The transformation of the Purchasing function into a profit center

Faced with the current economic context, companies are constantly looking for new strategies to optimize their financial performance. One of the emerging trends in business management is the transformation of Purchasing function in a profit center. Once perceived as a simple operational support service, this function has evolved to become a real source of value creation and profit generation for the company. As a result, it is increasingly being seen as a strategic function. The growing recognition of the Purchasing function in the company transform the business: the latter is now seen as one of the “reasons for being” of the company. In this article, we will discover the evolution of the role of The purchasing function, the reasons for this transformation and its implications. We will also explore four models relating the different roles of Corporate purchasing function.

The changing role of the procurement function

The role of Purchasing function within organizations has undergone a significant transformation in recent years. Formerly perceived as a purely transactional or administrative function, it has become a real strategic lever for businesses. This evolution has been motivated by several factors, including profound changes in the economic landscape, the emergence of new challenges and the adoption of new practices.

The evolution of The purchasing function in business took place in three phases:

The traditional transactional purchasing function

In the past, the role of The Purchasing function was primarily focused on operational and transactional tasks. Buyers were responsible for finding suppliers, negotiating prices, managing contracts, processing orders, and ensuring the availability of goods and services needed for business operations. Their main objective was to save on procurement costs, by ensuring that products or services were delivered on time.

However, this transactional dimension of Purchase function often limited it to a subordinate role, relegated to the simple execution of requests from other departments in the company. The purchasing department was rarely involved in strategic decisions, which reduced its contribution to the creation of value for the company.

The emergence of new challenges and trends

Over time, Procurement has faced new challenges and opportunities that have led to the evolution of their role. Among them, we can mention:

• Globalization of markets: The rise of globalization has expanded global procurement opportunities. Procurement has had to adapt to increasingly complex supply chains and manage the risks associated with geographically remote suppliers.
• Changing consumer expectations: modern consumers are more demanding in terms of quality, sustainability and corporate social responsibility. Les Shopping functions must therefore ensure that products and services meet these expectations and choose suppliers who share the same values.
• Innovation and new technologies: the emergence of new technologies such as artificial intelligence, process automation through P2P software, such as Sourcing Force or even data analysis has significantly changed purchasing practices. La Purchasing function must be at the forefront of these innovations to improve efficiency, reduce costs and promote innovation in the company.

The purchasing function has become a strategic hub

Faced with these challenges, businesses have begun to recognize the strategic value of The Purchasing function. They realized that Procurement could play a much bigger role in their overall strategy. They can contribute to the achievement of the company's strategic goals. Here are some key aspects of the strategic role of Procurement:

• Supplier management: one of the missions of The Purchasing function is the selection and management of suppliers. It ensures that the service providers chosen are reliable, competitive and aligned with the values of the company. Supplier relationship management plays a critical role in risk reduction, innovation, and long-term value creation.
• Collaboration with other functions: Purchasing is increasingly working closely with other functions of the company, such as R&D, production and marketing. This collaboration makes it possible to take advantage of the specific knowledge of each function and to ensure that procurement is aligned with overall business goals.
• Data analysis: Purchasing departments are increasingly using data analysis to make informed decisions. By exploiting available information, they can identify opportunities to reduce costs, monitor market trends, assess risks, and optimize procurement processes.

What are the causes of the transformation of the purchasing function in business?

Several factors contributed to the mutation of The Purchasing function in a profit center.

First, competitive pressures and globalization have prompted businesses to look for ways to reduce costs and improve competitiveness. Purchasing can play a key role in optimizing expenses and finding suppliers who offer innovative and profitable solutions.

By taking a strategic approach, they can identify opportunities for significant cost reduction. This will be possible through negotiations with suppliers, the establishment of advantageous contracts, the optimization of procurement processes, the reduction of inventories and the search for more profitable sources of supply. By generating savings, The Purchasing function contributes directly to the profitability of the business.

Then there is digitalization. The latter has profoundly changed the Purchasing landscape. New technologies allow businesses to make greater use of cost data, optimize procurement processes, and make more informed decisions. In addition to the savings it generates, the digitization of purchases is also a vector of innovation. It makes it possible to identify new suppliers who can provide innovative ideas and solutions. By creating differentiated products or services, they help businesses stand out from the competition and generate additional revenue.

Finally, the mutation of The purchasing function in the profit center is also motivated by the evolution of consumer expectations. The latter have become more demanding in the expression of their needs: higher quality, greater sustainability, products that respect the environment, a committed and responsible company, etc. All this pushes The purchasing function to adopt a strategic approach that creates value. By doing so, it does not only contribute to the financial results of the company. It also plays a key role in its growth and profitability.

What are the implications of the transformation of the procurement function?

The transformation of The Purchasing function in a profit center has major implications for organizations:

Improving the financial performance of the company

The evolution of the Purchasing function has allowed the company to save money, optimize its costs and maximize its profitability. The purchasing department can play a key role in improving a company's financial performance by adopting a cost control strategy and identifying savings opportunities.

Creation of added value

La Purchasing function is increasingly recognized as a key contributor to the creation of added value for the company. By working in collaboration with other functions, it can foster innovation, improve the quality of products or services, and support the company's competitiveness in the marketplace.

Better risk management

The transformation of The Purchasing function involves the proactive management of supply chain risks. The buyer should identify, assess, and mitigate potential risks, such as stockouts, late deliveries, or quality issues. Effective risk management makes it possible to reduce production stoppages, minimize additional costs and maintain the company's brand image.

Improving the relationship with suppliers

Purchasing must develop strong relationships with suppliers based on trust and collaboration. The evolution of their role implies a more strategic approach to the selection and management of suppliers. By working closely with suppliers, the Purchasing function can promote innovation, improve the quality of products or services, and create long-term partnerships that are beneficial to the business.

Adoption of new technologies

The transformation of The Purchasing function is closely linked to the adoption of new technologies and the exploitation of data. Procurement departments are increasingly using data analysis tools, digital procurement systems, and other technological solutions to improve efficiency. This allows them to gain valuable information about suppliers, costs, performance and risks, which contributes to more strategic management of the procurement process.

Change in mentality and procedure

The mutation of The purchasing function requires a change in mindset and approach. It is indeed a question of moving from a purely operational approach to a strategic and results-oriented approach. Procurement teams must therefore develop new skills in data analysis, negotiation, and supplier relationship management.

In addition, it is essential to strengthen collaboration between the purchasing department and other business functions to implement change in the business ecosystem and foster innovation and the creation of added value.

Some examples of models relating the roles of the purchasing department in the company

Here are 4 models outlining the different roles of Purchasing in an organization, ranging from support to its consideration as a real profit center:

#1 — Impacting profits

This model, the most simplistic, only considers that the savings generated by The purchasing function contribute to higher profits.

Here, the Purchasing department seeks to demonstrate its impact on the company's profits by showing that without Purchasing action, they would have been weaker.

#2 — Define budgets

This model also recognizes the savings generated, but it also defines the budget allocated to Purchases (for supplies, equipment, employees,...) based on previous annual savings.

In addition, the Purchasing function negotiates supplier discounts and can incorporate these into its annual budget.

#3 — Billing for services internally

This model is used by businesses with multiple subsidiaries or franchises. The Purchasing function of the parent company manages the Purchasing conditions for subsidiaries or franchises, and the latter “pay” the Purchasing Department to execute tenders, negotiations, etc.

Subsidiaries or franchisees have a customer/supplier relationship with the parent company's Purchasing Department, and are therefore not obliged to use its services.

#4 — Selling tools and techniques externally

It is the most controversial model. For the performance of its own organization, a Purchasing Department will take the initiative to develop and improve the tools, techniques, technologies, etc. of its process. Then, after a successful implementation internally, he will seek to sell his new tools, techniques,... to other organizations in the form of training, software or other.

The fourth model may work for some organizations, but remains dangerous for the competitiveness of the company in the event of a dispersion of activities.

Our advice? Do not attempt this model unless you have a very close relationship with the management of your company.