Like the question that led up to the article “What Is Supply Chain Management, Anyway?“, I have commonly gotten questions like “To whom should Purchasing report?”
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My answer: it depends.
To whom the purchasing function reports to can be different from company to company, and that’s OK.
To simplify it, if the company sees Purchasing’s primary role as delivering cost savings, the company generally positions Purchasing under Finance, reporting up to the Chief Financial Officer. If the company sees Purchasing’s primary role as supporting operations (through assuring continuity of supply, reducing risk, etc.), then the company generally positions Purchasing under Operations/Supply Chain Management, reporting up to the Chief Operations Officer or VP of Supply Chain.
As another generalization, in manufacturing I see Purchasing more commonly reporting to Operations/Supply Chain Management and in service industries Purchasing more commonly reporting to Finance.
Comments
Hey Charles,
Regardless of the type of company, can you give me some arguments as to why it would be best if the purchasing department reports to the CFO rather than to the COO or any other executives for that matter.
Thanks
One of the most compelling reasons why Purchasing should report to the CFO is that it serves to best align Purchasing’s performance with the financial performance and priorities of the company.
Hey Charles,
Suppose I have a small start up company, would it be accurate for me to argue that since we are a young company our priority should be in cost saving. Therefore it is in everyones best interest that the purchasing department is under the CFO; so that purchasing would always be in the same wavelength as to the financial condition of the company.
Actually – and this is just an opinion here – I think that cost savings is less important in a small startup company vs. a mature company.
There are a couple of reasons for this.
As a company is growing, it is depending more on increasing sales as a driver of profit improvements. Mature companies have usually reached somewhat of a plateau in revenues, so have to rely on decreasing costs for profit improvements.
Secondly, small companies will have less history of previous year’s pricing. They are more likely to buy new things that they didn’t buy in previous years, making year-over-year savings difficult to calculate.
Third, the focus in a small company is on keeping up with a rapid pace of growth in order to continue winning customers and gaining market share, so the operational benefits of a procurement department may be more beneficial than the financial ones.
All that being said, it is still of benefit when Purchasing reports to the CFO so that Purchasing’s activities are aligned with the financial goals of the company.
Hey Charles,
Thanks for all your input. I greatly appreciate them.
Regards
Ed Levitra here from New York. Your blog is one of the best! Thanks for such wonderful post. I have subscribed to your post. Thanks again
Wes,
As a rule, no.
A purchasing manager reporting to the production manager typically produces results where the only thing that matters is on-time delivery, often at the expense of other factors. Purchasing and Production, therefore in my opinion, should be peers on the org chart and either both report to the COO, who can balance purchasing initiatives, or have the Production report to the COO and Purchasing report to the CFO.
It all depends on the culture of the organization for the optimal arrangement and what works well for one company may work poorly for others.
Do you think the purchasing manager should report to the production manager?