I believe that procurement holds one of the golden keys to company success. And its not through cost cutting. Its through optimised logistical networks, just in time material supply and delivery, and its all developing in a sustainable environment. Production can produce the right products, at the right time and right quality in an efficient and effective manner.
What if?
I reduce the procurement budget by 20%?
A major logistical supply route is interrupted?
A global key component is missing?
What is the impact of this disruption and how vulnerable am I?
If I manage this well the company grows. But the world is not perfect. My stakeholders want more. The financial analysts speculate that we can make more money. I’ve been told to grow revenues, cut costs, outsource, reduce inventories, change fixed to variable costs. Conclusion – I need to take some risk in order to achieve those goals!
So on paper this strategy, and decisions making, are to improve my financials. The overlooked downside is I have increased my risk level. Is it OK?
Lets run some “What if” scenarios to establish the cost of the downside and see what happens to the financials?
The problem with the typical way of looking at this is that we are trying to get the balance to be horizontal. Ie status quo. But risk can be asymmetrical. Meaning that for a small increase in revenue I take an exceptionally large risk if it fails. So yes, I can establish the value of the risk I’m taking and even things out. But Im not growing! It means that I will be in the same position two years from now, fighting a cost war but with higher operational risks.
I want to identify and implement the opportunities of having a great procurement function.
The only way I can effectively improve procurement, and help the company grow, is by asking three questions.
- Who is the owner of the decisions we need to make?
- Is the decision helping me now (Risk Mitigation) or will it help me in the future (opportunity management)?
- Where, and why, am I actually losing money and what do I need to do to stabilise the business? (This can be fundamental as it strengthens the foundation on which I plan to grow.)
How often has a maintenance operation been planned, production stopped, only to realise the parts aren’t in the warehouse as inventory has been reduced? How often have sales stressed that a specific order needs to be made and sent out but retooling equipment and quality issues on start-up and shut-down cost the company more money? Have certain operations been outsourced and the new owner is cutting costs?
With increased focus on ESG in supply chain, managing such complexity is challenging. So I need a system that can handle this.
- Each function needs to understand the strengths and weaknesses of the others and work as a team so that decision ownership can be defined.
- The financial bridge visualisation needs to be improved allowing for leakage transparency and value creation to be clearly represented.
- I need to see results in the bottom line.
Through utilising the existing management systems and data available we can generate a managerial bridge as opposed to a financial bridge. This provides the insight for decision making and transparency to:-
- See the value propositions being made currently, and ensure they deliver full value
- Identify erosion of profits by function and ensure procurement is addressing, where applicable, those issues
- Defend increased spend if the consequences of cuts will hurt the core strength of the company
- Attract financing as ESG targets are transparent and achievable.
Through parallel rollout of the transformation plan, and some simple tools for capturing leakage, we can help you to use procurement as a value creation tool and support ESG goals while improving performance transformation.