Is profit made when you BUY or when you SELL?

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By Bernie van Niekerk

If it is true that "You can't manage what you can't measure"..., then what exactly is the "management objective" with measuring company buyers on the number of purchase orders they process a day?

It is quite possible that this type of measurement could result in buyers buying the company faster and faster into bankruptcy. To me it says: "Don't worry about the strategic impact on the company, just make sure those orders are flowing." It also says" The end users know what they are doing, procurement must just obey!".

Consider this. In a typical large construction company, a 5% reduction in the cost of purchased goods and services would have the same effect of a 67% increase in sales! Talk about the leverage effect of procurement!

This holds especially true for large organisations where their opportunity to grow sales is impaired significantly by the maturity of the market. In one local petroleum company an 8% reduction in procurement costs would have the same effect of firing 30% of the staff. (Perhaps, before a company looks at Down-Sizing its staff, it should look at "Super-Sizing its Procurement Function!)

One medium sized company that I spoke to recently said that their first 1200 procurement transactions buy them less that R3m. The remaining 200 transactions bought them several hundreds of millions. At the majority of large organisations (Based on feedback form more than 90 large companies over the last two years) the situation is as follows:

Usually 90% of the volume of procurement transactions at an organisation make up only 10% of the value. And so, as a result, procurement people have only 10% of their time available to focus on where 90% of the value lies. (Find out how to do this analysis quickly)

Which brings me to the following question. If sales people are incentivised on revenue (and one would hope profitability), should procurement not be incentivised on savings (which equals profitability!), or the strategic impact they are making on the organisation? In fact, buyers should be measured on how they are actively reducing the number of orders (and number of Suppliers for that matter) so that they can have time to optimise the spend. And then be rewarded for the optimisation.

Many accountants seem to have the view that sales people should not get commission... "They should just do their job!, they say. In light of this kind of thinking one can understand why it might be difficult to get people to agree on paying procurement a part of the action.

Then there is also the issue that end users believe that if it were not for them, procurement would have nothing to save! I also know that saying that Procurement should get a cut of the savings will raise some resistance in some companies. What about all the other people that are involved in the process?

But following a commodity team based approach based on strategic sourcing principles can result in the team being rewarded for their efforts as well as the budget holder that helped make the savings happen.

What's in it for me (WIIFM)? - is ultimately what drives us all even if the organisation has a lovely mission and vision statement. If procurement professionals are not rewarded for creating value for the company, and measured appropriately, then the company can only make profit when it SELLS well.

On the other hand if the right mechanisms are in place for procurement to achieve, the company can make a profit even when sales are down and even greater profits when it does SELL well.

BUYING well is one of the greatest strategic advantages a company can have. Is the profit made when you Buy or when you Sell?

Well that depends on what is in it for the Buyer...


To your success! BUY well!

Bernie van Niekerk

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