Whether it sells goods or services, the aim of the business is to make money. If its aim is successful, the money it makes will show as a profit. That means the money it gets from selling to customers is greater than the money it puts into running the business. Money from sales is called revenue. Money put into a business is called overhead.
You could write it as a maths equation: Profit = Revenue — Overhead.
If the revenue is greater than the overhead then the profit is a positive number, and the business makes money. The larger the profit, the happier are the people who work there, especially the boss.
If overhead is greater than the revenue then profit will be a negative number. This means the business is losing money. If it carries on in this way, the business will go bust and the people who work for it will be out of a job. The boss won’t be happy.
So what does this have to do with someone working in procurement? Well, if you look at the equation I gave above, you will see that there are two ways to make the profit as large as possible. First, you can make the revenue as large as possible, by selling as many goods or services as you can. The other way is to make the overhead as small as possible.
That’s where a procurement professional comes in.
We know overhead is the money you put in to run a business, but what is this money used for? Well, whether a business sells goods or services it can’t run on thin air. All businesses need a whole range of things so that they can operate. First, if the business sells goods then these will need to be obtained and stored in a warehouse. For example, a toy business might buy ready-made toys from China and sell them on to shops at a profit. All they need to procure in this case is the means to transport the toys to the shops: these are the trucks and fuel. Also if the business doesn’t own a warehouse then it will need to rent somewhere to store the toys. Taken together these costs give the business its overhead.
To keep the overhead as low as possible, a procurement professional will try to get the lowest price he can for the trucks, fuel and warehouse storage. The same holds true for businesses that sell services. If the procurement professional works for a gardening business, he might try to get the lowest price for the tools and equipment needed. So he would try to get the best deal on lawn mowers, fuel, weed killer, and so on.
Procurement is the act of obtaining equipment, material, and supplies for a business. In effect, the procurement professional buys these items from the best supplier he can find. A lot of money is also spent on keeping the daily activity of a business going. When you start to think about it, there is an almost endless amount of materials, tools, and equipment needed to ensure the business runs smoothly. (Oh, and to keep the boss happy!)
Remember too, a business is in competition with other businesses selling the same goods or services. It’s often not enough to only make a profit. Sometimes, if the market is tough, the business has to make more money than its competitors to ensure it stays in business. A good professional buys everything he needs to keep the business running at the lowest cost possible. He does this to maximize profits and keep the business competitive. There are several ways to reduce these costs, which we will look at later.
First, let’s examine the kind of things a procurement professional buys. The following is not an exhaustive list but will give you a good idea of how versatile a procurement professional must be. We mentioned trucks above; these also need to be maintained and repaired by someone. That’s another cost to factor into the overhead. Office buildings need regular maintenance, as well as cleaning.Then there’s all the office equipment and furnishings. Desks, chairs, pens, paper, printers, water coolers, and phones. The building needs to be heated and phone lines installed and maintained. Drinking water and kitchen facilities also must be supplied. Staff costs money too. There are their salaries; but it can cost a lot of money to find them and train them up. These days most businesses use computers with accounts and sales software. Every business also needs a website these days, which are not often cheap to set up. IT costs can quickly escalate, which is why a good procurement professional needs to have at least a basic understanding of computing. In fact, procurement professionals need to be very versatile. They need to have knowledge of many different areas, from computers to trucks, from building maintenance to HR. The list is endless, and they also have to juggle hundreds of different suppliers in their heads. A supplier who sells stationery won’t sell headlights for trucks too. A procurement professional has to be able to strike deals with dozens of different suppliers every day. That can mean lots of phone calls and meetings.
Procurement professionals also need to be able to use often quite hi-tech software. To access current prices and manage inventory, procurement professionals need to be data analysts. They must be able to sift through price and availability data in real time. This enables them to increase efficiencies and get the best prices. Scouring online e-auctions also gives them easy access to the cheapest services worldwide.
But it’s not all about using software and the web, procurement professionals need other skills. They must also be great communicators, as well as tough negotiators. A computer doesn’t have the ability to bargain for the best terms with suppliers. It can’t draw up a tender for services to select the best supplier. Nor can it advise and influence budget holders and those who make the big decisions. It takes a real person to do that. A procurement professional communicates both internally and externally. Internally to the company’s stakeholders, and externally to a large range of suppliers. The procurement saves companies money by keeping the money it needs to operate as low as possible. The costs of running a business can be as high as a third of the total overhead. This is why procurement professionals are highly valued within their company (as long as they keep their boss happy!)
Creating Value through Procurement