For many years, large corporations have invested in procurement leadership to realize the significant value talented procurement executives can unlock for the business. In most small organizations, procurement is an informal process managed by one or more people on a part-time basis. But the story is not so clear for mid-sized companies. Unfortunately, many mid-sized companies still manage procurement as a tactical purchasing process just as they did when they were much smaller companies despite having a significantly larger amount of spend.
CEO’s at mid-sized companies often invest heavily in sales leadership in an effort to grow sales revenue even though every dollar in new sales may only result in 10-20 cents in actual profit. If those same CEO’s invested in procurement leadership they could achieve a higher ROI as every dollar in procurement cost savings results in a dollar in actual profit. I’m not suggesting that investment in sales leadership should be minimized, but rather more CEO’s at mid-sized companies should be investing in a Chief Procurement Officer (CPO) who would surely generate an ROI of 2x or greater.
Even if CEO’s don’t think potential cost reductions are enough reason to invest in procurement leadership, talented CPO’s can also unlock value in six powerful ways:
1. Align supplier strategy to the corporate goals and objectives.
- Companies in high growth mode need Procurement to identify suppliers capable of rapid growth. Those suppliers may not be the ones that supplied the company when it was smaller.
- Companies in highly competitive, price-sensitive markets need Procurement to identify low cost sources of supply and work with suppliers to develop cost reduction roadmaps.
2. Reduce supply chain risk.
- Small companies often single source key materials but this creates a risky situation as companies grow and don’t have Procurement leadership to identify and qualify alternate sources of supply.
- Procurement can develop a sourcing strategy with key stakeholders that ensures quality and continuity of supply while accounting for key risks the company may face.
3. Address indirect expense management.
- Indirect spend is often managed by individual departments with little or no coordination or oversight. Consolidation of this spend can result in cost reductions and service improvements.
4. Manage payment terms strategically.
- Companies in high growth mode may need Procurement to negotiate extended payment terms to free up cash needed for growth investments.
- For cash-rich companies, Procurement can negotiate accelerated payment terms and achieve payment discounts which flow straight to the bottom line.
5. Streamline and simplify the purchasing experience.
- CPO’s can take multiple, inconsistent purchasing processes often found in mid-sized companies and implement a single, efficient process that is easier for stakeholders to use and ultimately results in higher levels of adoption.
- CPO’s also bring expertise in use of cloud-based eProcurement software tools to more effectively manage the sourcing process, contracts, expenses, suppliers, and cash flow.
6. Contribute to top-line growth as well.
- Integrating suppliers into the new product development process can reduce time to market and generate innovations
This is just a sample of the value that CPO’s can bring to mid-sized companies who are ready to make the investment in procurement leadership.
As awareness of CPO’s value proposition increases, I think you will see more investments that transform mid-sized companies’ Procurement function from a tactical group focused primarily on continuity of supply into a strategic business partner achieving significant cost reductions and value improvements for the business.