We’re operating by the old school rules a bit in procurement. Of all of our goals and objectives, the one that never changes and is the ultimate measure of our success is Cost Savings.
But cost savings is mostly an internal metric. The rest of the company doesn’t see the same value.
Here’s what happens when the C-Suite gets cost savings rolled up to them: “$280M in cost savings! This is outstanding!! Where is this money? We could use it right now!!”
And of course, this money doesn’t exist anywhere. It’s gone. What happened to it, the executives want to know.
“Well, you see, we gave it back to the business units, and uh, you see, well they kind of spent it.”
That’s where the cost savings went. Back to the spending machine. And of course, more was able to be purchased, and the business probably ran better as a result.
Don’t tell that to the C-Suite though.
And that’s why procurement rarely reports to the C-Suite. They’ll instead report into finance, operations, site services, or manufacturing.
I even had a client that had procurement reporting into HR!
Their logic? “HR buys people, so they should buy everything else too!”
And so, while we should aspire to smartly maximize cost savings, if that’s not going to get us a seat at the table, what will?
Procurement needs to become a source of Strategic Enterprise Advantage. They need to be and be perceived as a Value Added Center of Profit.
What needs to be done to get there?
- Much stronger integration in business unit product and service design to drive improvements in cost, quality, and performance before things are baked. This way, the company will more directly see tangible results beyond just cost savings. My organization has found an average of 18% cost savings with our clients in doing this – and that’s BEFORE supplier negotiations.
- Streamlining of all but the most strategic deals with AI & Robotics such that procurement is invisible. It just happens. Just like the payroll department – it just works, you just get paid, and you never have to think about it.
- Eventually, negotiating for a CFO financial repository where a % of cost savings achieved goes there, instead of getting spent by the business unit again.
- Shifting from reporting cost savings to reporting Contributions to EBIT. We’re terrible marketers, and we need to know how to position our value differently. The central repository above will make this easier.
These are just a few of things we need to be looking at. But just trying to get better and better at cost savings – which we should always do – AND hoping other people will care is a losing agenda.
If we want to get a seat at the table, first we need to get off the menu for lunch.
Now go off and do something wonderful.
– Omid G. “THE Godfather of Negotiation Planning” ~ Intel Corp
P.S. contact my office at Support@PurchasingAdvantage.com to find out more about our Capability Building Training Programs. Over 40% of the Fortune 100 has already invested in them.
