How to Use Financial Statement Analysis for good procurement?

By Fathi
S. Matbaq
The financial statement analysis for procurement managers was a
professional secret for a long period but now it will be revealed, and you
will not find anything similar to this article in the internet or major
libraries.
As a material and purchasing manager I have faced many situations that
demands me to extensively analyze several financial statements of major
corporations in order to get a clear idea about their current financial
position, market strategies, expanding/discontinuing activities and future
orientations. Outcomes of this analysis; used it to get a better prices,
terms , contracts, and even better quality with lower prices.
Audited Financial Statements and Shareholders' statement have many
hidden information that it can be used effectively in negotiation process.
These statement are available quarterly and annually in the internet but
you have to take some time to analyze them. How it can be done? In this
article I will explain how you can do it.
This article is great for strategic procurement, high value purchasing,
indirect procurement, proactive procurement, and for companies that have
short list of suppliers with good and strategic relationship.
In addition, in this article we will know whether it's better for a corporation
to hire a person with engineering background or commerce background as
procurement manager or supervisor!

What is Strategic Purchasing?

Strategic purchasing is the process of planning, implementing,
evaluating, and controlling strategic and operating purchasing decisions
for directing all activities of the purchasing function toward opportunities
consistent with the firm's capabilities to achieve its longterm goals by
Carr and Smeltzer (1997).
As shown in the definition, the strategic purchasing process consist of
Planning, Implementing, evaluating, and controlling purchasing activities.
In this article; the major part of it, is focusing on the planning process
which is the most important step in my experience and opinion. In modern
management and marketing , it's well-known that there is a direct
relationship between planning and results, good planning equals excellent
results. Also, in purchasing, the more time you spent in planning the more
positive outcomes you will get. As a purchasing manager I spend more
than 40% of my time in planning and in some projects I spend 60%. The
major factor to you to success in procurement is that you spend more time
in planning. However, It's not the only factor, if you have a good plan but
poor implementing (poor negotiation skills), it's obvious that you will have
poor results. Planning is one part of a comprehensive system that every
step is related to other and each one is completing each other.
The purchasing strategy is a part of the overall corporate strategy, and
planning process within purchasing strategy is different from planning
process with corporate strategy. Ellram and Carr (1994) define four stages
of purchasing organization related to the level of strategy development.
The four stages are:
Stage I is a passive stage, in this stage the purchasing process normally
begins as a reactor based on requests from other departments in a
corporate organization. Many of the purchasing activities and processes
are handled by totally other functions than pure purchasing functions
within the corporate organization (Ellram, et al., 1994).
Stage II is an independent stage where the purchasing departments spend
considerable time attempting to professionalize the own purchasing
function by introducing such things as computerized information systems,
formalized supplier programs and communication links (Ellram, et al.,
1994).
Stage III is a supportive stage where the purchasing departments are
viewed by top management as an essential business functions. The
purchasing organization is expected to support and strengthen the firms
competitive advantage by providing timely information to all surrounding
departments in the firm about for example potential changes in the price

and availability of goods and services which may impact the firms
strategic goals (Ellram, et al., 1994).
Stage IV is the integrative stage, in this stage the firms competitive
success rests significantly on the capabilities of the purchasing
departments personnel. The purchasing departments role within the firm
is also changed from facilitator to functional and this development process
must be implemented, significant supported and guided by management.
The longterm perspective is also of great important regarding
development to this stage (Ellram, et al., 1994).