How to Turn Procurement into a Profit Center for Your Business
Three years ago, I wrote in "The Technology Procurement Handbook":
My message was that procurement strategy must transform in line with Industry 4.0 requirements or be dissolved by cost-cutting and new technologies.
It still sounds above right but needs practical advice on achieving such transformation.
So, here it is: procurement must become the profit center.
Notably, a profit center is a cost center but not vice versa.
The following article elegantly explains important distinctions that matter to people employed there.
Your company will invest in your growth as long as you earn and create. If you comply and obey, be prepared to go with the wind of technological changes or an inevitable right-sizing campaign.
Below is a summary of the crucial differences between the two types of centers.
In this post, we described many ways procurement generates revenues, e.g., reciprocal buying, subleases, co-marketing, revenue share, and sale of obsolete assets.
In addition, we should develop a functional strategy that is deeply integrated with the corporate one. Then, we should stop measuring ourselves by the outcome of sourcing efforts (efficiency) but by the success of strategy execution (effectiveness.)
Our KPIs must demonstrate the procurement contribution to the critical business metrics – not just COGS but profit margins. Further, we may show the time-to-market cycle improvement, employee satisfaction resulting in improved retention, inventory turnover, etc.
Procurement savings must reflect upon budgets. We'd instead commit to 2-3% price erosion upfront than get shaking the purse with 10+ percent later, which makes no one better off.
Our area of influence should be wide enough to enable the deep search for efficiencies and innovations.
Easier said than done, but it still looks achievable.
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"Three horsemen of Apocalypse – decentralization, automation, and outsourcing – entered the realms of procurement and conquered the transactional and presentation layer. They're further aiming at category management, reporting, and operational SRM; the closer you're to the center, the safer your job is."
My message was that procurement strategy must transform in line with Industry 4.0 requirements or be dissolved by cost-cutting and new technologies.
It still sounds above right but needs practical advice on achieving such transformation.
So, here it is: procurement must become the profit center.
Profit center vs. cost center
I needn't explain these two centers' differences – the names say it all. Some earn money to spend, and some spend other people's revenues.Notably, a profit center is a cost center but not vice versa.
The following article elegantly explains important distinctions that matter to people employed there.
Your company will invest in your growth as long as you earn and create. If you comply and obey, be prepared to go with the wind of technological changes or an inevitable right-sizing campaign.
Below is a summary of the crucial differences between the two types of centers.
When I worked on it, I suddenly realized why many procurement departments need more functional strategies or ambition to develop it.
They're still comfortable being a cost center and protecting their glebe, which can be done without strategizing.
Procurement strategy of becoming a profit center
Logically, to become a profit center, procurement performance must reflect on the company's bottom line.
In this post, we described many ways procurement generates revenues, e.g., reciprocal buying, subleases, co-marketing, revenue share, and sale of obsolete assets.
In addition, we should develop a functional strategy that is deeply integrated with the corporate one. Then, we should stop measuring ourselves by the outcome of sourcing efforts (efficiency) but by the success of strategy execution (effectiveness.)
Our KPIs must demonstrate the procurement contribution to the critical business metrics – not just COGS but profit margins. Further, we may show the time-to-market cycle improvement, employee satisfaction resulting in improved retention, inventory turnover, etc.
Procurement savings must reflect upon budgets. We'd instead commit to 2-3% price erosion upfront than get shaking the purse with 10+ percent later, which makes no one better off.
Our area of influence should be wide enough to enable the deep search for efficiencies and innovations.
Easier said than done, but it still looks achievable.
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More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
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