Is procurment a "support" or a "core function"?

Actualizado: 14 sept 2020

As you have seen me saying many times, the role of Procurement is to deliver value to the company by identifying and delivering cost efficiencies with the objective of increasing bottom-line profit.

Cost efficiencies can be as material to the company’s profit as sales increases, and this is the reason why I have asked myself many times in the last years if we need to keep seeing procurement as a support function or if actually is another core function which is doing a slightly different business than the marketing or product teams but with the same final goal.

I like to use the below example (which you may have seen in the book) to highlight how important and material is to control costs.

3rd party spend can be up to 65-70% of sales revenue depending on the industry and the company so any cost improvements can have a direct impact to the net profit. In the below example we have assumed a company which has 50% of 3rd party costs, 30 % of salaries and 20% of profit mark-up. In this case a 5% reduction to cost will be translated into a 12.5% gross profit increase.

This is a great example to see how what apparently seems to be a small action can have a massive impact when we look at the holistic picture and analyse the bottom-line results.

We may need to start seeing procurement as an extension of the sales team. While sales bring the volume, procurement brings the efficiency to this volume and both together achieve bottom-line growth.

Capitalism cannot be understood without the concept of growth. It is based on the entities and people investing in companies with the aim of obtaining benefits. This means that companies require to obtain benefits in order to pay back the cost of this investment in the way of interest, dividends... At the beginning of the 21st century when the online explosion happened, many big companies and investors were mostly focused on growth instead of bottom-line profit. I have seen how, in these last 20 years, in some instance growth was the only goal at no matter what cost. This is now starting to change, and the concept is evolving to “sustainable growth” rather than growth only. It basically means that today it is also important to take a deep look at the costs incurred to obtain growth. The core of the business is now split in between the functions in charge of achieving growth (sales, product…) and the functions in charge of reducing the costs of the growth, make it sustainable and make it ultimately profitable for the investors.

With this in mind, may we see CPOs reporting to CEOs in the future?

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