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(originally published by Booz & Company)


Saving Procurement from Itself

It’s time for chief procurement officers to stop relying solely on functional depth and start increasing functional breadth.

The emergence in the 1980s of strategic sourcing — a concept in which procurement leaders take a holistic approach to their organization’s supply chain and constantly seek to improve purchasing behavior — was a defining moment for procurement, with the potential to transform it from a primarily administrative function to a powerful new force for competitive advantage. Today, however, this reinvention has stalled in many businesses.

Many chief procurement officers (CPOs), chasing short-term stretch goals and facing a lack of interest from other functions, no longer seek to influence the supply chain or strive to tackle the underlying drivers of cost and value. They are increasingly focused inward, implementing sophisticated ways of improving procurement itself but neglecting coordination with the wider organization. Indeed, CPOs have been successful in refining their function. Innovations of the past five years, such as e-procurement, e-auctions, spend analysis, and procurement outsourcing, reflect this attention.

But focusing on cost reduction leaves untouched the significant potential for creating value generated when procurement engages the rest of the business and its suppliers. In today’s business environment, many companies are finding top-line growth elusive. To generate revenue and eliminate costs, they are devising complex business models that will require more sophisticated skills from procurement leaders. It’s time for those leaders to step up to the challenge: Procurement is uniquely positioned to reach out across the organization and the supply chain, pursuing cost reduction, but also emphasizing collaboration, innovation, flexibility, and resilience.

Broadening the Procurement Agenda
Too often, management invites procurement to participate only after decisions have been made and detailed contracts need to be negotiated and drafted. For procurement to be considered more than a functional tool for other departments, CPOs need to build influence and credibility with their internal management colleagues by showing that what they do adds real value. By engaging with peers — that is, by taking a cross-functional approach — procurement can influence the decisions that impact value all along the chain. There are several key ways for CPOs to accomplish this.

Develop a close working relationship with finance. Chief financial officers (CFOs) want procurement to demonstrate clearly how it contributes to value generation. In fact, translating procurement results to the bottom line will continue to be one of the toughest cross-functional challenges CPOs will face over the next five years. To succeed, they must design a procurement performance system that reflects the CFO’s definition of profitability, but that requires finance to look at inputs rather than outputs. The CPO and CFO should meet regularly to review how procurement’s efforts are affecting budgets. Armed with that up-to-date information, the CFO can make the best use of the value created by procurement, and the CPO gets a little well-deserved recognition.

The Lego Group, the world’s fifth-largest toymaker, introduced this collaboration as part of its supply chain transformation. It established a purchasing performance management forum that includes regular meetings between the CPO and CFO (monthly if everything goes according to plan, and weekly or bi-weekly if issues have arisen) to ensure that results hit the bottom line. In the case of one initiative to change packaging, such meetings enabled the team to break down consumption by plant and identify the sources of gaps in performance. Working together, they were able to ensure that in the next month, orders were made at the right quantities and savings leakages were minimized.

However, a recent study by CPO Agenda makes clear that CPOs have their work cut out for them: An online survey of more than 200 CFOs, vice presidents, and directors of finance in North America revealed that only one in five believed procurement’s ability to provide “timely and accurate spend data” was excellent, whereas one-third believed this ability to be poor.

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  1. Hugh Baker and Fabrice Saporito, “Avoiding the Procurement Rabbit Hole,” CPO Agenda, June 2007: The study on which this article was based goes into more detail for industry experts. PDF Download.
  2. Doug Hardman, Simon Harper, and Ashok Notaney, “Keeping Inventory — and Profits — Off the Discount Rack,” Booz Allen Hamilton white paper, February 2007: An in-depth look at Zara’s highly successful collaboration-based operating model. PDF Download.
  3. Bill Jackson and Michael Pfitzmann, “Win-Win Sourcing,” s+b, Summer 2007: Toyota’s knowledge-based sourcing consistently outperforms more traditional procurement models. Click here.
  4. Geraint John, “CFOs Less Than Happy with Procurement’s Performance,” CPO Agenda, May 25, 2007: Procurement and finance should be working together, but in many cases aren’t. Click here.
  5. Keith Oliver, Edouard Samakh, and Peter Heckmann, “Rebuilding Lego, Brick by Brick,” s+b, Autumn 2007: How a supply chain transformation helped put the toymaker back together again. Click here.
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