Procurement's Time to Shine

If ever there was a time -- and an opportunity -- for the procurement function to step up and make its voice heard, this has got to be it. With the outlook for the capital markets looking stormy for the foreseeable future, questions about the capacity and viability of cash-strapped suppliers are becoming increasingly urgent. It will be procurement's job to find the answers.

A new survey of almost 600 senior executives by KPMG International identified supplier continuity as the top supply chain risk, cited by 69 percent of respondents. Half of the respondents were procurement or supply chain professionals, but the poll also included a range of other decision-makers, including CEOs, CFOs, and COOs.

Even before the present crisis, worries about supply continuity had been increasing, according to Samir Khushalani, Houston-based principal in KPMG LLP's Advisory Services. "As more and more companies in the West are relying on companies in the East to fulfill some aspect of their supply chain, the overall supply chain is becoming more complex," he says. "There are instabilities associated with some countries in the low-cost regions, and that risk had already been increasing. And now it's further exacerbated by the credit crunch. It makes for a very volatile situation, and it puts this whole question of supply continuity risk at the very forefront for all financial executives."

The reporting relationship of the procurement function is about equally divided between finance and operations. Yet even for CFOs with direct oversight, procurement is still "pretty peripheral," says Khushalani. But that needs to change. "Externally procured goods and services constitute anywhere between 40 percent and 80 percent of companies' operating costs," he points out. "That's a sizable chunk of change, and an effective procurement function can have a direct impact on it."

So how can procurement enhance its contribution in the current turmoil? Khushalani offers the following tips:

• Proactively monitor the financial health of your suppliers. Perform more diligent and more frequent reviews. Deciding which suppliers you want to monitor takes some thought -- the vast majority of companies have poorly controlled vendor management processes, and suppliers often number in the tens of thousands -- but it's well worth the effort.

You may want to pay special attention to smaller vendors. Many organizations have diversity programs that require them to commit a certain amount of spend to minority and women-owned enterprises, Khushalani notes, and these firms might be particularly impacted by the credit squeeze.

• Diversify your supply base. "There are companies that have literally done sole-sourcing -- and been bitten in the rear by that," says Khushalani. Make sure you're not buying only from India or China.

• Develop a more collaborative model for supplier relationship management. If there's one silver lining for procurement pros in the current crisis, it's the chance to develop closer relationships with suppliers. "In some cases we've seen companies alter payment terms to help their suppliers out of temporary difficulties," says Khushalani "Help them now so that they can help you later." The quality of your supplier relationships can become a competitive advantage that directly impacts your top line.

In the longer term, CFOs and CEOs need to recognize that the procurement function merits a boardroom seat, argues Khushalani. It's justified by the function's top-line and bottom-line impact and its increasing strategic importance in areas such as globalization and sustainability.

The KPMG advisory "Beyond Purchasing: Next Steps for the Procurement Profession" explores the growing influence of the function and the major issues procurement pros face. It's available here.