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Central Procurement – the Financial Implications

by Nick Mühlemann, Director, Consulting, PwC and Sebastian di Paola, Partner, Global Corporate Treasury Solutions, PwC

Procurement is the purchase of goods and services for consumption in business operations and or resale. The purchase of goods and services accounts for a major component of the costs base of manufacturing, services and retailing companies alike. For this reason, most companies are constantly examining ways to manage procurement more effectively; for many, this means increasing the level of central control over the function. As companies grow, the opportunity to drive benefit from procurement also grows – but so do the challenges, especially where the growth is across national borders.

As companies grow, the opportunity to drive benefit from procurement also grows - but so do the challenges.

The international marketplace is now a fact of business life: value chains span countries and regions and companies have both international supplier and customer bases. In response many companies are centralising control over aspects of their supply chains. For procurement this presents specific challenges, for example how to adopt a low cost country sourcing strategy whilst balancing the need for supply flexibility and managing the risk of continuity of supply, transport cost and lead time. These complex challenges contribute to the drive to centralise control over procurement and take more of these strategic procurement decisions above the individual country level. The centralisation of procurement is typically not a goal in itself, rather a staging point on the journey to a wider supply chain or corporate centralisation programme. However, the structural changes necessary to facilitate this central control can present further opportunities to optimise financial aspects of the business, including a more tax effective structure for procurement and or the wider business.

For the treasurer, initiatives to optimise and centralise procurement processes create some important challenges, but also deliver opportunity. In particular, the impact of centralisation on the nature, visibility and location of commodity exposures means that the organisation needs to consider how commodity risks can most effectively be managed in the new structure. Equally, benefits may arise for treasury in respect of centralised FX hedging, payments and third-party financing arrangements.