A letter to the CFO/CIO of Product Manufacturing Companies

To the CFO/CIO,

How was the last purchase order made?

Does your current system show how the supplier for that item was selected and the contract finalized?

A recent incident at a large Auto manufacturer where some senior folks from procurement were let out by a whistle-blower for inflating costs of parts and inflating the settled rates of raw material commodities caught my attention.

As a small business CEO, I realize that even a single dollar is critical. So for any company that is dealing in millions or billions, even small changes in pennies would add up.

Yet, when we talk to people in decision-making roles in Sourcing and Procurement, the most common response we get is “We trust our buyers and suppliers”. Trust is a great virtue, but is only as strong as the first breach that is detected.

My question to those in the roles of Head of IT, Head of Finance, and Governance is: Are you willing to wait to find out that something has happened?

Let’s say we are working with a bunch of highly trustworthy professionals. Have you, however, considered the other non-intentional but natural behavioral and situational factors that may create the same impact?

For example, our business is about procurement, sourcing, and supply chain. So, we talk to people in such roles 24×7 and across the world. Irrespective of whether we talk to people in Europe, North America, or Asia, folks in these professions are the busiest set of people I have come across in my 25 years of professional experience. And honestly, rallying the supply base to get all the items at the right Time, Cost, and Quality consistently every day over several years is not an easy task by any means.

Given such a consistent and heavy workload, how can we expect that a few things here and there may not be missed?

Another common situation could be procrastination on non-emergency activities versus attention to immediate production and other operational priorities. In such situations too, wouldn’t you agree that a few pennies here and there may get missed out?

Another common statement we hear is that the cost of action far outweighs the benefits. It may seem logical and acceptable in the context of one item that the action taken does not justify the benefits.

However, when you look at the situation across the company and the consolidated impact, it becomes quite significant. My question to the C – level: How long are you going to allow this given that direct material adds up to 70% of the total revenue? I expect that your immediate response would be to point to the ERP system. And the question again is,  do you know how the procurement and sourcing decisions are made before the purchase orders come into the system?

ERP is only step 1 of the journey. There is so much beyond ERP when you look at ensuring visibility, compliance, governance, and control in the Direct Material Procurement / Purchasing Life-cycle.

I’ll be happy to discuss this in more detail. Please write to [email protected]