To enhance financial sustainability, businesses should consider bringing procurement into a strategic sphere by expanding its role, redefining its span of influence and positioning it as an equally vital arm to achieve business objectives. Hassan Iftikhar, Supply Chain Manager, Network Aviation Australia and Network Turbine Solutions, writes for PASA.
Businesses across the board fully understand, weigh and underscore the importance of sales to breathe and stay alive. However, on the same note, it is disturbing to see how the importance of procurement isn’t envisaged as a central pillar for survival in the scheme of things surrounding a competitive market place.
It’s well understood that business is primarily reliant on healthy sales to be viable and should inspire to continually improve the gap between revenue and cost of goods – to make it profitable. However, it is often forgotten that there are two components to profitability. Sales & Cost.
If one element has to go up other must go down. It is noticeable that often businesses strive hard to increase sales but fails to recognize the veiled cost as an obstacle. Management tends to divert their focus on business sales and marketing and neglect cost element. Or in some cases, businesses claim to adopt cost conscious approach in their own opinion but most of them fail to establish the root causes.
This ignorance is often contributed by lack of appreciation, resources and professional approach deserved by the cost element. Procurement – one of the main drivers of cost is generally positioned outside the strategic sphere and consulted less as a natural choice to be a baton bearer to drive cost related strategies. Cost element thus finds no umbrella to nourish once it comes to introducing new projects, initiatives and continuous cost improvement programs.
Cost has varying roots – some are visible and some are not. Often businesses get imprudent in appreciating the cost that accumulate & funnel through non standard practices that result in driving the cost upward. They concentrate more on the visible costs but fail to appreciate the hidden and underground practices that stimulate the cost factor as a whole.
Generally, the product variance among the competitors is often marginal. Business with the small positive margin gets the sales. Similarly for cost, the business who is able to reveal and mitigate the invisible marginal cost – is the winner.
The success of the efficient business is a result of having effective controls up to the grass root level to identify waste – being one of the main ingredients behind key cost factor. Efficient cost practices are like effective solutions originating from the operational level through people involvement. It is estimated that about 70% of the revenue generated by the business is reinvested in purchase of goods and services. Procurement, the end spender possesses that default insight through its central position with in the business to appreciate, negotiate and maintain a fine cost balance.
Cost reduction appears to be a difficult task but relatively easy to achieve. A sale is dependent on the external factors such as customers and market dynamics which are beyond business control where as, cost is directly linked with employees and processes and easy to exercise influence. Convincing a buyer is harder but much easier to inspire an employee to achieve cost targets.
We commonly hear about the sale center but barely know about the cost center. A sale is a specialized area and cost is every ones responsibility. Albeit making cost everyone’s responsibility has its own wisdom but perhaps that’s also where the problem is- making every one responsible leads to no one responsibility. Cost drive is similar to sales drive that needs focus, expertise, methodology and a free hand. Business seems united once it comes to challenging competitors but seems fragmented once the finger turns inward. Cost drive tends to kindle rift among various functions of an organization as every one seems to posses a mastery of cost and need no advice. It’s a term that everyone’s seems to have a full understanding. A sale is unanimously accepted as a commercial term that is holy and not every one has the required knowledge and expertise and therefore can only be dealt by specialized minds. Cost on the contrary is a techno-commerce term. It often receive varying inputs from all corners and silently end-up with no one’s responsibility. In addition, the first part of the term “techno” takes it far into the deserts of technocracy that not every one seems to have an understanding and dare challenge. Unlike Sales, it’s a boat with no captain. The best fit for this role is Technical Procurement that can act as a nexus – by being part of both worlds (techo & commerce). Procurement is the best fit and should be given the forum, mandate and voice to highlight areas that they seem to have potential to dry out cost.
Mass flow of information and interaction through modern day technology has given procurement much visibility. It is very much embedded with all the business functional areas through day to day interaction to meet varying level of requirements. It has the know-how and ability to appreciate how waste is produced and more sadly gets undetected in the scheme of affairs.
Surprisingly, the extent of waste information that can be derived is fairly diversified – ranging from surplus demands leading to surplus stock, “better to have” initiatives leading to increased inventory/holding cost, absence of stringent approval processes leading to incorrect ordering – causing waste through buying assets that will attract no usage, lack of planning and last minute buying, varying degree of human acumen and sensitivity to price and commerce, “not my money” behaviors are some of the dimensions that procurement come across on every day basis.
The waste produced in this manner has a constant pace and recurring trend. This potential source of intelligence is often not tapped by management primarily for the reason that it belongs to techno branch of the cost element and often categorized as an unavoidable cost. Bisection of all such practices will bring about massive cultural shift and pave the way for a very efficient cost oriented base.
It can be argued that rocurement has started to get its due recognition and CPOs are getting attraction however, the pace is slow in conjunction with the existing economic environment and competitiveness.
To enhance financial sustainability, businesses should consider bringing procurement in a strategic sphere by expanding its role, redefining its span of influence and positioning it as an equally vital arm to achieve business objectives. This is only possible through better understanding of the cost fabric and having a targeted approach with the right people sitting on the driving seat. Once done, procurement can prove to be a catalyst in nurturing sales and profitability of the company in the long run.
Read more about Network Aviation Group on their website: www.networkaviation.com.au