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Traditionally the procurement and Finance & Control discipline (F&C) are tightly interwoven. This relationship becomes especially evident in dire economic times, when cost reduction is a top priority and – even more than usual - procurement is looked at to contribute to cost savings. Obviously Procurement has much more ground in common with F&C, both on a strategic and tactical level; for example the relationship between corporate and procurement strategy, supplier management, risk management, implementation of ordering systems (P2P), measurement of realized savings, etc. This post explores some of the interfaces between the disciplines and presents a few suggestions on how F&C and Procurement can collaborate.
The essence of procurement
To describe the connection between the financial and procurement domain let us dwell for a moment on the essence of the procurement function. This can easily be described using the following simple figure.
The basic task of Procurement is to adequately meet an organizations demand for the goods and services required to achieve the goals of that organization. A clear understanding of these demands and thorough knowledge of supplier markets enables Procurement to negotiate proper contracts. All relating activities can be summarized as “Sourcing.”
To facilitate an effective order process, and usage of available contracts, an organization should strive to have all employees using an optimized order process (process compliance) and authorized contracts (contract compliance). This is called “Control.” A prerequisite for an effective procurement function is insight. Insight into the needs of the organization, procurement behavior, characteristics and trends of supplier markets, the extent that available procurement processes and accompanying systems are used, etc. All efforts aimed at obtaining this insight can be lumped together as “Transparency.” Let us take this model to examine the interfaces between Procurement and Finance more closely.
Sourcing
It is good practice to define a sourcing strategy per commodity. Each category has its own characteristics and these determine the requirements that goods, services and suppliers must meet. At the basis of all of these considerations are the strategic objectives of an organization. If, for example, a company is aiming at leading the market in innovation, then it makes sense to search for suppliers that are capable of supporting that ambition. Should they alternatively pursue a cost leadership strategy, then they would rather contract suppliers that are perhaps less innovative, but are the most capable of offering quality products under favorable cost conditions.
A critical success factor for a successful cooperation between Procurement and Finance is that the objectives of sourcing are clear to all. As stated, these objectives are for a large part determined by the corporate strategy. Because of his role in the board, the CFO typically has a responsibility in implementing the strategy and aligning it with the strategy of the different corporate domains. Based on the corporate strategy the different procurement commodities can be prioritized and the sourcing strategy per commodity can be determined. A second success factor is that the sourcing objectives are translated into clear, measurable performance indicators, which clearly articulate how the performance of Procurement will be measured. It is obvious that these might go further than sheer cost control. Other factors could be the extent to which the competencies of suppliers are used to create additional value for the organization, improved quality management or increased supply reliability.
Control
Sourcing is mainly about organizing the tactical aspects of procurement. Control deals with the translation to operational level. It is here where the real ordering of products and services takes place, including receipt of goods and handling of the invoice. To maintain a grip on this it is important that there are clear, practicable order processes, adequately supported by systems. Only when you make sure that employees are supported by effective processes and tools can one demand that they are leveraged at all times: process compliancy. This highlights an important interface between Procurement and Finance. The interest of Procurement in this interface is that negotiated contracts are made accessible for those employees authorized to order goods and services. This way, people have a standard way of ordering things and information is recorded uniformly in systems, which makes it a source for information for new procurement activities (see transparency). This is the way for F&C to keep a grip on costs and to have insight into on-going obligations. For a successful cooperation between Procurement and F&C it is of imminent importance that the design of the order process and the accompanying administrative organization is carried out as a joint operation.
Next to process compliance, control relates to contract compliance. Not only is it vital that employees follow the correct ordering process, but it is also important that these purchases, if possible, are based on procurement contracts. This has financial advantages, such as bundling of purchases into one contract with one supplier to obtain better conditions, and is likely to simplify the control of risks, because the monitoring of risks is very cumbersome when sources of supply are not assigned methodically. Similar as it was for “Sourcing” it is important for “Control” that both disciplines (Procurement and F&C) define the performance indicators collectively.
Transparency
Transparency is the area where the connection between Procurement and F&C becomes the most visible. Assuming it has been set up properly, transparency provides the eternal source of information and inspiration for improvements in tactical and operational procurement processes. It also determines, to a great extent, the contribution that Procurement can deliver to achieving the corporate objectives.
Through enforcement of process compliance the obligations are consistently and uniformly recorded. This provides the financial function more insight into the availability of liquid assets and the impact on working capital. This insight helps steer the financial streams, for instance by deploying instruments like dynamic discounting. Once the operational procurement process is truly in control, it becomes possible to negotiate more complex payment conditions with suppliers, containing arrangements such as supply chain financing. In times of ample working capital one can decide to pay invoices earlier and reap the payment discount, which in general yields more return than placing it on deposit. Alternatively, in times of stringency one can decide to pay invoices later. Indeed this makes it impossible to take advantage of a payment discount, but it still costs less than funding a short-term financing need by overdrawing the current account.
The consistent tracking of all purchases helps Procurement in their sourcing activities. It helps keeping an eye on the buying behavior of the organization. It can also be seen as a means to agree on more fiscally sound budgets, even more so if it can be combined with information derived from the sales & operations planning. Ultimately, an advanced information system might make it possible to control in real time the margin on sales, enabling the company to take corrective measures if the margin threatens to go below a certain desired level
In any business organization, sales is the department that generates revenue. No matter how good your manufacturing operation is, how cutting-edge your technology is, how tight your financial goals are or how progressive and forward-thinking your management techniques are, you must still have a sales mechanism in place, or everything else is useless.
Yes, otherwise everyone performing procurement activity will pay the difference price for similar product and will result in revenue loss to the institution.
I echo the answers given by experts.
YES.
Depending on how you look at it, procurement plays a very vital role, and its activities can affect the two both directly and indirectly and it can be positive or negative. Remember Procurement is a cost center in any institution and if it is prudently managed the organizations will realize value for its money. Take for example when procuring for production, what happens, when value for money is not realized? When the quality of the materials are not met? In short when a firm is able to Meet its 5Rs in when procuring this will translate into more revenues and the converse is true in this case.
Procurement is finance and sales enabler for good or bad perfomance.
Yes most definitely ... Procurement is a key element in any manufacturing / non-manufacturing industries.
1.Choosing the correct supplier, vendor or distributor
2. Checking the quality (initial) and supply capacity
3. Profits through negotiations and new contracts ( Payment terms)
4. Strategic planning of requirement according to the demand
I do; The reason for so is because they act as a support unit such as finance, If you take them out of the game then there will not be raw material to buy. They also act as cost-savers through placing their negotiation skills to save amounts on behalf of the company.
The objectives of a world-class procurement organization move far beyond the traditional belief that procurement’s primary role is to obtain goods and services in response to internal needs. To understand how this role is changing, we must understand what purchasing is all about, starting with the primary objectives of a world-class purchasing organization.
Supporting this flow requires purchasing to:• Understand business requirements• Buy products and services• At the right price• From the right source• At the right specification that meets users needs• In the right quantity• For delivery at the right time• To the right internal customer
To manage the procurement process and supply base efficiently and effectively procurement must follow the following key steps:• Identify opportunities• Manage internal operations• Achieve objectives
Identify opportunities where the procurement team adds true value:• Evaluation and selection of suppliers• All purchases should go through the approved procurement processes• Engineering and other functional inputs are part of this process• Sales personnel should not be allowed to enter contractual agreements without procurement’s involvement• Increasing use of sourcing teams• Review of specifications or statement of work• Review the requirements for the material or service being provided• May be able to suggest alternative standardized materials that can save the organization money• Periodic review of requisitions can allow greater leveraging of requirements• Acting as the primary contact with supplier• Managing the supply base• Current suppliers are competitive• Identification of new potential suppliers and develop relationships• Improvement and development of non-competitive existing suppliers
Manage internal operations efficiently and effectively including:• Management of procurement staff• Developing and maintenance of policies and processes• Introducing and leveraging appropriate technology and systems• Defining procurement strategy and structure• Developing plans and measures• Providing procurement leadership to the organization• Providing professional training and growth opportunities for employees
Achieve this objective through:• Leadership of procurement for the organization• Sourcing management• Ownership and accountability for sourcing processes• Communication of purpose, process and pay off• Collaboration and partnering• Teamwork• Develop integrated purchasing strategies that support organizational strategies.
Effective purchasing strategies involve:• Monitoring supply markets and trends (e.g., material price increases, shortages, changes in suppliers) and interpreting the impact of these trends on company strategies• Identifying the critical materials and services required to support company strategies in key performance areas, particularly during new product development• Developing supply options and contingency plans that support company plans• Supporting the organization’s need for a diverse and globally competitive supply base
The listed points will help put all procurement activities in check in order to obtain the best value for the spent and at the same time minimize cost that might arise due to bad planning.
You can as well save yourself all the stress by contacting us to handle all procurement and supply needs
Yes, of course, it make business to earn money through smart buying.
YES BECAUSE OF CHEQUE PAYMENT UNTIL TO THE FINAL BUYER OR USER
