Purchasing's Top 250 spent $1.4 trillion in 1999
That's up 10% from '98 and 40% from '96.
By -- Purchasing, 11/2/2000
If Purchasing Magazine spent a dollar for every person who called over the past year looking for "more detailed information" about its 1999 Top 250 report, it would probably be listed in this year's Top 250 compilation of big corporate spenders. An exaggeration? Of course. Even the smallest spender on this year's list shelled out around $1.3 billion for goods and services in 1999. Nonetheless, this little tall tale points up a very real-and very dramatic-increase in the scrutiny that purchasing organizations have come under in the past 12-18 months.
Reason for this scrutiny, of course, is e-procurement. Suddenly, it seems that the entire global software industry, or at least a vast chunk of it, has turned its attention to automating purchasing processes-everything from supplier research and sourcing, to negotiations, to logistics, order placement and payment-using the Internet. But it seems that few software companies want to sell their products anymore. Rather, they wish to host their software remotely, charging buyers "per seat" and/or charging suppliers small percentages (finders' fees) for each transaction.
That's where the Top 250 data comes in.
By Purchasing's estimate, the Top 250 procurement departments in the U.S. shelled out a grand total of $1.4 trillion for goods and services in 1999, a whopping 10% increase over the $1.27 trillion total estimated spend in 1998, and a 40% increase over the $1 trillion spent in 1996 when Purchasing first expanded its big spenders' list from 100 to 250 companies.
A 5% transaction fee on $1.4 trillion worth of deals works out to $70 billion worth of potential revenues for e-procurement service providers. A 10% transaction fee doubles that revenue potential to $140 billion. And that's just for the 250 publicly held, U.S.-owned industrial companies appearing on Purchasing's list.
By design, Purchasing's annual spend compilation leaves out mammoth spenders in such industry segments as apparel, beverages, toys, sporting goods, trucking, banking, software, securities, financial services, insurance, entertainment, retail, wholesale, healthcare, hospitality, publishing, real estate and temporary employment, to name a few. The Top 250 also omits companies that are either privately held (not compelled by law to publish revenue figures) or foreign-owned, including such manufacturing behemoths as DaimlerChrysler, Toyota, Honda and many others-especially Asian and European high-tech firms-operating on U.S. soil.
Now the bad news
But for e-procurement companies licking their chops-and hanging their business plans-on the big revenue potential in Purchasing's Top 250 data, there's an ugly downside as well. By virtue of their great size and the diversity of what they buy, many of the companies represented in Purchasing's Top 250 are markets unto themselves. Purchasing's estimates place spending for the Top 250 companies at nearly 16% of the U.S. Gross Domestic Product (GDP). Forty-two percent of that spending is done by only 25 companies; 27% is done by the Top 10.
The problem for start-up Net market makers is the wakening of these companies to the awesome power they wield in the realm of B2B e-commerce. The past year has seen many of the companies on Purchasing's list opting to make their own Net markets, either alone or in groups, rather than joining the electronic trade exchanges established by third parties. And short of making their own Net markets, companies big enough to appear on Purchasing's list are seeking to leverage their considerable buying volumes, winning big equity deals and other perks in exchange for the instant liquidity they bring to Net markets. (Interestingly, the only feedback Purchasing received over the past year about incorrect spend estimates for 1998 came from companies complaining that their figures reported in the magazine were too low!)
Strategic sourcing
Beyond the bald revenue potential inherent in Purchasing's Top 250 numbers, there's another aspect of the data attracting big attention as well.
By major industry grouping, Purchasing's annual spend figures-supported by nearly 15 years' worth of continuous research-show that some U.S. manufacturers fork over to suppliers nearly two-thirds of every dollar they make in revenues. According to the 2000 data, makers of motor vehicles and parts, other transportation equipment, primary metals and textiles pay to suppliers, on average, 62¢of every dollar they take in.
Industry segments that spend, on average, between 50¢and 61¢on the dollar include: pipelines, metal products, industrial and farm equipment, chemicals, furniture, computer peripherals, engineering and construction, forest and paper products, aerospace, scientific and control equipment, waste management, and computers and office equipment.
And industries paying to suppliers at least 40¢on every dollar of revenue include: medical products and equipment, mining and crude oil production, mail, package and freight delivery, network communications, soaps and cosmetics, semiconductors, electronics and electrical equipment, pharmaceuticals, railroads, airlines, building materials and glass, rubber and plastic products and telecommunications. (For details by industry, see table on this page.)
For the people trying to sell high-level business execs on the idea that they need to spend money (on software and services) in order to save money, these data are compelling tools. In effect, the marketers of e-procurement software and services are using the numbers to make the same case to chief executive, chief procurement and chief financial officers that Purchasing Magazine set out to make in devising its original Top 100 listing way back in 1986. That is: By virtue of these numbers, the corporation's non-labor spending demands,
Comprehensive corporate strategies,
The best information,
The best tools for managing information, and
Top corporate talent.
With numbers like these, it becomes clear that the corporation's very competitiveness may depend upon it.
Editor's note: In the past year or two, Purchasing has received several requests to expand its annual spend database to industry segments not typically covered in the Top 250 survey and listing (for example, banks, insurance companies and other financial institutions, etc.). There is an expansion project under way, although it may take several years before Purchasing has amassed enough source data to feel confident in making spend estimates for these industry groupings.
There's no law requiring public corporations to disclose-even to know-how much they spend on goods and services. It's hard to believe, but quite a number of U.S. conglomerates conducting business in today's fiercely competitive global economy continue to operate with no central oversight of purchasing and supply management. Some really don't know how much they spend on goods and services. Others simply won't say. So, with the goal of creating a realistic portrayal of U.S. manufacturing spending, Purchasing makes educated guesses where supplied data are lacking.
There is some method to Purchasing's estimating madness. Each year, Purchasing sends written requests for spend data to five- or six hundred manufacturing companies. The survey asks them to cite their total sales and spend data for the prior calendar year and to cite major qualifying information or factors that might have changed their spend-to-sales ratio dramatically in the past year.
Numbers supplied each year are maintained in a database, which is augmented with data captured in story research throughout the year by the magazine's editors. By grouping companies with their primary competitors and using both supplied information and historical records, Purchasing maintains general industry and, where possible, company-specific estimating guides for average number of cents spent per dollar of revenue. (Note: The industry numbers depicted in the table on page 68 are the averages for companies appearing in this year's Top 250 and may or may not reflect the estimating guides used by Purchasing Magazine which are based on a larger sampling of companies.)
It makes sense, the thinking goes, that the spend ratios will be fairly well defined according to industry segment. Companies within an industry are usually established in the same business era according to similar models of organization (even re-engineering tends to produce similar structures). They buy roughly the same materials, pay roughly the same labor rates, allocate overhead in similar fashions, and sell products at like prices. What's more, Purchasing's survey process finds that the numbers change very slowly from year to year. So if a company responded to the survey in 1998, but not in 1999, the magazine will weight its 1998 cents/dollar figure fairly strongly in creating an estimate for 1999. (Actual data supplied in 1997, 1996 or 1995 receives progressively lighter weighting by comparison.)
Where prior supplied data is not available, Purchasing relies more heavily on its industry average guides. Often, however, survey data supplied to Purchasing reveal that cents/dollar spend ratios for competitors within an industry can vary in ranges spanning 10, 20, sometimes 40 cents on the dollar.
Factors governing where a company might fall in a range are too numerous to count, but captive supply or vertical integration is probably the most significant. For example, some paper or paperboard companies have their own upstream pulp operations while others buy their pulp on the open market. Other industry segments show big diversity in the responsibilities they invest in their purchasing organizations. Some airlines, for example, give their purchasing organizations responsibility for buying jet fuel while others maintain separate groups for the tasks of using financial tools to hedge fuel cost risks.
Another big complicating factor is that some companies continue to maintain separate purchasing organizations for their U.S. and offshore operations. Other estimating difficulties include end-market diversity (both number and distribution of SIC codes), price volatility in major raw material and end markets, expansion of procurement into nontraditional areas of purchasing such as HR benefits, advertising, marketing, etc., and the competitive contributions of procurement organizations themselves.
Because of this complexity, Purchasing has added this year another step to its process, using both industry- and company-specific guides from the previous year to create advance estimates for each company in its survey sample. The survey itself now provides each company with its industry grouping, the industry guide for that grouping, company-specific guides where they exist, the company's advance estimate, and an opportunity to agree or disagree with any of the above.
The editors at Purchasing have been compiling the Top 250 (formerly the Top 100) for nearly 15 years. All told, the magazine's staff has more than a 100 years of experience in examining procurement strategies and, looking back, their estimating track record looks pretty good (at least the complaints have been few and far between). This year's addition of advance estimates to the survey only serves to validate the established estimating process. Where the survey itself may have missed its intended recipients, Purchasing, as usual, shall be quite happy to stand corrected. Requests for printed clarifications to Top 250 data or updates to Purchasing's Top 250 mailing list can be e-mailed directly to Anne Millen Porter at amp.purchasing@cahners.com.
Industry grouping No. of companies in Top 250 Average¢/$ Total spend mil. of $ Aerospace 9 50¢ $88,744 Airlines 7 42¢ $32,264 Building materials, glass 5 42¢ $9,540 Chemicals 17 56¢ $64,061 Computer peripherals 4 53¢ $11,388 Computers, office equipment 12 50¢ $130,934 Electronics, electrical equipment 12 45¢ $49,097 Engineering, construction 11 52¢ $30,572 Food 20 38¢ $65,944 Forest and paper products 11 51¢ $50,202 Furniture 2 55¢ $3,639 Industrial and farm equipment 17 58¢ $55,356 Mail, package and freight 4 48¢ $24,183 Medical products & equipment 4 49¢ $8,343 Metal products 10 59¢ $34,077 Metals 7 62¢ $24,774 Mining, crude oil 3 48¢ $8,153 Motor vehicles and parts 19 62¢ $249,782 Network communications 3 47¢ $26,428 Petroleum refining 11 21¢ $71,979 Pharmaceuticals 11 44¢ $73,362 Pipelines 6 60¢ $50,077 Railroads 4 43¢ $14,731 Rubber and plastic products 1 41¢ $5,281 Scientific, photo, control equip. 4 50¢ $19,247 Semiconductors 2 45¢ $16,456 Soaps, cosmetics 5 45¢ $29,618 Telecommunications 13 40¢ $115,822 Textiles 3 62¢ $5,835.07 Transportation equipment 2 62¢ $4,471 Utilities, gas & electric 9 26¢ $22,747 Waste management 2 50¢ $8,299.25 Totals/averages 250 49¢ $1,405,406.62 SOURCE: PURCHASING |
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