Collaborative Procurement – Navigating Challenges and Driving Financial Success
Procurement and finance teams are typically viewed as two distinct functions with two very different sets of priorities. Procurement is focused on sourcing and purchasing goods and services and managing suppliers, while finance is concerned with budgeting, forecasting, and financial control.
As organisations continue to navigate modern challenges, such as supply chain disruptions, geopolitical uncertainties, and inflationary pressures, many are recognising the significant advantages of working more closely together. For procurement, having a better understanding of financial constraints and goals ultimately leads to more strategic purchasing decisions. For finance, having access to procurement insights can enhance budgeting accuracy and financial forecasting. Overall, collaboration between these departments leads to better decision-making, improved cost management and enhanced risk mitigation, significantly enhancing organisational performance – not to mention a 20-40% increase in realised savings, a 10-30% improvement in operational efficiency, as found in a study by Deloitte, and a better end-user experience.
Understanding the Challenges
Collaboration between finance and procurement doesn’t come without hurdles. Finance teams may not fully appreciate the value procurement brings in terms of cost savings, risk management, and supplier innovation. Similarly, procurement may struggle to align its goals with the financial objectives set by the finance team. For example: While procurement recognises the CFO’s goals to lower costs and improve the bottom line, many procurement decisions are driven by other priorities and outside forces, such as ensuring supply and combating supplier risk, which in some cases, can result in higher costs.
How can teams overcome this hurdle? Trust and clear communication is key. Procurement must demonstrate its role in achieving financial objectives by providing tangible data on cost savings and value creation. On the other hand, finance should work to understand the procurement process and its impact on overall business performance. And while both parties operate in the same macro-economic environment, specific economic challenges – such as inflation, regulatory pressure and consumer demand, affect each function in different ways. Again, communication is key so each party can see the full picture of what’s driving their colleague’s decisions.
Together, procurement and finance have the power to overcome several key challenges:
Rising Costs
Rising costs have affected everything from raw materials to operational costs. And while inflation appears to be cooling, cost containment remains a key priority for all enterprises. In fact, inflation was the number one issue affecting 62% of CPOs from Deloitte’s 2023 Global Chief Procurement Officer Survey.
Procurement and finance must work together to manage increased costs and protect profit margins. Procurement plays a critical role in negotiating favourable terms with suppliers and exploring cost-saving opportunities. By collaborating with finance, procurement can ensure that cost-saving measures align with financial goals and budgets.
Finance, on the other hand, can provide insights into cost trends and assist in developing strategies to combat inflation and price pressures, such as hedging on certain commodities, adjusting pricing strategies and changing payment terms. They can also implement electronic invoicing and payment processes that create operational efficiencies, cut costs, and save time.
Inventory Stockouts and Supply Shortages
Inventory stockouts and supply shortages negatively affect top-line revenue. And while the brutal supply disruptions we experienced over the past three years have cooled, the supply chain, by its very nature, remains fragile.
Unfortunately, stockouts are still surprisingly common with around 50% of businesses experiencing at least a few per year. Procurement and finance can collaborate to mitigate supply and inventory risk by aligning around risk management objectives. Finance can provide procurement with advanced forecasting models and liquidity analysis, enabling procurement to anticipate potential financial disruptions. In addition, finance and procurement can work together to establish contingency budgets and financing that can be deployed if procurement identifies an urgent need, like securing emergency stock or sourcing from a new supplier during a disruption.
Geopolitical Uncertainties
Geopolitical uncertainties can have profound effects on global supply chains, leading to fluctuating costs, tariffs, and trade restrictions. Through close collaboration, procurement can monitor geopolitical developments and assess their potential impact on the supply chain. Finance can then analyse the implications of these risks and adjust strategies accordingly, such as helping procurement with exchange rate modifications to mitigate risk. Technology is a critical enabler of collaboration when it comes to geopolitical uncertainties.
“Our company is able to respond because we have one central system and all the data is available there.”
– Sharad Mantri, Sr. Director of Sourcing and Procurement at Baker Hughes/ISBN.
Take Russia’s invasion of Ukraine for example. Keeping medical supply chains functioning during war requires intelligence and agility. State enterprise Medical Procurement of Ukraine (MPU) had to quickly adapt by reimagining its operations to meet an urgent need for medicines and medical supplies.
By using SAP Business Network, a B2B collaboration platform, MPU’s teams can now tap into a network of more than eight million connected companies across the world to quickly find and engage suppliers of essential goods while minimising the time spent on procurement. This has been especially useful in meeting complex demands caused by the war.
Regulations
Regulations, such as the Corporate Sustainability Reporting Directive and The German Supply Chain Act, require proper disclosure and compliance. Failure to comply negatively impacts the business through costly fines and reputational damage.
Procurement should keep finance abreast of the latest regulations and legislation (with help from the legal team), and make sure everyone understands how each regulation affects spend decisions and supplier management. Procurement and finance must work together to not only change behaviour, but to ensure the proper reporting is in place, and that procurement processes are easily auditable. Tools like SAP Business Network can also increase compliance rates by 30-50% by using technology that enforces regulatory requirements and provides tracking and auditing capabilities for compliance activities.
Looking Ahead
As businesses continue to face complex challenges, the need for a strategic partnership between procurement and finance will only grow. By embracing collaboration and leveraging technology, organisations can navigate uncertainties more effectively, optimise their operations, and achieve their financial goals.
Building a strong relationship between procurement and finance is not just about improving internal processes. It’s also about driving strategic success and better collaboration with suppliers and trading partners. Through better communication, shared goals, and technological integration, these departments can work together to create value and resilience in today’s rapidly changing business landscape.
Presented in partnership with SAP Business Network, Procurious is hosting the ‘Collaborative Procurement – How to Drive Better Financial Resiliency’ webcast on 29th August at 10am AEST. Join Procurious founder Tania Seary as she explores the importance of collaboration between procurement and finance and with suppliers outside your four walls, and how this partnership can help you mitigate risks, manage costs, and enhance supplier relationships with Rob Halsall, Chief Procurement Officer at Transport for NSW and Nate Moon, Global Head of SAP Business Network for Finance.
