Supply Chain

Procurement Pros Swap Staff for IT

World-class procurement operations produce a higher ROI, keep a smaller list of suppliers, and develop better employee retention strategies than th...
Marie LeoneJuly 28, 2004

Smaller, faster, better: Apparently this high-tech mantra also applies to the corporate procurement process. A study by The Hackett Group has found that companies with the most productive procurement processes operate with half the staff of their peers, are more adept at leveraging information technology to speed up transactions, and produce a 60 percent higher return on investment.

Hackett surveyed 300 companies (most of them, members of the Fortune 500) to measure the differences between world-class businesses and the median in their peer groups. A world-class company, as defined by the advisory firm, scores in the top 25 percent of Hackett’s database of 2,400 companies, both in the efficiency and in the effectiveness of the function under assessment.

That top quartile of companies enjoys costs 30 percent lower than the median, according to Chris Sawchuk, Hackett’s procurement practice leader, and shifts procurement investment to higher-value activities. For example, world-class companies spend less on purchase-order processing but more on supplier management, such as involving suppliers in the manufacturing or product development cycle.

What’s more, says Sawchuk, world-class companies have successfully swapped labor costs for technology costs — they spend 48 percent less on staffing than the median, but they also invest three times as much in procurement technology. These companies are much more rigorous about reporting on and analyzing their expenditures, and the robust software that helps them do the job gives them an additional advantage.

Whittling down the supplier base also differentiates world-class procurement organizations from their peers. While median companies use 7,800 suppliers per billion dollars of spend, world-class businesses have cut the supplier total to 3,500. That principle holds true for smaller organizations as well — but Sawchuk cautions that companies of all sizes must regularly assess these supplier relationships to avoid becoming too reliant on any one company.

Another key practice of world-class companies, Hackett found, is to include procurement managers in the budgeting and planning process, where they can spell out the benefits of the supplier contracts they’ve negotiated. Requiring employees to use electronic procurement catalogs can help steer them toward preferred vendors. Sawchuk also recommends that procurement staffers highlight the cost of noncompliance — that is, produce reports on spending behavior that underscore how much could have been saved if employees complied with procurement rules. “It’s all about better visibility from better information,” reasons Sawchuk.

As for outsourcing the procurement process, all but about 1 percent of the surveyed companies shy away from the practice. Sawchuk points out, however, that most companies do use third-party electronic purchasing protocols; those expenses are usually wrapped up in the cost of goods sold and are not considered a separate outsourcing expense.