Is Procurement a Cost center or Profit center
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Following is a typical definition of cost center and profit center
A cost center is a subunit of a company that is responsible only for its costs. Example of cost centers are the production departments and the service departments within a factory and administrative departments such as IT and accounting.
A profit center is a subunit of a company that is responsible for revenues and costs. Often a division of a company is a profit center because it has control over its revenues, costs, and the resulting profit.
So the question which I always debate with, is whether Procurement should be considered a cost center or profit center. I strongly feel that the answer lies somewhere between the two. Let’s look at some of the functions of the department and where they tend to align themselves.
- If you look at the transaction processing aspect of procurement (Purchase orders processing) then I believe one can see that particular function as Cost center.
- If you have a world class Sourcing department then they are managing cost and hence contributing to the bottom line. Yes, the sourcing department doesn’t contribute to the top line however reducing the expenses have a direct impact on the bottom line. Also an argument can be made that if there is no sourcing department then the sales organization have to put double the effort to drive the impact on bottomline. So in a way, Sourcing is contributing to the top line.
- Let’s look at other aspects like reputational risk or cyber risk. Sourcing with strong upfront due diligence during vendor selection and ongoing vendor audits can mitigate risk and hence prevent erosion of top line.
Let me know what you think about this subject.
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