Author: Gloria Qiao, Founder & CEO of Trusli
1. Procurement is a Much More Strategic Role Than Most Think
There is a lot of confusion about what procurement does. In traditional industries such as automotive, it’s called “purchasing”. That’s straightforward—buying things. From wheels to chairs in the office, you name it. When people need something, purchasing buys it. The end.
A slightly better term, especially if you add “strategic” in front of it, is “sourcing”. Now you are talking about strategy. The act of searching, qualifying, and eventually selecting different suppliers based on business needs and strategies. The tradeoffs of pros and cons.
There is also a lot of confusion about supply chain. All of Apple’s procurement team is called “Global Supply Chain”. When you produce hardware, you naturally need to purchase or source physical components for such hardware, and you encounter supply-demand issues, hence the term “supply chain”. However, if you are a software company without any hardware component, you typically don’t need a supply chain team (unless you are building your own data center, for example).
Ultimately, all these sub-components roll into a general practice, known as procurement. Procurement is the combination of purchasing, supply chain, strategic sourcing, and sometimes operations.
Now that we established procurement goes beyond buying chairs, what kind of strategic values does procurement bring to the table?
a. Enabling the Business to Hit Its Goals and Deliverables
For many hyper-growth companies, not having the hardware or software they need will cause them to miss product development milestones and deliverables. This has a direct impact on revenue and customers. In this sense, if one day, procurement is unable to fulfill what the business needs in both quality and speed, then the business will suffer. Unless this point is clear, procurement will have a hard time establishing the right metrics and KPIs. Speed of execution often trumps everything else for a fast-growing company. What the business needs, procurement must deliver on time with good quality and good terms.
b. Cost Savings
This is a self-explanatory point. Once we can satisfy the business’ needs, cost is the first thing that comes to mind. For a company with significant spend, the role of procurement is right below sales. While increasing sales increase the top line, decreasing spend and achieving savings effectively increases the bottom line, in a more efficient way. As we always say, a dollar saved is two dollars earned.
c. Strategic Alignment or Even Revenue Generation
In a complex market where many players compete and collaborate, the role of procurement goes beyond building supplier relationships. Through the intricacies of supplier relationships, the procurement team may find strategic opportunities to collaborate and form strategic partnerships, which then may, in turn, lead to revenue-generating opportunities for the company.
d. Trusted Advisors of the Business
Ultimately, procurement is the team that possesses both the subject-matter expertise and the business acumen to effectively counsel, access, and advise the entire business for strategic directions. A highly-functional procurement team not only supports the business to be agile in go-to-market, it also provides unique opportunities to save costs and find additional revenue streams.
2. The CPO must have a seat at the table
Based on the last section, you probably guessed that I am an advocate for a Chief Procurement Officer. Because of the strategic value of procurement for a fast-growing company, the leader of procurement must become part of the C-suite and have a seat at the table when discussing strategic, company-level initiatives.
Anything short of that, the business will suffer. I will describe below why alternative organizational designs don’t work, at degrading levels.
Interestingly, while many of the Fortune 500 do have CPOs, especially consumer products, many don’t. Despite Apple’s global fame for managing an extremely effective supply chain and producing world-class procurement leaders, Apple doesn’t have a CPO. VP of Procurement (Amid Tony Blevin’s incident), reports to the COO.
3. Why Procurement Shouldn’t Report to the Business
An old-school organizational design is to split procurement into functional areas they support and have them report to that department’s head. For example, IT-related procurement reports to the CIO.
This creates a lot of chaos for the business: lack of a consistent system to manage procurement; overlapping purchases from various departments; lack of oversight of the company’s overall procurement strategy, to name a few.
The worst outcome of this structure is misaligned incentives. Now, instead of trying to balance speed execution and cost, procurement teams for these business units become rubble stampers, as their only incentive is to buy whatever they are asked to, and not even worry about strategic cost savings. As long as we are staying within budget, then who cares?
4. Why the CPO Better Not Report to the CFO
I have personally worked within this setup in two companies and have to acknowledge that it has its advantages. For starters, if the budget decision maker and the procurement team sit under the same team, they tend to be much more aligned and get into fewer fights. In addition, I used to own accounts payable, thus creating a true “procure to pay” end-to-end closed loop. There is less back-and-forth and finger-pointing.
In addition, because the CFO is always a big whip, now procurement has a lot more authority to enforce certain procurement policies and let the business face real consequences if they don’t comply.
However, as this KPMG report pointed out, this setup will definitely create an inaccurate incentive for procurement to place savings on top of speed for execution. Since savings are often more easily quantifiable, this may cause severe consequences for the business not having the right tools or resources for execution, which may be a shadow consequence unless someone is measuring the impacts of delays and/or lack of sources with financial numbers.
The CPO must be able to be “neutral” and independently balance the tradeoffs between speed for execution and savings. To be titled either way will cause them to lose the holistic value thus the ability to think strategically about the best next steps.
5. The CPO Reporting to the COO is a Viable Choice but Still Not Optimal
The Apple set up to have the CPO report to the COO is probably the best out of all these alternatives. If you have a global supply chain, the procurement function obviously takes on various operational tasks such as managing supply and demand, quality issues, etc.
The disadvantage of this setup is it prevents CPOs from getting out of the box and coming up with more creative solutions such as forming strategic partnerships with key suppliers. Sometimes these relationships can turn into revenue-generating opportunities. If we are buying so much from a single supplier, are there things they may need from us as well? What if we do these things for them so that not only do we get what we want for free, but we even make money out of it? These are the things that strategic CPOs should be thinking about, as opposed to being pigeonholed to solely thinking about how to meet customer demand and save money.
To help put things into perspective, a modest company’s procurement leader manages hundreds of millions or even one billion spend. A larger company’s CPO can manage several tens of billions. A small saving out of this amount is the revenue of entire companies. For people who don’t understand the strategic value of procurement, this may seem shocking. Do you still not believe that the CPO should have a seat at the table in the C-suite meetings?