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.

Manage cross-functional trade-offs. CPOs must also measure the efficiency of the organization as a whole and enforce cross-functional decisions. They must ensure that the interests of the whole enterprise are taken into account when deciding to invest in inventory, and manage the inevitable trade-offs that arise from tensions among the company’s key functions.

The Spanish clothing company Inditex is a perfect example of how procurement trade-offs within the value chain have led to success. Its most famous brand, Zara, competes with other mass clothing brands, but rather than inducing customers to buy a lot at once, Zara gets them to buy often. Whereas most fashion brands launch new collections no more than four times a year, Zara rolls out 16 new collections annually. Reducing costs through large-scale purchases would undermine its strategy. Instead, procurement contributes to the brand’s success by ensuring supply network flexibility; it is the kind of feverish pace that requires speedy decisions and strong cross-functional teamwork among procurement, design, manufacturing, logistics, and sales. Having a procurement department with the ability to step up and synthesize cross-functional requirements in an aligned operating model is key to Zara’s success.

By casting procurement in a major role and ensuring it is highly integrated with all of the other functions, Zara has created a strategic advantage that has proved exceptionally difficult for others to replicate. The traditional model of retail procurement is a back-end service function that merely sources fixed designs at the lowest cost, usually irrespective of the delivery lead time. To copy Zara would require top management to recognize purchasing as a strategic function that supports the company’s competitive objectives. Because this operating model is embedded in the company’s culture, the best way to copy such a strategy is to start from scratch.