Hackett report finds best procurement orgs see greater ROI
Staff -- Purchasing, 12/8/2005 2:00:00 AM
World-class procurement organizations generate 133% greater return on their investment in procurement than typical companies, driving an additional $3.6 million to their company's bottom line for every $1 million in procurement operations costs, according to 2005 Book of Numbers Research from The Hackett Group. According to Hackett, world-class procurement organizations also show dramatically improved effectiveness over typical companies. They now operate with 46% fewer suppliers, are nearly five times more likely to be involved in enterprise-wide planning initiatives, and make much greater use of cross-functional teams for supplier sourcing, selection/negotiation, and partnering/development.
In an interview with PURCHASING, Chris Sawchuck, Hackett's procurement practice leader, said top-performing procurement organizations are investing more in technology. "With the top-performing procurement departments identified, we can go back and find out what they're doing differently and one of the areas that jump out is technology investment. They are making significant investments in the transactional area to make the 'technology for labor' swap. The technology has been an enabler in getting higher-level people into more strategic roles in their organizations and in the long run that drives the returns on investment." Sawchuck says supplier development and management skills are much higher in the world-class organizations and training investments are much higher.
According to Hackett, world-class procurement organizations now see procurement operations costs that are 20% less than typical companies (0.68% of procurement spending vs. 0.85%). World-class procurement organizations also now operate with nearly half the staff (44.9 staff per $1 billion of spend vs. 89.2).
Supply base rationalization and partnering with key suppliers remain key techniques that world-class procurement organizations utilize to reap benefits, according to Hackett's research. World-class procurement organizations operate with 46% fewer suppliers than typical companies (7,710 per $1 billion of spend vs. 4,171) and also concentrate 80% of their spending on just 5.9% of their suppliers, significantly fewer than typical companies.
World-class procurement organizations are highly involved in enterprise-wide planning and budgeting 57% of the time at world-class companies, nearly five times more often than typical companies. Hackett also found that 100% of all world-class procurement organizations use cross-functional teams for supplier partnering/development, sourcing, and selection/negotiation, making them 37-50% more likely to do so than typical companies.
Procurement costs as a percent of spend
| Peer group | 0.85% |
| World-class | 0.68% |
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