Cost in Translation

Jan. 12, 2008
More effective sourcing efforts could be as simple as getting your procurement and finance departments to speak the same language.

At least in theory, a manufacturer's finance and procurement departments should be natural allies, sharing many of the same goals and challenges and working in an aligned, coordinated fashion. In a perfect world, maybe. But according to a recent survey conducted by analyst firm Aberdeen Group, less than 20% of chief financial officers consider the work of chief procurement officers (CPOs) and their staff as having a very positive impact on competitiveness.

The sentiment actually illustrates a long-standing obstacle that many companies face -- a fundamental breakdown in communication between the two departments. Earlier last year, Aberdeen reported that procurement, by its own admission, fails to implement 21% of the savings identified from its sourcing efforts. And by the time finance enters the equation to account for the booked savings, the number drops to 3.2% -- or only 27% of what procurement and sourcing teams initially identified.

While some traditional views place blame solely on procurement, the new report contends that the drop from implemented to booked savings is a larger issue than one party's failure -- but rather an underlying issue that needs to be addressed. A fix-all solution is easier said than done, but a step in the right direction has CPOs working with their CFOs to redefine their collective measures of success.

Aberdeen Group offers the following tips to help improve the lines of communication.

  • Trust starts with visibility and dialogue and ends with accountability. Engage your CFO directly and often; set regular meetings while ensuring that the dialogue is valuable to both parties. Demand accountability from your CFO and require it from your staff.
  • Focus on the total cost of ownership. Year-over-year cost reductions lose some of their glimmer and significance if the total cost of a new contract is not incorporated in the overall analysis. This will be increasingly important as the impact of global sourcing can drive lower part, component, or material costs, but can be associated with greater shipping and holding costs, as an example.
  • Procurement should not be responsible for booked savings. Challenge the current view that it is procurement's responsibility to negotiate budget reductions with the line of business. Once savings have been achieved, it should not fall to procurement to establish how this very real benefit should be allocated across the enterprise, but rather, to the line of business and/or finance.
  • Together with the CFO, work to develop common "language" with a set of metrics with standard definitions (and methodologies for calculation) and promote them across the company. Procurement doesn't need to provide everything it does in strict financial terms, but it does need to help the CFO and the larger finance department understand how its goals and objectives map to the broader company objectives.

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