Crossing the Corridor: When Finance and Procurement Meet in the Middle

Even in scenarios where the two do occasionally work together to examine new suppliers, these ad-hoc conversations often lack the coordination needed to be truly advantageous. They often result from just ‘checking the box’ and running through corporate requirements. When the exercise is just a formality, procurement may not even incorporate finance’s advice into their decisions, leading finance to feel disenfranchised by what they view as an unnecessary drain on resources to provide an opinion without significance.

Yet as many companies have learned the hard way, the need to manage risks in the supply chain is critical to ensuring business continuity. An event such as supplier bankruptcy can halt business operations and impact profitability as well as result in costly re-sourcing initiatives. A portion of the finance team’s resources is therefore well spent supporting procurement’s risk programme to reduce vulnerability and ensure supply continuity. Product delays, operational shutdown, revenue loss from clients and reputational damage are just a few of the potential outcroppings of supply chain disruption.

Suppliers with financial health issues have a higher likelihood of unreliability and command a tremendous amount of attention from procurement professionals. They pose increased risks of default, breach of contractual obligations, or deterioration of their overall quality of goods and services. Conversely, strong suppliers are more likely to make better business decisions for scaling or efficiency, handle expansion opportunities from customers and more easily recover from the potential shocks of their own supplier or other customer issues.

It is not only paramount to assess supplier financial health upon sourcing and selection, but on an ongoing basis as well. Annual reviews – and for the most critical suppliers, quarterly reviews – are necessary. Financial evaluation provides a baseline for understanding the risks posed by suppliers and for this it is crucial that procurement and finance collaborate on the assessment.

 

Rapid Ratings case study

Collaboration 101

Company operations hinge on the abilities of both teams: finance’s analytical skills and financial knowledge are critical to managing costs and financial risks, and supporting profitability. The procurement team’s supplier relationships and understanding of the supply base are equally valuable. Procurement negotiates contracts, monitors supplier performance and risks, develops supplier strategies, manages internal and external expectations, and manages disruptions or hiccups that may occur in the company’s supply chain. Procurement professionals may not have the financial background needed to assess supplier financial health, and thus often rely on supplier payment history, which is insufficient as a gauge. But with finance’s contribution, the resulting collaborative approach helps to ensure business operations run smoothly and costs are controlled.

Finance and procurement professionals typically have contrasting backgrounds and divergent perspectives, which can lead to friction or fundamental miscommunication. However, when they are able to work together the harmony rings obvious: they complement one another well. With a coordinated approach to risk management, the bottom-line benefit is palpable and powerful.

Moving to a model of collaboration, the procurement team would engage finance in all supplier evaluation exercises, for both sourcing initiatives and ongoing risk assessment updates. Instinctively, procurement may shy away from financial assessment for fear that certain uncovered risks could doom the prospect of working with a given supplier. Yet procurement teams are increasingly held accountable for financial risk. Financial assessment is critical to encouraging open dialogue with suppliers, which can ultimately strengthen supplier relationships. It also allows procurement to develop needed contingency plans and ultimately avoid preventable business disruptions.

Senior management needs to mandate the collaborative effort between finance and procurement, in order for the company to reap the benefits. With a mandate in place, a few key steps can help the finance team contribute in a meaningful way:

  • Get involved in sourcing decisions from kickoff: Finance should be consulted in the process of vetting potential suppliers. This allows both sides to contribute ideas proactively, and eliminates the practice of asking finance to weigh in at the last minute to corroborate an already-reached decision or provide ‘check the box’ guidance that will go unheard.
  • Educate procurement on key areas of financial strength and weakness among suppliers: When the procurement team is armed with the right tools, they can gather valuable information from their suppliers. Additionally, when educated by their counterparts in finance, procurement professionals gain the ability to most effectively use the information provided and to engage in an informed, productive cross-functional dialogue.
  • Provide feedback that is easy for non-financial professionals to interpret: The finance team should also be able to coach their procurement counterparts as needed, answer questions, and offer ongoing support, especially during discussions with suppliers relating to financial analysis.

Collaboration allows both finance and procurement to capitalise on one another’s strengths, and ultimately benefits the company as a whole. Effective coordination is invaluable to a company’s need to maintain a comprehensive view of supplier exposure and financial risk, streamline operations, and manage costs.

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