The Growing Significance of Supply Chain for Global Businesses
by Bertrand de Comminges, Head of Structured Trade Advisory, J.P. Morgan Treasury Services, EMEA
While the concept of ‘strategic sourcing’ has been in vogue for the past ten years or so, in reality the notion has existed since time immemorial. Obtaining goods of the right quality, delivered in the right place, at the right time and at the right price is sound business practice and while the means of achieving this has become more sophisticated, complex, and geographically diverse, this remains the basis of every procurement strategy. This article looks at some of the ways in which the procurement function has evolved, and the strategic role that it now plays. Furthermore, with an efficient physical and financial supply chain now critical to the business success of every organisation, what are the immediate opportunities and benefits of treasury and procurement working more closely together?
The growth of a profession
Procurement officers may be variously known as buyers, purchasers or strategic sourcers, but however these professionals are named, the traditional emphasis has been on negotiating with suppliers in order to reduce or avoid costs. With complex products and services, involving components and raw materials around the globe, one product often combines inputs from hundreds of suppliers. Buying from any one of these at the wrong price can mean that the cost of the final product is undercut by a competitor, which could be a disaster for a major product launch. Order the wrong quantity or at the wrong time, and a company could end up with cash locked in a stockpile or unable to meet consumer demand. Net profit is therefore a key metric in procurement.
Order the wrong quantity or at the wrong time, and a company could end up with cash locked in a stockpile or unable to meet consumer demand.
Since the early 1980s, four different conditions have come into place that have allowed an increase in scope for treasury and procurement professionals. Firstly, the implementation of enterprise resource planning solutions (ERP), secondly an overall increase of political freedom, thirdly the liberation of the capital markets and, last but not least, the access to low cost sourcing countries. These four variables have been the basis for the increase in the complexity and strategic importance of the buying process.
As supply lines continue to extend further into new markets, procurement has become increasingly professionalised, with high calibre, highly qualified executives joining procurement departments, who have contributed to the strategic input that procurement makes to the businesses as a whole. The way that procurement fits into the organisational structure can differ as much as business models differ, with Chief Procurement Officers (CPOs) responsible to the CEO, the head of the relevant region, COO, CTO, CFO or even the Chief Marketing Officer; however, what is important is that CPOs today have a critical role to play in achieving a company’s strategic objectives.
Achieving liquidity and working capital objectives
As procurement becomes more sophisticated, procurement officers are increasingly becoming responsible for the quality of supplies, specific risk management KPIs, and have a major role in supply chain integration. From a treasurer’s perspective, the activities of procurement are key. The issue of a purchase order, receipt of goods and receipt of an invoice are all vital milestones in the financial supply chain as they directly affect working capital metrics, specifically days payable outstanding (DPO). Consequently, from a treasury perspective, there is a strong incentive to work closely with procurement to understand future payment flows.
However, there are potential friction points. These are primarily the result of having different objectives and metrics for measuring success. For example, payment incentives offered by suppliers, such as early payment discounts, may reduce the cost of goods and services and therefore meet procurement’s objectives. On the other hand, reducing DPO may be detrimental to working capital and liquidity management, and therefore compromise treasury’s goal to maintain adequate levels of liquidity and avoid short term borrowing to cover working capital shortages. Treasury therefore needs to understand and be able to influence procurement decision-making that has a potentially negative impact on the group as a whole.