How to define a world-class procurement organization
David Hannon -- Purchasing, 9/2/2004 2:00:00 AM
World-class procurement organizations spend 30% less on procurement operations than their peers and operate with nearly half the staff, according to 2004 research into world-class performance from The Hackett Group, a business advisory firm. At the same time, these world-class companies achieve 60% higher return on investment (ROI) than typical companies and rely on less than half as many suppliers.
Hackett's 2004 research also highlights several key areas where companies can improve their procurement processes. At most world-class companies, procurement is formally involved in cross-business planning and budgeting. This is virtually never the case at typical companies. World-class companies are also about twice as likely as their peers to engage in significant supplier rationalization annually, and they have greater control over indirect spending. Finally, an opportunity exists for both world-class companies and their peers to improve leverage of tools for sophisticated spending analysis.
Hackett research found that typical procurement organizations operate at a total cost of 1.03% of expenditures and have 104 full-time equivalents (FTEs) per billion dollars of spending. World-class organizations do significantly better in both areas, with 30% lower costs (at 0.72% of expenditures) and 48% fewer staff (54 FTEs per billion dollars of spending). But a lower level of spending at world-class organizations does not translate into less value creation. In fact, world-class procurement organizations drive 60% higher savings returns on their procurement investment, according to Hackett. This ROI was quantified by calculating total reported savings on enterprise-wide spending divided by the cost of procurement operations, including labor, outsourcing, technology, and other.
The study found that typical procurement organizations have caught up with world-class organizations in two areas: use of preferred suppliers and ensuring that procurement strategy is aligned with overall business strategy.
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