It’s time procurement and finance, two historically adversarial functions, join forces in an effort to create value for their company.
The traditional scoreboarding relationship, built on distrust, poor communication and a lack of understanding of supply chain and financial realities, perpetuates misplaced tensions and missed opportunities.
Ed was the outspoken chief financial officer of a large manufacturing company who had an affinity for customers and a contempt for suppliers.
His disdain for procurement was legendary. Ed would brag about his negotiations with customers and claim it would be just as easy to cut great deals with suppliers. One of his theories was that every time the quantity on a purchase order doubled, the price should be cut in half; he measured procurement performance with this unreasonable notion.
Ed was invited to a negotiation session with a critical supplier who was trying to pass on a major price increase. After the supplier’s president made her opening remarks about market conditions and cost drivers, Ed smiled and turned to the procurement side of the conference table as he left the room. "Good luck with this," were his last words.
But this lack of contribution to the negotiation session actually gave him a greater understanding of the pressure procurement was under. He became more patient and supportive, leading to an eventual increase in communication and trust between the two functions.
I would hope the relationship between finance and procurement has finally matured in this era of newfound respect and appreciation for all things supply chain.
The relationship between procurement and finance was once based on mistrust and control.
The purchasing function was not always held in the highest esteem, and finance would often police the purchasing process, looking for incidents of graft and financial malfeasance. Sadly, they sometimes found it, perpetuating the cat and mouse game.
Finance usually reported higher up in the organizational chart, creating a functional distance and an organizational subordination, as well as a professional inferiority complex.
Many complicated procurement activities, such as make-or-buy and lease-or-buy decisions, outsourcing analysis, lean activities, and consignment- and vendor-managed inventory programs benefit from expertise and buy-in from finance.
At the same time, sourcing decisions and procurement objectives can be better communicated to finance, creating cross-functional learning opportunities and the building blocks for additional collaboration.
I would hope the relationship between finance and procurement has finally matured in this era of newfound respect and appreciation for all things supply chain. In many companies, the organizational and professional distance has narrowed, creating opportunities for understanding and collaboration. But for others, the relationship is still strained.
The key to bridging the gap is to understand that both functions should focus on collaboratively creating value.
Build trust and confidence
Include those in finance and accounting in your internal relationship building efforts.
I was able to convince my friend Sue, a cost accountant, to join my outsourcing project team as a cost analyst, breaking new ground in the relationship with finance. She had shown an interest in one of my projects, and this was a good opportunity to get her involved.
We welcomed her to the project team. She saw the sourcing process firsthand and even made visits to suppliers. She began to understand the nuances of the procurement process, and her success created pathways for her colleagues to become more involved as well.
We learned from Sue and she learned from us. Finance trusted her analysis, creating confidence in the procurement process and fast-tracking many projects.
Build bridges for suppliers
Create stronger connections with finance, including such functions as the accounts payable staff. Prompt payment of supplier invoices, and fast reconciliation of invoice or receiving errors, strengthens supplier relationships. Encourage direct communication with the supplier, as well.
Many visits by suppliers included a stop in the accounts payable department to make sure things were running smoothly.
Humanize the experience for both sides, replacing the one-dimensional invoice with three-dimensional interactions.
Build relevant analytics
Historical measures like standard cost or last price paid are often not the best measure of procurement’s performance. Variations in product life cycle costing, changing economic conditions and overcoming supply chain risk all create cost pressures or opportunities that may not be visible in traditional measures.
Work with finance toward a shared design of analytics. And share the data freely — that develops confidence in each function’s process and provides early market intelligence to the company.
As the barriers between procurement and finance diminish, both functions have an opportunity to cooperate and create shared value. Procurement becomes less isolated and defensive, and finance spreads its expertise into the procurement team.
Our common goal should be company success.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.