rising energy costs, tightening supplier inventories, and the need to plan for the contingency of off shore supplymarket disruptions

• Increased outsourcing of noncore business processes and functions to third parties and managing these third-party relationships

• Increased regulatory oversight that includes compliance to both financial reporting guidelines and environmental regulations

• Increased use of global suppliersand distribution networks

To meet and exceed these new expectations, the procurement function must be transformed from a tactical buying centre providing minimal strategic value and little impact to the bottom-line, to an advanced procurement entity providing maximum strategic value and dramatically improving the bottom-line. Such a transformation takes time and requires technology, process improvements, and organizational changes.

ALIGNING THE ORGANIZATION
The rigid, hierarchical organizational structure of the past must give way to a more adaptive, cross-functional structure that reaches beyond the traditional realm of procurement and into all company functions. The organization's people charter must also be revamped in order to align its members – who should have the proper skills, measures and incentives – to its new role of delivering strategic value.

The optimal organizational structure depends on many factors, including organizational maturity, culture, number of employees, geographical location, industry, and business philosophy. Although there is no “one-size-fits-all”, there are common characteristics in all high performing organizational structures: Leadership and Executive Support, Cross-Functional Teams, Multi-Modal Organization and Deep Domain Expertise.

The charter of the procurement function must be re-evaluated and redefined. This new definition must focus on adding value to the entire organization and align procurement's objectives with the objectives of the entire business. If procurement continues to only be focused on reducing costs through process efficiency and negotiating price reductions, it is destined to remain an isolated and insignificant component of the business.

Economic incentives are the most powerful motivator in the business world. Typically what gets measured and rewarded gets done (and what gets punished is not done). Measurements that are not rewarded may not get done, especially with competing priorities and ever-present resource constraints.

Additional metrics should also measure procurement's role in increasing revenue, contributing to innovation, improving customer satisfaction and retention, and managing risk. Further, executives outside of procurement must be incented to toe the line and advance the agenda of procurement programs.

To sum up, procurement can have a signifi cant, business transforming bottom-line impact. Modern organizations are improving profits by transforming their procurement organization and adding strategic focus by making changes in three key areas: structure, culture and incentives. As a result, procurement organizations can demonstrate an increased contribution to profits.

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