Dive Brief:

• Nearly half of the finance leaders and 31% of procurement leaders recently surveyed by Protiviti believe just up to 20% of procurement savings reach the bottom line.
• The survey reveals a disconnect between many companies’ finance and procurement departments, stemming from a lack of communication over the value of spend reduction initiatives.
• Most of the 16% of procurement departments that were seen as “profit centers” by executives use spend analysis, or other cost-tracking tools, and include cash flow and working capital as key goals.

Dive Insight:

Procurement savings do hit the bottom line.

A company’s income statement includes an entry titled cost of goods sold (COGS), a calculation of direct costs that includes the labor and material costs associated with the production of goods. While an aggregate number, it includes a direct correlation to the performance of the procurement department as all material costs are factored in.

Parsing and calculating cost savings obtained by a procurement department is tough to calculate, manage, and track, and there is very little consistency in how companies do it. Some may calculate savings, or increases, based on last purchase order price. Others may base the calculation on standard cost, an annual calculation provided by a finance department that may include some overhead burden, as it is a method to calculate inventory value. Others may be tracked on performance to costs averaged over a period of time. 

Supply and demand also play a large role in cost savings. During the growth phase of a product, increased quantities typically result in lower unit costs. Conversely, a product in decline results in lower quantities purchased and higher unit costs. The laws of economics may have a greater effect on cost than most finance organizations care to admit.

Yet, the relationship between the finance and procurement organizations is a critical one. From a tactical standpoint, prompt and accurate payment to suppliers is fundamental to maintaining strong supplier performance. Strategically, finance departments who work collaboratively with procurement organizations and suppliers to understand cost issues and provide support with financial analysis and modeling contribute to the overall performance of the company.

The transition from scorekeeper to partner goes a long way to improving overall company performance, which is reflected directly in the COGS.