Procurement-Finance Collaboration: Building consensus to attain a shared objective

Transcription

1 Procurement-Finance Collaboration: Building consensus to attain a shared objective Nick Little, Assistant Director, Executive Development Programs, Eli Broad College of Business, Michigan State University Director, APICS Education & Research Foundation Shailendra Singh Rao, Manager, Product Marketing, Zycus Inc. Tuesday, September 27, PM EDT 1

2 Nick Little Assistant Director, Executive Development Programs, Eli Broad College of Business, Michigan State University Director, APICS Education & Research Foundation Nick is Assistant Director of Executive Development Programs at the Eli Broad College of Business at Michigan State University. He joined MSU in At MSU, Nick designs, develops and delivers customized programs, predominantly in integrated supply chain management and its component disciplines for corporate clients worldwide. He is also currently the chair of the Supply-Chain Council s North America Leadership Team, chaired Supply Chain World North America Conference & Exposition (Baltimore, MD, May 2011). He is an elected member of the APICS Education & Research Board with current role as Treasurer and Company Secretary. He is also a founding member of the global Supply Chain Talent Academic Initiative Nick has extensive industry and international experience in Supply Management and Supply Chain Management including British Rail s prestigious Supplies Management Training Scheme and the UK Post Office where he successfully established a regional and business unit supply management organization. Nick has a Bachelor of Arts in Business Studies from Ealing, CHE in England and professionally, is qualified MCIPS (UK Chartered Institute of Purchasing and Supply) and CPSM from ISM (US). 2

3 Shailendra Singh Rao is Product Marketing Manager at Zycus, a leading provider of Spend Management Solutions. A thought leader and innovator in the field of Spend Analysis, Shailendra has been a key strategist at all the stages of the product lifecycle, from conceptualization to growth. At Zycus, Shailendra helps Global 1000 companies achieve their spend management objectives and streamline procurement processes. Shailendra Singh Rao Manager, Product Marketing, Zycus Inc. Shailendra holds a master's in technology degree from Indian Institute of Technology Mumbai. 3

4 Learning Objectives How procurement can demonstrate the savings it generates in the language of finance Grey areas and reasons for procurement-finance standoff How technology can help attain common goals by closing the communication gap between procurement and finance By understanding the language of finance, procurement can deliver much greater benefits 4

5 Popular C-Level Misconceptions Procurement is only about reducing unit price Savings never reach the bottom line Switching suppliers saves money Low-cost country sourcing has to be the answer Outsourcing is always good for cost management Procurement is merely negotiation by another name! 5

6 Finance/Procurement Integration Practices Strategic commitment Cross-functional sourcing teams for critical goods/services Finance representation on team (credibility of numbers) Team leadership by business units to ensure customer focus Wider remit than mere cost reduction/elimination Suppliers adopt company philosophy and processes Become trusted customer of choice 6

7 Measuring Procurement s Business Contribution Why? More and more organizations have CPOs reporting into CFOs Automation has enabled better visibility and control over data and processes Volatile economic conditions make it imperative to minimize cost 7

8 Current Scenario Savings Management Concept Procurement perceived as a cost center and strives to achieve savings Each organization has its own methodology of measuring savings No way to demonstrate the financial impact of procurement savings Savings Management Process Data pulled in from multiple systems and managed in excel sheet Lack of a collaborative platform to manage the savings Not a transparent process Usually involves multiple stakeholders across the organization- A single project may have as many as stakeholders 8

9 ALL organizations have a savings management process, and EACH PROCESS is DIFFERENT from the other 9

10 Challenges Procurement-Finance disconnect Different savings definition No common baseline for savings measurement Common savings definition and baseline agreed upon by finance and procurement Lack of collaboration No formal process for tracking, reporting and approving savings Track and manage savings across the enterprise by category, business unit, impact type Difficult to demonstrate procurement s impact on company bottom-line Enables procurement to forecast and report savings in terms of impact on company bottom-line 10

11 Benefits Common definition of savings and base-line for savings measurement Enables procurement to demonstrate financial impact of savings Single version of truth ensures transparency into forecasted and achieved savings Enables finance to forecast and book savings into department budget and income statement Track savings across multiple parameters like Business divisions, time Savings type Hard/Soft/Avoidance/Revenue Share etc Strategy Volume, Negotiation etc Stage Forecasted, Realized, Actual, Budget Down, Reinvest etc Monitor performance and take required actions in time 11

12 Five Strategic Supply Management Objectives Reduce Total Cost Timely Availability Quality Foster Social Responsibility Supply Management Innovation 12

13 Look beyond Traditional Savings Procurement can impact: Purchase price (COGS) Inventory (working capital) Accounts payable (cash flow) Asset utilization (balance sheet) Quality (customer satisfaction) On-time delivery (business performance) Etc. Think value not just price or cost Top line revenue not just bottom line 13

14 Talk the CFO Language Relate benefits to strategic success factors such as: Time to market for new products Hitting target costs Supplier design integration Return on capital employed (ROCE) Return on assets (ROA) The strategic profit (DuPont) model framework Measurement and assessment immediately recognized by finance Manages trade-offs (e.g. inventory or discounts for bulk) Business-wide perspective Can be developed as a spreadsheet Can get very complex needs good data management and mapping 14

15 It IS All Related! RETURN ON ASSETS 10% ( PROFIT MARGIN 5% net profit ( ) net sales TIMES ASSET TURNOVER 2 net sales total assets ) PROFIT 100 SALES 2000 SALES 2000 TOTAL ASSETS 1000 GROSS MARGIN TOTAL EXPENSES 400 CURRENT ASSETS FIXED ASSETS 400 SALES COST OF GOODS SOLD 1500 VARIABLE EXPENSES FIXED EXPENSES 100 INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS 100 Price x Quantity Cost of goods x Quantity Transportation Handling Storage Space Promotion etc. 15

16 Simple Example Inventory Reduction RETURN ON ASSETS 11.11% ( PROFIT MARGIN 5% net profit ( ) net sales TIMES ASSET TURNOVER 2.22 net sales total assets ) PROFIT 100 SALES 2000 SALES 2000 TOTAL ASSETS 900 GROSS MARGIN TOTAL EXPENSES 400 CURRENT ASSETS FIXED ASSETS 400 SALES COST OF GOODS SOLD 1500 VARIABLE EXPENSES FIXED EXPENSES 100 INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS 100 Price x Quantity Cost of goods x Quantity Transportation Handling Storage Space Promotion etc. 16

17 Value Drivers for the Framework (examples) Driver Category Profit Margin Asset Turnover Classification Gross Margin Sales COGS Expenses Fixed/Variable Total Assets Current Fixed Supply Chain Value Drivers Price Quantity Material cost,/ inbound freight Packaging Manufacturing Conversion Cost Freight/duties/fees Procurement Administration Storage & Handling Transportation (Non-Freight / Capital) Gen. Admin. / Tech Support Quality costs Returns Management Disposal Costs Raw Material Inventory WIP Inventory Finished Goods Inventory Accounts Receivable Loading / Unloading Equipment Transportation Assets Storage Space Packaging Facilitites/Equipment Manufacturing Facilities/Equipment 17

18 Questions to ask What is the current savings management process? How do you manage the process across so many stakeholders? How do you report the savings to finance? How do you manage to speak a consistent language? How do you demonstrate the financial impact of procurement savings? Do you have an automated platform for managing and reporting savings WITH FINANCE? Are users well-versed with interpretation of savings data generated by this system? 18

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20 Contact Details Nick Little Assistant Director, Executive Development Programs, Eli Broad College of Business, Michigan State University Director, APICS Education & Research Foundation Shailendra Singh Rao Manager, Product Marketing, Zycus Inc. Zycus Inc. 103, Carnegie Center Suite 117 Princeton, NJ Phone: