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Purchasing Officers Are Too Often Shackled

June 29, 2021
CFOs who depend on quarterly analyst calls tend to hold all the power.

My columns can get a lot of feedback. The bulk of it is not in the comments section at the bottom of the article. Rather it is sent to my email address.

While I’d rather receive the feedback on the website—so all readers can see both the feedback and my responses—I sometimes receive comments and questions that pique my interest and become the basis of a future column. This article is an example of that.

In a recent article, I expressed frustration with chief procurement officers (CPOs) and how they tend to operate. That led to the following question from a reader: “What are other areas did you come into conflict with your CPO?”

Chief financial officers (CFOs) often set the parameters within which CPOs must operate, so I’ll use this column to focus on my interactions with CFOs. My next article will focus on the same relative to CPOs.

In my stint as a CPO, I was on the CEO’s staff, so you might think I was on par with our company’s CFO in terms of clout and/or influence. This wasn’t the case. In fact most, often the CFO would lead the CEO’s staff meetings. In other words, all the others on the CEO’s staff knew their job was to pretty much do as the CFO dictated.

In my earlier work as a consultant with this company, I had put together a purchasing business plan focusing on supplier “true” lead-times and their reduction, facilitated by a supplier development function.

If you are a regular reader of my column, you’ll know that reduced lead-times highly correlate with improvements to the traditional supplier performance metrics of price, as-delivered quality and on-time delivery. Reduced lead times also position OEM customers to realize increased profits by both reducing internal overheads and satisfying demand that varies from what was forecast.

This company had several divisions that had relatively short selling seasons. From my work at a former employer, I knew that the “true” lead-time reduction strategy was especially effective in such a scenario. Consequently, the business plan I developed paralleled the approach I had applied in that previous effort.

The plan must have made a positive impression because shortly after I presented it, I was hired on as CPO.

Upon joining the company, one of my first steps was to arrange individual meeting with all of the CEO’s direct reports and describe to them in detail how I intended to implement that plan and how it would affect their areas of responsibility. There was general acceptance with what I laid out—as I expected—except from the CFO.

I remember that first conversation vividly. The business case I presented was based on reducing the amount of pre-built inventory the company currently relied on to support satisfactory customer fill rates through increased supply chain flexibility. After I had presented the details to him, he replied:

“While I’m sure this would be interesting from an academic perspective, I’m not sure how it fits into the financial goals of this company.”

My reply was that it was more than an academic strategy as I had implemented it in the past and it had delivered significantly positive financial impacts. He responded by saying he had to present on company financial results to stock analysts on a quarterly basis and all the work of the purchasing function should focus on making a positive contribution to that quarterly report; i.e., lowering material costs through a focus on piece-price reduction. Hmmm.

I decided to bide my time and sure enough, that sales season our forecasts both exceeded customer demand by a large margin and were also off target with the pre-built quantities of different SKUs. In the end, we were stuck with a lot of pre-built inventory that had been expensive to stockpile and would also be expnesive to carry, discount, etc. I went back to the CFO and showed him these numbers, but it didn’t sway him from his previous position. I was pissed.

So I went to the CEO to express my concern and he told me I would have to work this out with the CFO myself. At that point, I told him I had tried and didn’t think further discussion with him would have any effect. Then I asked him why, if the company wasn’t interested in implementing the business plan I had put together—the outline of which had been the basis for hiring me—had they hired me in the first place.

A couple of weeks later, I negotiated a somewhat amiable separation from the company.

It is interesting to me that in my last week there, the CFO sent a memo to all division presidents requesting a plan from them on how to reduce their reliance on pre-built inventory to maintain customer fill rates! This, of course, was the wrong thing to do without having first assured that the supply base could effectively react to short-term changes in schedule. Why? Because while our own factories were relatively flexible, the supply chain was not.

Read more of Paul Ericksen's supply chain management articles

As far as I could tell, the CFO’s memo had little impact on how the company operated going forward, and the problem of having excess inventory at the end of the sales season continued to be a recurring issue in certain divisions. For instance, have you ever heard of a marketing manager that didn’t set an optimistic forecast? If so, that person probably didn’t last long in that position.

So what is my conclusion about working with CPOs?  It is that they primarily work within the constraints of their quarterly analyst calls. And CFOs certainly want to present a pretty picture of the company’s results and prospects since this is what is required to maintain and/or increase the price; i.e., pretty much the only things stock analysts are interested in. Note: a large part of executive compensation is tied to increasing company stock price.

Because of this, most companies tend to focus on short-term incremental changes driven by their impact on standard accounting practices. An exception to this is that when needing to present a bigger impact on their quarterly calls, they typically rely on laying off employees!

How do I expect CFOs should operate? The same way all executives should operate: setting metrics to drive results in the short-term, but also expecting functional managers to work toward higher impact middle-term (evolutionary) and longer-term (revolutionary) changes. To do this, CFOs must accept the idea of keeping investors relatively—not maximally—satisfied in the short-term, while allowing functional areas to expend resources to focus on longer-term, “bigger-bang” strategies.

Unfortunately, I don’t see this happening much based on the current Wall Street focus on short-term stock price.

Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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