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Your boss’s job title says a lot about the importance of your role. “I work for the CFO, and I think that’s a good thing,” says Simon Boggis, CPO of global freight management and contract logistics firm CEVA Logistics. “He is tough and demanding, but he understands the value of procurement.”
This reporting line reflects the decisions CEVA has made about where procurement sits in the business. It is part of the organisation’s approach to procurement governance, which also defines the function’s structure and the policies that give it power.
Procurement can report into a number of different functions – including finance or operations – or may have its own place on the board. Governance is extremely important as it determines the value that procurement is able to provide to the business, whether in terms of saving money, avoiding risks or achieving broader business objectives such as innovation or time-to-market improvements.
For CEVA, the decision to make procurement report to the CFO reflects the financial demands on the business. “We don’t make a 25% margin,” Boggis says. “It is closer to 4% or 5%. For that we have to work very hard, but the power of procurement is understood.”
Simple and flexible structures
Approaches to procurement structures can vary: from a devolved approach with management responsibility held in business units; to highly centralised functions with a mandate to manage spending right across the business. CEVA employs a hybrid, ‘centre-led’ model, in which a small central team answers to the executive and supports procurement managers who work within business units.
The challenge is to have a structure that avoids the complexity of a multi-tiered procurement hierarchy, but instead balances the goal of simplicity with the need to remain flexible to local conditions and requirements.
Having a central global team can help make the most of scale where it helps the business, but having a local presence makes it easier to manage local supplier relationships and understand variations in legislation and working practices, Boggis says.
“We look at how we can leverage spend from the highest point that makes sense for the business. For IT, we can manage software licences on a global level. For packaging, it is managed nationally.”
Local procurement teams answer to the local managing directors, while spend, supplier and invoice data is held centrally and can be accessed from anywhere in the business (see The importance of data in supporting governance), so the central procurement team can help inform local decisions.
Use data to remove barriers
However, procurement needs to be careful about how it uses this data to influence local decisions. “Data can remove barriers to success,” Boggis says. “But I can’t walk into a local road transport operation and say: ‘Hi, I’m from procurement. Here’s what you’ve been doing wrong for 25 years.’ That is not going to work.”
Instead, he says, the function needs to acknowledge local teams’ strengths in customer service while presenting data that will support a collaborative programme for improved procurement. “We say: ‘We’d like to work with you and look at supplier costs, but no decision will be made without your input.’ Of course [procurement has] a mandate to do that anyway. But both organisations have been asked by the CFO to lower costs. The trick for us is making sure that we train people to collaborate.”
Procurement as a business partner
After the onset of the financial crisis in 2008, there was a trend towards businesses advocating a streamlined, centralised approach to procurement to contain costs, says Natalie Henfrey, a procurement expert at PA Consulting.
“It has tended to come from higher in the business: procurement is seen as an engine for driving out cost,” she says. “Some companies have put high levels of compliance with a central procurement policy in place.”
As the global economy returned to growth, however, best-in-class businesses were looking for procurement to drive value within the organisation. To do so it needs to work closely with business units and suppliers, she says.
“Procurement is moving out of its central office again. What we are starting to see in leading pharmaceutical firms, for example, is procurement going out there as a business partner, working with high-spend areas. While they still report into central procurement, there will be a dotted line to internal customers and they may be located with them,” Henfrey says. “There is a realisation that procurement needs to be more deeply involved with the internal functions to understand what the cost drivers are with them and their suppliers. It is being led by a few visionary CEOs.”
Align to the growth cycle
Since the trends for and against centralised procurement tend to ebb and flow with economic cycles, the function should build some flexibility into its governance, says Alan Day, chairman of procurement consultancy State of Flux. Simplicity and rigidity are not the same thing.“We need to create procurement structures that flex. We need to align to the organisation growth cycle and flip our model when necessary to do the best things for the business,” he says.
That is all the more important in the current economic environment. While the global economy may have recovered from the worst damage of the financial crisis, China’s recent economic data and the fluctuations in the stock market both show there are still substantial risks to be confronted. Creating governance that prepares the business for the future is the challenge confronting procurement leaders in these still-uncertain times.
For example, it may be most appropriate during times of rapid growth for businesses to give a lot of leeway and empowerment to the procurement functions in subsidiaries. But if growth slows or goes into reverse, other corporate priorities – such as costs and cash flow – may take precedence over innovation and supplier collaboration.
The right measures
Having the right key performance indicators (KPIs) in place and communicating them throughout the procurement organisation and the business as a whole is absolutely vital, therefore, to ensure the function is delivering according to the business’s strategic objectives.
Traditionally, KPIs have been used in a very operational way – to measure cost-savings or percentage of spend under management, for example. As procurement takes on an increasingly strategic role, however, the KPIs the function uses have to link upstream to the corporate objectives – which may relate to revenue generation or working capital, to name but two – as well as downstream to the operational level.
In practice, this means proper governance requires making a distinction between KPIs used by the top management team to determine how procurement is contributing to the corporate goals, and the KPIs used within the function to measure the operational steps necessary to achieve those aims. Your speedometer will tell you how fast you’re going, but your sat nav will tell you whether you’re going to arrive at your destination on time.
Accurate, accessible data is essential for procurement governance models to succeed, says Simon Boggis, CPO of CEVA Logistics.
The company has adopted a hybrid, centre-led governance model, as part of which a small central team supports procurement management embedded in business units. To do so, it has to work from an informed position in terms of business-wide spending and supplier relationships. But the employees who collect this data may not realise its importance, Boggis says.
“The funny thing is, the most powerful people in a company may look at a set of data and make decisions on that basis, but most data comes from the [most junior]. A purchase order may be entered into system, but sometimes it goes wrong. Data with integrity is vitally important. Once you have got visibility, management can have an informed discussion about what we spend and where we spend it.”
By getting a clear, simple-to-aggregate global view of spend data, businesses are better able to make strategic decisions about procurement and also improve the efficiency of day-to-day working, he says.
“You can look at 100 suppliers and see 70 are on 60-day payment terms and 30 are on 30 days. Could we not align them all to 60 days? Could we consolidate that spend? Maybe you see so many small-value invoices that you could benefit from having a single invoice and improve efficiency,” Boggis suggests.
Whichever way procurement tries to benefit the business, however, it will struggle to do so without accurate, meaningful data.
“Historically, there was often a proliferation of poor data as companies struggled to integrate systems – following mergers and acquisitions, for example,” Boggis says. “This is often used as an excuse not to do things in terms of company-wide procurement.”
This article has been written by an experienced journalist, commissioned by Procurement Leaders. It is part of a sponsored editorial product, published in partnership with SAP Ariba.