Where should procurement report?

Should this question be put to senior procurement practitioners the three most common answers may very well be: CFO, COO and CEO.  The general perception is that procurement probably reports to the CFO more than to any other position, even though that is probably not so for larger organisations¹.  But is this the optimal place to be?

One should start, logically, with asking what the primary purpose of procurement is.  And that surely cannot be anything else but to support operations in producing whatever it is the business produces, by ensuring that the materials and services needed by the operation are available.  And in doing so it will be contributing to maximising profit, inter alia by focusing also on minimising total cost.  The "purpose" of procurement is, however, not to minimise cost - that is one of its duties in pursuing its purpose.

If that is accepted, one can consider how best to position procurement in the organisation.  Again the logical suggestion would be that they should be placed in the position that would create the best environment for close co-operation with those that they have to support, so as to ensure the smooth operation of the production facilities.  Naturally they would observe all rules and guidelines laid down by the organisation, including those of finance, but their role typically does not require constant interaction with any other function at the same level of intensity as required by operations, be it production, engineering, maintenance or whatever.

The default position, therefore, should be that procurement should report to the board member responsible for operations, including production - often called the COO, Technical Director, Production Director or similar.  There will always be situations where it will be argued that in a specific organisation the default position should not apply, and there may ostensibly be good reasons in support of such argumentation.  However, should you accept the above logic, these reasons should be challenged in terms of their validity and necessity.

Should it be argued that procurement should report to another business function, typically finance, it should be recognised that there are many internal "borders" within an organisation, and that the functional borders (as one of the types) are, of course, very defined and clear, and are, therefore, very prominent.  As such they create barriers in the best of cases, and silos in the worst.  And these barriers create a climate where friction increases and co-operation decreases.  It is hard to imagine an argument that can overcome these objections.  Yet the reality is that procurement is often controlled from the other side of the border of the function it serves primarily.

Why would "working across the border" create friction, and prevent procurement from fulfilling their purpose?  Simply because the purpose and focus of finance is not to produce that which generates the income of the business, but to manage the business's funds, primarily through sourcing and preserving same.  Immediately there is a conflict, as production has to spend money to be successful, and finance has to preserve money to be successful.  A CPO reporting to a CFO, therefore, is between the proverbial rock and a hard place.  It is really as simple as that. 

 A brief examination of the essential and critical elements of the role of procurement, as relevant to the question this article poses, highlights the need for procurement to be close to its primary internal customer, and may help to make the above more palatable for supporters of finance-led procurement (this list is not meant to be exhaustive):

• The CPO should, of course, support those in production by ensuring that the materials and services, fit-for-purpose, are available when required in the production process - this is the purpose of procurement, and can only be over-ruled by the person in charge of production where deemed appropriate, an unlikely but not impossible scenario.  Clearly liaison with production and inventory management is critical;
• The CPO should endeavour to minimise the total cost of production, in such a way that profit is maximised.  Such reduction need not come from a reduction in purchase price and may, therefore, ostensibly fly in the face of the finance-driven preservation of money objective.  The opportunities in this regard are too numerous to discuss under this topic.  Liaison with production staff, technical product / service experts and suppliers is critical.  Assistance from finance may be required but in most cases these skills should be present within the procurement structure, limiting finance's role to confirmation, either at the time or post facto through internal audit;
• The CPO should ensure that the safety of staff and assets are not compromised through purchasing decisions.  Liaison with production staff, technical product / service experts and suppliers are critical.
• The CPO should ensure that products or services acquired conform to internal and external requirements (laws, regulations, guidelines etc.) regarding the protection of the environment.  Liaison with production staff, technical product / service experts (including environmental advisers) and suppliers is critical
• The CPO should ensure that other legal requirements related to the procurement of materials and services are complied with.  Liaison across the organisation, and external, as appropriate, is critical.

It is hopefully not even necessary to discuss the question of level of seniority of the - within operations the head of procurement should have the same level of access to the board member responsible for production as any other operational area, for very obvious reasons.

Lastly, should procurement perhaps report to the CEO?  Many will see this as proof that procurement "has finally arrived".  But in all probability it is not a good idea.  Consider procurement's purpose as discussed above, and see that in the context of the barriers-argument advanced.  Add to that the reality that all CxO positions are not created equal.  It should be obvious that procurement will achieve much more when reporting to the same person as the operations they serve.  AB

Footnote

1. A KPMG report of 2011 (sample size of 322 FORTUNE 500 companies), indicates that more procurement organisations report to the CEO and COO than to the CFO.