Procurement savings 'don't reach bottom line'

28 July 2017

Procurement’s “rosy” view of what the function contributes to an organisation’s bottom line is often not shared by their colleagues in finance, a survey has found.

According to a study by consultancy Protiviti, nearly half of finance leaders claim that 20% or less of procurement savings wind up contributing to their companies’ bottom line.

The report, Bridging the Gap between Finance and Procurement, surveyed 440 finance and procurement executives.

Half (48%) of finance leaders believe that 20% or less of savings achieved by procurement dropped to the bottom line, whereas only 31% of procurement leaders thought the same.

Protiviti said it had been motivated to carry out the study after observing that procurement tended to have a “rosier view” of its own performance than finance.

Perceived shortcomings in the way procurement functions track and communicate savings, how they collaborate with finance departments and how they work with the wider business were responsible for the disconnect.

Some 41% of those surveyed said that although procurement savings were being tracked the measurement and value of savings were not being articulated across the organisation.

Overall, less than half of respondents tracked absolute savings.

A third (35%) of procurement leaders rate their function’s sourcing process in delivering value and cost savings as “very effective”. But only 20% of finance leaders shared this opinion.

Just over one in three respondents viewed the working relationship between finance and procurement as collaborative.

“Our research showed that most organisations need to work on savings-to-P&L traceability,” said Tony Abel, a Protiviti managing director and a leader within the supply chain practice.

Only 16% of respondents said procurement departments were viewed internally as profit centres.

Profit centres were characterised by high use of spend analysis within budgeting and planning functions, use of third-party tools to conduct spend analyses and the tracking of procurement savings.

Top-performing procurement functions also tended to have a centralised department, which offers a higher level of strategic alignment with finance and other functions, said the report.

When respondents were asked the primary causes of savings not dropping to the bottom line, the most common reason given was budgets not being enforced and savings being spent in other areas.

This was followed by realised savings not being effectively tracked, calculated savings not being realistic or accurate and changes in specifications.

Other reasons included savings being based on purchase price, while other costs such as total cost of ownership were increasing, invalid savings assumptions and poor demand management.

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