THE ADDED VALUE OF THE PROCUREMENT FUNCTION
By Luis Herrera / TRAC
For CEOs and CFOs, the most important result of their businesses is obtaining the projected profits. Therefore, our contribution to the bottom line through savings or process improvements justifies our paycheck. There are two ways of increasing profits: Increasing Net Revenues or Decreasing Expenses. To communicate effectively with CEOs and CFOs, you must speak their language — The Language of Profits. This is a good opportunity for the procurement function professionals to shine in the organization. Why? An operation is as good as its logistic and procurement function. It is responsible for more than 60% of the direct and indirect cost of the product, not counting the cost of non-conformances for not having an item or part on time or with poor quality. CFOs expects that modern procurement professionals know:
1.How to communicate the impact of the procurement function on net income.
2. How to read financial statements
3. How to evaluate financial viability of suppliers.
4. How to justify capital investment
Nevertheless, in many companies the purchasing function is taken as a function that selects suppliers and places orders for the services or goods that the organization needs. The main objective of the purchasing function is to obtain the necessary goods and services (inputs) with the right quality, delivered in the right quantity, to the right place, at the right time and at the right price. Normally, the procurement function is relegated to a third or fourth level in the organizational structure. Having a structured purchasing system placed at a hierarchical level, that can be part of the executive group, can represents great savings for any operation.
The question now is: How can we approach the procurement function, so that it can add value to the organization? You can take the following steps:
- Implementing a formal purchasing program, where five basic functions are defined and systems are established to support them:
a. Administration and Governance
Target setting and follow up. Establish policies. Budget process. Data base and systems administration, Procurement organization. Process audits and Sustainability program
b. Strategic Sourcing
Identify commodities. Items rationalization. Develop an annual spending plan. Evaluate single versus multiple sourcing. Identify cost drivers. Evaluate local and international sourcing. Communication system with suppliers and stakeholders
c. Suppliers’ Selection and Contracting
Identify needs. Identify strategic suppliers. Request and evaluate proposals. Negotiation. Select suppliers and Annual contracts.
d. Execution of the Purchase Order Process
Receive purchase requisitions. Place orders. Send orders to suppliers. Conduct day to day negotiations. Execute contract terms.
e. Suppliers Performance Management
Approve suppliers. Monitor suppliers’ performance. Suppliers’ rating system. Suppliers’ certification program, Education system from and for suppliers. Conduct suppliers’ satisfaction surveys as a customer.
2. Allow participation of the purchasing function when evaluating the supply chain and how to work with your business partners to eliminate waste (activities that do NOT add value) wherever they are in the supply process.
3. Develop the Cost-Time Profile of the organization from the point of view of the customer.
The Cost-Time Profile (CTP) is a tool that presents graphically the accumulation of direct costs of a product as it moves through the supply chain. CTP incorporates the time dimension to the cost accumulation and the area under the CTP curve is the Cost-Time Investment (CTI) and the “waste” in the system. We should eliminate anything that does not add value.
4. Implement the concept of Total Operating Cost (TOC).
TCO is a concept that examines all the costs related to the acquisition, transportation, storage of products and quality non conformances within the supply chain.
5. Prepare a formal cost savings and reduction plan in the organization, where all types of cost reductions are included and all employees feel responsible for its execution.
6. Apply the use of proven leading-edge technology and methods to streamline the decision-making in the procurement process. Example: Reverse Auctions, Electronic Payments, Rebate Programs, Returns, Credits, Guarantees, Insurance, Contracts covenants follow up system, etc.
Sounds like too much work, but once set up, it is not a burden. The next step it is up to you. At TRAC, we can evaluate your overall procurement process. Let us make an assessment. For more details, you can contact luisherrera@tracsolution.net or at 939 -529–2745.
By Luis Herrera Pr /TRAC
