CFOs Should View CPOs as 'Gatekeepers' to the Supply Chain

20 Nov 09

"The supply chain is a gigantic source of risk to us...we are exposed to a collapse in our business delivery if this breaks down" [CFO]

"The supply chain is critical and we are all guilty of not watching it closely enough" [CPO]

Despite the similarity in emphasis on the centrality of the supply chain for business, there is a fractious rift between many finance and procurement departments, with chief financial officers (CFOs) overlooking the role chief procurement officers (CPOs) play as 'gatekeepers' to the supply chain. According to recent research by Professor Adrian Done, IESE business school, and Basware, a purchase-to-pay solutions firm, the gap persists even though supply chain risk has significantly increased due to the economic climate and years of severe cost cutting.

This qualitative report, following a quantitative study of 550 CFOs conducted in June 2009, provides insight into how large organisations are struggling with risk evaluation and cost control. Indepth interviews with 20 CFO/CPOs in continental Europe, the UK and US reveal that cost control and reduction has become 'the new normal' going into 2010, with the urgency for reactive cost cutting measures continuing to supersede longer term investment driven directives. The report also identifies a growing trend for increased levels of finance and procurement collaboration, as well as transparency among businesses seeking to overcome finance and purchasing challenges.

In an interview with gtnews, Done said: "CFOs have finally woken up to supply chain risk. What they are not aware of is that there is a function within their company that is a 'gatekeeper' to the supply chain. The July survey revealed that only 17% of CFOs think that CPOs belong on the board and only 28% feel that the procurement function can help to reduce supply based risk - this is staggering. How else are you going to reduce supply chain risk other than through your own procurement or sourcing department?" A contributing factor to this situation, he believes, is a communication breakdown between the two departments, which should be working together in order to get the supply chain under control and leverage the benefits.

In addition, Done voiced concern that businesses are focused solely on the large risk events and not paying attention to the slow fading away of small suppliers. "Businesses are looking for 'tsunami' events in the supply chain but failing to keep track of the 'soil erosion' that takes place day-to-day. This mentality is a big disruption as decision makers fail to see the sequential risks of suppliers struggling to meet demands, while obsessing about discrete insolvency episodes and their impact on short-term operations," he said.

To help tackle these challenges, Basware recommends a three-point plan for CFOs and CPOs alike:

As cost cutting options narrow, finance and procurement must use each department's expertise to find a way forward. CFOs need the knowledge residing in the realm of the CPO to fully grasp the issues involved, and likewise, CPOs will need to take a more active part in formulating corporate strategy and be more innovative in its execution across the supply chain.

It is imperative that organisations push levels of spend visibility, cost transparency and general openness to unprecedented levels in order to unleash significant new areas of cost savings. Only once an organisation has 100% spend visibility - both direct and indirect - can they make informed and effective financial decisions.

Develop integrated and collaborative relationships with first and second tier suppliers to better evaluate and control risk in the supply chain. Fostering closer relationships with preferred suppliers will enable an organisation to tap into supplier expertise to identify the source of potential threats.

First published on www.gtnews.com