Inside Supply Management Magazine
The Monthly Metric: Finance’s Viewpoint
The last two editions of The Monthly Metric addressed the analytics — procurement ROI and procurement savings — that are most important to the C-suite and require supply management practitioners to develop definition and performance-evaluation synergy with the finance department. After all, the financials are the biggest barometer for a business.
With recent installments detailing the relationship between procurement and finance primarily from procurement’s perspective, we feel it’s appropriate to forego discussion of a specific metric this month to provide equal time to finance.
Debbie Fogel-Monnissen, CFO at Institute for Supply Management® (ISM®), has worked in finance in the manufacturing (at Motorola from 1994-99) and technology (at MasterCard from 2002-17) sectors. She says she’s never considered the relationship between procurement and finance a zero-sum game; instead, those departments should work together to be “enablers” of a company’s overall goals. While such procurement performance yardsticks as cost savings should be measured in conjunction with finance, that department need not be viewed as a numbers-crunching killjoy by supply management practitioners.
“We should combine our resources to support the business. Otherwise, you’re just working against each other,” Fogel-Monnissen says. To her, there’s no such thing as stand-alone “procurement metrics” — any department’s performance criteria should be viewed through the lens of an organization’s overall agenda.
It’s easy, but counterproductive, for supply management practitioners to assume that procurement goals are the most important to executives and other departments. Such myopia is one of The Five Worst Practices in Procurement, the title of a white paper by GEP, a Clark, New Jersey-based supply management consultancy.
“Procurement doesn't exist on its own,” Fogel-Monnissen says. “It’s there to support a business objective. So, the metrics should also be based on that. It’s a fundamental philosophy — the order of things.”
What Finance Looks For
The March edition of The Monthly Metric focused on procurement savings, stating that it has the most impact on a supply management practitioner’s performance review. Generating value is an even bigger objective — the objective — for finance. And savings is a part of generating value.
“The hard truth for supply management organizations is that finance is going to win most definition battles,” the March edition stated. “Cost avoidance will likely not be recognized as savings. Neither will contract-negotiation savings. The invoices and financial reports will tell the tale.”
Is that true, in Fogel-Monnissen’s experience? Yes and no.
Cost avoidance was measured by finance at Fogel-Monnissen’s previous companies, she says, but procurement was still expected to meet the cost-savings targets set by the business unit. Also, finance typically includes a critical qualifier: “real” cost avoidance. For example, a vendor bids (US)$20 million, and procurement negotiates it down to $15 million. That could be considered a savings of $5 million, but if it's a new expense, the company is still spending $15 million. To the finance department, true cost avoidance occurs when a company needs materials, and procurement negotiates for the same quality at lower than market price. “Cost avoidance should be real — spend that is truly necessary and is more competitive than the market,” Fogel-Monnissen says.
Since finance professionals are well-versed in their own metrics, she says, they can help procurement practitioners. As PricewaterhouseCoopers (PwC), the London-based professional services giant, points out in its 2016 publication Finance & Procurement: Optimizing Performance Through Collaboration, finance has evolved from being merely a bookkeeper to perhaps the most important function to a company’s CEO. And finance has done this, in part, by harnessing advanced analytics — something to emulate for procurement organizations longing to earn the trust of executives and be involved in a company’s decision-making process.
“We're good with data, analytics, and our instincts are worth leveraging when looking for low-hanging fruit,” Fogel-Monnissen says. “There's a lot of insight there to tap.”
The procurement and finance departments “should be like a married couple, where they support one another through the good and the bad times,” Michael Wunderbaldinger, CFO and COO of Tecom Group, a Dubai, United Arab Emirates-based business-community developer, says in the aforementioned PwC publication.
Fogel-Monnissen helped foster such organizational teamwork at Motorola, where she worked in various capacities for the company’s semiconductor sector. When raw materials were purchased from suppliers in other countries, finance played a key role during negotiations, helping determine payment currency risk. Cost savings were important, she says, but inventory and production metrics were also critical.
“We had weekly operating metrics that looked at unit cost, volume output and quality where there were standard measurements,” Fogel-Monnissen says. “The people on my team, the financial analysts, were working with the procurement team on the data. Everybody was staring at the same thing. There was no ‘my data’ and ‘your data.’ We were working toward common goals — the goals for the plant, which were more output and lower unit costs.”
In the March edition of The Monthly Metric, Mark A. Crowder, C.P.M., a specialist master at Deloitte Consulting who is based in Chattanooga, Tennessee, said that it’s vital to foster collaboration with finance before performance tracking begins so “there are no surprises.” Fogel-Monnissen takes that advice even further.
“I would definitely echo working side-by-side and not sitting in a corner in your own office,” Fogel-Monnissen says. “It helps to really understand the business, even going to work outside of procurement, spending time in finance or even manufacturing. The more you're in their shoes, the better you understand the day-to-day challenges. That will make you better at procurement. It's really that simple.”
And it’s also a good way to raise the visibility of procurement in an organization.
We’ll resume diving into the waters of procurement metrics — remember, think of them in terms of overall company objectives — in the May edition of The Monthly Metric. To suggest an analytic to be covered in the future, leave a comment on this page, email me at email@example.com or contact us on Twitter: @ISM_Magazine.